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Posted by on Oct 1, 2014 in CEO Corner

My response to Dave Nadig on his article regarding our recent 5 star announcement

My response to Dave Nadig on his article regarding our recent 5 star announcement

It seems like some in the media think of active managers who outperform their passive benchmarks as the golden unicorns of investing.  The reason why is that we all know how difficult it is to outperform a passive benchmark, especially in a category such as domestic equities.  Looking at the latest update that monitors active manager’s performance to their underlying benchmark, we know that in the domestic large cap space (S&P 500 benchmark) 84.94% of active managers in the last three years have underperformed the S&P 500.  It is, the indexers will tell you, basically impossible to beat the index, and not worth paying a manager a higher fee to do it.

At AdvisorShares, we like to turn the stat around. We always say “alpha is hard to deliver, but not hard to find.”  For example, if there are 100 funds (there are more of course) that try to outperform the S&P 500, then 15 of them, according to the high level statistics, will do it.  With the help of a variety of services that analyze and rank managers, we can easily identify them, and with some additional insight into how the managers approach their strategy, we also know that the outperformance of good managers can persist. We know this is hard to do.  So you would think when this magical unicorn shows itself, people would appreciate the beauty of it.  For the article, not so much.

First, let’s just focus on the some of the inaccuracies we all can agree on.

“It’s not really being a large cap fund” – It’s not designed to be. It selects from the largest 500 securities (that information is in the 3rd sentence of the marketing material, not hard to find).

“It beat the S&P, the magical number for getting your Morningstar rating?” – This is simply incorrect. A fund’s star ranking is based on a peer group comparison, not beating an index.

(In reference to the equal weight comparison) “it’s a scant 30bps behind … after 5 years” – our ETF has only been out for three years.

“…if you care about these things, (the equal weight fund) has 5 stars from our friends at Morningstar.  The stars are just mechanically assigned based on past performance, so of course they have the same stars” – Also not true. The equal weight fund has a five-star overall rating, but four-star for the three-year time frame, which is what our star ranking is based on.

“You’re also doing it in a fund with almost no liquidity” – ugh, this is the worst. You guys have done such a good job (historically) with educating investors that trading volume does not equal liquidity for an ETF; it’s the underlying holdings that matter. The incredibly frustrating thing, is you are one of the technically smartest when it comes to ETFs, but (in my opinion) your index bias is so strong that you forget something so fundamentally simple about an open-end ETF structure.

“Maybe I’m just getting old and cynical” – again not true. Oh wait, never mind I think you might be on to something there.

The things we can debate are your snap shot in time factor-fitting.  A strategy that can invest in the same universe as the S&P 500, albeit in an active manner creates the expectation that in some period of time like the duration of a stock market cycle, things will change – you can be in the bigger stocks sometime, then in the smaller. Sometimes you might have a value tilt later a growth tilt.  It is the nature of what an active manager does – your snap shot view does not do justice to what the value of a good active manager is, which is how they can make those decisions correctly.

You discount the Morningstar approach, which uses all of the historical data to assess mutual funds and ETFs.  We know it’s not perfect, but utilizing more data in making the category assessment is significantly better than your approach.

To your downside beta analysis where again you extrapolate that in the last three-year bull market, having a higher downside beta means bigger losses when the market turns – again this is an active strategy so you really have no idea what will be the beta compared to the benchmark in the future. How could you realistically expect to be able to forecast the expected performance to your readers?

You start your article saying that you are happy to see a small ETF firm be successful, but you are not unless they manage money the way you think they should.  We know not every product we offer will be successful; we know guys like you will jump on them when they are not.  This one is different, if only at least for now.  On behalf of the 20 employees at AdvisorShares, we are proud of this ETF. Most in our industry would be as well.

Also, for the record, we fairly consistently make ourselves available to the writers at, but were not contacted for this article about us..