Personal Finance

Security Selection – Products

Javier Estrada
IESE Business School – Barcelona

1. The Product Landscape

• Performance: Absolute and relative
• Management: Active and passive
• Absolute return funds (and hedge funds)
• Mutual funds
• Index funds and ETFs
2. A Critical Decision
• Active vs. passive management
• The two challenges of ‘going active’

The Product Landscape

Javier

Performance
Estrada

IESE
Business
School

Barcelona
Spain
Absolute Relative

Active Passive Active

Management Management Management

ARFs Index Mutual

MBA ETFs
PERFIN
Fall/2023
(Hedge Funds) Funds Funds
Go

1
 Performance
Javier
Estrada

IESE
Relative Absolute
Business
School

Barcelona
Spain

The benchmark is an The benchmark is a

index return level (often 0)
Consider a global equity fund that lost 20% in 2008

Exposure is ‘limited’ Can ‘go anywhere’ in

by the benchmark terms of exposure

Lower cost than Higher cost than

MBA
PERFIN absolute performance relative performance
Fall/2023

Management
Javier

A critical distinction
Estrada

IESE
Business
School

Barcelona
Spain Active Passive
Management Management

Aims to outperform Aims to replicate/track

a benchmark a benchmark

Higher cost than Lower cost than

MBA
PERFIN passive management active management
Fall/2023

2
 Products
Javier
Estrada

IESE
Business
Mutual funds The ‘traditional’ choice
School

Barcelona
Spain The beginning of
Index funds
passive investing

Exchange Traded Funds The star product for

(ETFs) the last several years

Target institutional and

Hedge funds
accredited investors

Absolute return funds ‘Baby hedge funds’

MBA (Liquid alternatives) Target individual investors
PERFIN
Fall/2023
Go‐1 Go‐2 Go‐3

Two Choices You Need To Make

Javier

Neither of which is either‐or

Estrada

IESE
Business
School

Barcelona Absolute Perf. Active Mgmt.

Spain
vs. vs.
Relative Perf. Passive Mgmt.

This choice is relatively

This choice is critical
less important

Because of low AUM Affects most of the

MBA
PERFIN and bad performance product landscape
Fall/2023

3
 Active vs. Passive Management
Javier
Estrada

IESE
Business
School One of your most critical investment decisions
Barcelona
Spain

?
MBA
PERFIN
Fall/2023

Active vs. Passive Management

Javier
Estrada

IESE
Business
To make this decision focus on …
School

Barcelona
Spain

1. Goal

2. Success

3. Cost

MBA Let’s explore 2 and 3 for ARFs (and HFs)

PERFIN
Fall/2023
Go

4
 Active Management – Challenges
Javier
Estrada

IESE
The two challenges of ‘going active’
Business
School

Barcelona
Spain
Ignoring costs, active management is a 0-sum game
(Considering costs, it is a negative-sum game)

Then, over your chosen holding period, ask …

can you really pick can you really stick

the future winners? with those winners?
MBA
PERFIN Problem: Underperformance Problem: Persistence
Fall/2023
Go‐1 Go‐2

Some Further Reading

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

5
 Appendix
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Too Much Choice?

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023
Back

6
 Passive Management
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Passive Management
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023
Back

7
 ETFs
Javier
Estrada

IESE
Business $10.2tn
School
9,838
Barcelona
Spain

MBA www.etfgi.com, as of Jul/2023

PERFIN
Fall/2023

ETFs
Javier
Estrada

IESE
Business
School

Barcelona
Spain

≈ $3tn

ETFs: $8tn

MBA
PERFIN
Fall/2023

8
 ETFs
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Mutual/Index Funds vs. ETFs

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023
Back

9
 Absolute Return Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Absolute Return Funds

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023
Back

10
 Absolute Return Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Absolute Return Funds

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

11
 Absolute Return Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Absolute Return Funds

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

12
 Hedge Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Hedge Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

13
 Hedge Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Hedge Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

14
 Hedge Funds
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023
Back

Active Mgmt – Underperformance

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

15
 Active Mgmt – Underperformance
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Active Mgmt – Underperformance

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

16
 Active Mgmt – Underperformance
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

Active Mgmt – Underperformance

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

17
 Active Mgmt – Underperformance
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023
Remember underperformance!
Back

Active Mgmt – Persistence

Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Fall/2023

18
 Active Mgmt – Persistence
Javier
Estrada

IESE
Business
School

Barcelona
Spain

MBA
PERFIN
Remember (lack of) persistence!
Fall/2023
Back

19