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Does Guru Investing Work? | CFA Institute Enterprising Investor


A brand new funding fashion has proliferated during the last decade or so: the copycat investor.

The fundamental thought is at all times the identical. Have a look at the quarterly studies of outstanding funding gurus and their holdings on the finish of every quarter. Then merely put money into the identical shares they maintain.

There are apparent issues with the copycat funding fashion. Holdings are disclosed solely with a considerable time lag, and we don’t know which shares an investor has purchased after which offered once more inside every quarter. We will solely see the holdings per every quarter’s finish.

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But when the funding guru is a long-term investor and holds principally shares and little or no by way of derivatives or non-public property, the copycat technique would possibly simply work.

These copycat methods have been put into motion in the USA by way of exchange-traded funds (ETF)s and now have a comparatively lengthy observe file that — crucially — consists of the 2020 bear market. To the perfect of my data, there are three such copycat ETFs on the market, all of which completely put money into US shares and will thus be in comparison with the S&P 500:

  • The International X Guru Index ETF (GURU) has $74 million in property beneath administration (AUM) and tracks the positions of 1000’s of hedge fund managers.
  • The AlphaClone Various Alpha ETF (ALFA) has $32 million in AUM and tracks the holdings of ~500 hedge funds.
  • The Goldman Sachs Hedge Business VIP ETF (GVIP) has $220 million in AUM and tracks the 50 shares held most often by hedge fund managers.
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For the reason that 2016 launch of the GVIP ETF, two of those ETFs have materially outperformed the S&P 500. Whereas GURU has underperformed the index by 0.5% per yr in complete returns, ALFA and GVIP have overwhelmed the S&P 500 by 2.% and a couple of.6% each year, respectively.


Copycat ETF Efficiency since 2016

Chart showing Copycat ETF Performance since 2016
Supply: Bloomberg

Not dangerous, however that outperformance comes with larger volatility and higher drawdowns throughout a disaster. The utmost drawdown of the S&P 500 occurred through the peak of the pandemic panic in March 2020. Again then, the index fell by 19.6%, whereas GVIP dropped 21.4% and ALFA 25.1%.

Because the chart above signifies, that meant that the copycat ETFs both misplaced all of the outperformance they created from 2016 to 2020 in a single month, as in ALFA’s case, or underperformed the S&P 500 after beforehand matching its efficiency, as with GURU and GVIP.

It was solely within the restoration since April final yr that the copycat funds began to outperform.

And whereas the GVIP ETF solely exists since 2016, we will use the GURU and ALFA ETFs to return even longer to mid-2012 when these two funds have been launched.


Copycat ETF Efficiency since 2012

Chart showing Copycat ETF Performance since 2012
Supply: Bloomberg

With nearly 10 years of efficiency to take a look at, we will hardly conclude that these copycat funds add lots of worth. Each GURU and ALFA have underperformed by 1.3% and 1.6% per yr, respectively, and had a lot larger volatility. The chart above exhibits that copycat funds fared properly within the upswing from 2012 to 2015 after which misplaced all of that outperformance and extra within the 2015–2016 correction.

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These copycat funds very a lot resemble truthful climate investments that don’t carry out over a whole cycle. Certainly, copying from different traders misses one key ingredient for outperformance: creativity.

I’ll cowl that ingredient in my subsequent put up.

For extra from Joachim Klement, CFA, don’t miss 7 Errors Each Investor Makes (And The best way to Keep away from Them), and Danger Profiling and Tolerance, and join his Klement on Investing commentary.

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All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the creator’s employer.

Picture credit score: ©Getty Pictures / Joas


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Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Analysis Basis and provides common commentary at Klement on Investing. Beforehand, he was CIO at Wellershoff & Companions Ltd., and earlier than that, head of the UBS Wealth Administration Strategic Analysis group and head of fairness technique for UBS Wealth Administration. Klement studied arithmetic and physics on the Swiss Federal Institute of Know-how (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a grasp’s diploma in arithmetic. As well as, he holds a grasp’s diploma in economics and finance.

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