Since this is a slightly lower risk stance than the broader market, we would expect this fund to receive a slightly less return from this risk factor than the average return available to the factor. A portion of an investment manager's return can be attributed to the amount of risk, or lack thereof, that the manager is taking in each of these factors. Alpha is the portion of return not attributable to any risk factors, and a positive alpha is usually associated with the excess return generated from a manager's stock picking ability. Only about one-third of the universe of investment managers are able to generate a positive alpha after adjusting for their risk taken in the three factors. In evaluating managers, it is important to determine if their value-added, or alpha, is due to skill or to luck.
Statistical techniques assess the probabilities of consistent and sustainable value- added.
This graph also shows the returns attributable to each of the three risk factors and the risk free rate. Return and Sector Analysis Risk adjustment of returns is only part of the picture. Manager returns are examined in a percentile ranking format as well with both long and short periods considered. We look for managers that, in addition to generating return for the risk they take, are able to outperform an appropriate index and their relevant asset class universe average over longer time periods. The sample manager in Figure 3 has remained in the top 15th percentile of its peer group for the last five, seven and ten year periods and is in the top 30th percentile over the last three years.