Читать книгу Competitive Advantage in Investing - Steven Abrahams - Страница 24

Sharpe's case for the best way for an individual or manager to construct a portfolio and for the best way to value an asset or an asset manager would have a powerful impact over the following decades, ultimately leading to a Nobel Prize in 1990—a prize shared with Harry Markowitz and option theorist Merton Miller. Among other things, Sharpe's approach implied important things about financial leverage, or borrowing money to make risky investments. It implied important things about the fair rate of return for providing investment capital. And it also implied important things about the ability of an asset manager to beat the market.

Sharpe's approach underscored the importance of financial leverage. The ability of investors to borrow money and reinvest in riskier assets plays a critical role in making markets efficient. When investors can borrow and reinvest easily, the riskiest investments have to compete against returns available from a leveraged position in a safer portfolio of assets. When investors cannot borrow and reinvest easily, the riskiest investments can get away with providing returns below a fair rate. Investors who need an above-average rate of return have to invest in assets that provide less-than-fair compensation. That might hurt the individuals, banks, insurers, pension funds, and others that might need high rates of return to cover some of their greatest expected future expenses. This belies the common perception that financial leverage only adds risk to an investment portfolio without adding sufficient return. In Sharpe's world, it is just the opposite. A portfolio unable to use leverage or borrow to invest will likely buy risky assets nevertheless but get underpaid for taking the risk.

Sharpe also gave the market a yardstick for measuring the fair price of an equity investment in a company. The fair price of equity had always been elusive. Investors hand over their money and then wait for dividends, a rise in the value of their equity stake, or both. By making the case that the value of an investment depended on its expected performance compared to the market, investors had a way of setting fair price. Equity investments with roughly the same risk as the overall equity market—in other words, investments with a beta of 1—should provide the same rate of return as the overall market. If the market had an expected excess return of 8%, for example, equity with a beta of 1 should also provide a combination of dividends and price appreciation of 8%. Similarly, equity with a beta of 0.5, or half the risk of the overall market, should provide returns of 4%. And equity with a beta of 1.5 should provide returns of 12%. The cost of equity depended on risk relative to the market overall. That gave investors and companies a way to measure and compare the cost of debt and equity.

Sharpe also put the performance of asset managers in a spotlight, one that left many a little pale. Investors who entrusted their capital to an asset manager could now compare periodic returns in their portfolio to periodic returns in the market overall. If the manager invested in equity, the investor could compare the manager's equity returns to an equity market index such as the S&P 500. If the manager invested in bonds, the investor could compare returns to a bond market index. If a manager invested in real estate, the investor could compare returns to a real estate index. The comparison provided an alpha, beta, and a measure of idiosyncratic risk in the manager's portfolio. This simple approach has transformed asset management.

One thing investors quickly realized is that an asset manager could deliver an above-market return simply by taking on above-market risk, or deliver a below-market return by taking below-market risk. Absolute return alone didn't indicate either a good or bad job. It could all depend on beta. Once the investor measured a manager's beta, it became clearer whether the manager was adding any value beyond the portfolio's level of market risk.

The measure of value showed up in the manager's alpha, and one revolutionary implication of Sharpe's approach was that investment managers may not have any sustainable competitive advantage in creating alpha. Alpha for a portfolio that just invested in the market basket of assets would simply be the average riskless rate over the investment period. If a manager showed an alpha higher than this average riskless rate, the manager had added value above and beyond the simple returns from beta or systematic market risk. If the manager's alpha came in below, then the manager had destroyed value. Across the entire market, however, the average manager would neither add nor destroy value. The average alpha across the market always had to equal the average riskless rate. This challenged the very value of asset management itself. Not long after Sharpe published, Burton Malkiel, an economist at Princeton, wrote A Random Walk Down Wall Street, arguing that few if any managers can consistently beat the market (Malkiel, 1973). And decades of research since Sharpe first published have tended to show that few asset managers consistently deliver alpha across long periods after subtracting their fees. In Sharpe's world, no manager can beat the market. No manager can get a sustainable competitive advantage.