Measuring Style Efficiency
13 Pages Posted: 13 Jun 2017 Last revised: 14 Jun 2017
Date Written: June 11, 2017
As we noted in Grover and Kizer , the proliferation of style (or factor) investing has created a more complicated landscape for investors. It can be difficult for investors and their advisors to understand what style exposures a particular fund or strategy provides, whether the net expense ratio is reasonable for the style exposures provided and the efficiency of the style exposures of the strategy, which is the focus of this paper. To help with this last issue, I develop two new measures of style efficiency, one related to the expected style return of the strategy per bps of net expense ratio, which I refer to as the Cost Efficiency Ratio (CER), and one related to the expected style return of the strategy relative to expected tracking error, which I refer to as the Tracking Error Efficiency Ratio (TEER).
Keywords: style investing, factor investing, tracking error, mutual funds, portfolio efficiency
JEL Classification: G11, G12, G14, G23
Suggested Citation: Suggested Citation