Generating Alpha

Adding further exposure to different investment styles and market segments can boost returns while reducing risk through additional diversification.

What is Alpha and Why Does it Matter?

Alpha means excess returns. Alpha can be generated by adding solutions that focus on different investment styles, market segments or regions. That additional diversification has the potential to boost returns and reduce overall risk in portfolios.

The Definition of Alpha

definition-alpha

For illustrative purposes not representative of fund or benchmark performance.

Though exposure to the US market can provide diversification for Canadian investors, it isn’t specifically beneficial for adding alpha.

  • Investors need to further diversify by adding different investment styles (i.e. value), regions and company size in order to add sufficient alpha.
  • Exposure to smaller emerging market companies is a good way to add alpha.
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1 The Risk/Return illustration is based on a five year period from March 2013 to March 2018. Past performance is not indicative of future results. One cannot directly invest in an index. Source: Morningstar Research Inc. as at March 31, 2018.  

The right mix between upside capture and downside protection has the potential to provide a greater chance of long-term outperformance relative to an index.

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Source: AGF Investment Operations, as of December 31, 2017. Using the S&P 500 TR Index (CAD) modelled the outcome of up/down capture of the monthly index returns. For illustrative purposes, not to be construed as an allocation recommendation. Past performance is not indicative of future results. One cannot directly invest in an index.

The more exposure a portfolio has to global securities the greater potential for excess returns.
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Source: Morningstar Research Inc, as at December 31, 2017. Global represented by MSCI ACWI, Canada represented by S&P/TSX Composite Index