Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 131

The biggest rort of all

As a beginner investor there are a myriad of asset classes you can invest in and it must be a bit confusing knowing where to start. So let me give you an idiot’s guide to rating investments from ‘alpha’ to ‘beta’. Stick with me.

Alpha is an expression from the funds management world used to describe the ‘excess return’ of an investment relative to a benchmark. In the industry it is used as an expression to denote how much value someone is adding to your investment returns above the average. If funds management was a gladiatorial sport the fans would be chanting “Alpha, Alpha, Alpha, Alpha!”.

Beta on the other hand represents how an investment performs relative to the market. All you need to know here is that a beta of 1 means an investment will move with the market and a low beta investment is something that moves less than the market. A beta of minus one, just to make it clear, is an investment that moves in exactly the opposite direction of the market and a beta of 2 is an investment that moves twice as much as the market when the market moves in a particular direction.

I like to think that alpha means ‘Action’ and beta is ‘Boring’.

With that little definition in mind let’s now look at the most common investments and rate them from high alpha, a lot of action, to low beta, no brain required. The first couple might surprise you but they should be on your list:

Building a business – This is a very high alpha investment, high activity, high risk but it is where all really wealthy people made their money, in business.

Your career – This is also massive alpha. Getting up, going to work, coming home for half your life. It is also, rather amazingly for a high alpha investment, about the lowest risk investment you can make. In terms of risk and reward, investing in yourself is one of the best investments in the whole world.

Then we come to traditional investments that are high alpha. These include:

Direct investment in equities and property - I have put these on a par because if you manage your own property investment or equity investment they are both hard work for similar returns. Both are very involved and both require a skill set. Both are high alpha, high activity with significant risk. They only suit you if you can service the need for action, not pretend to. This also makes the point that when weighing up which asset class is the best the answer is the one you will enjoy the most, know the most about, are more suited to managing, because both are very different activities meaning it is not really which asset class is the best, its which asset class you want to expend your alpha on.

Then comes a big drop in alpha to the first of the higher beta investments. These include managed funds and listed investment companies. It also includes the large super and industry balanced funds. These are investments that are marketed as if the managers are ‘adding alpha’ but really, the majority of them are benchmarked to an index and the moment you benchmark a professional, even if they consider themselves an ‘alpha adding’ fund manager, they unavoidably start to ‘hug the benchmark’ trying to emulate the benchmark which makes it a lot harder for them to beat it. Their investments will also become diversified across a lot of individual investments and because of that diversification these funds will never set your hair on fire despite the marketing and despite the fees. Some funds like smaller companies funds, sector funds and special situations funds may be more volatile and appear alpha orientated but even they have their benchmarks and their alpha compared to those benchmarks is more of a beta in the end even if it is more exciting.

Beta investments are things like index funds and passively managed exchange traded funds. Investments that do what they say they’ll do on the box, mechanically match an index, a market, a sector. They can be volatile, as volatile as the market they represent, but no-one is working them, they just represent an average, nothing else. And low fees.

Finally there are lower beta investments. These are investments that offer no value above the expected return. They are predictable, low risk and don’t require you to sweat them to get a return. They can’t be pushed. They include everything that offers no growth including hybrids, cash, term deposits and money under the mattress. I know a lot of people become highly concerned about the returns on these investments, but really, the main point is that you are taking very little if any risk and you are parking your money out of harm’s way instead of driving your money. The returns used to be enough to live on but they’re not anymore, pushing low risk investors into more risky investments.

The most common mistakes on this rating system are taking on a high alpha role yourself but not giving it the attention it requires and the second is the biggest rort in the investment industry, paying an alpha style fee when it’s obvious from the structure you’re only ever going to get a beta style return.

 

Marcus Padley is a stockbroker and founder of the Marcus Today share market newsletter. He has been advising institutional clients and a private client base for over 32 years. This article is for general education purposes only and does not address the personal circumstances of any individual.

 

  •   22 October 2015
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Competing for alpha

How passive investing is driving the decline of active fund alpha

The best opportunities in fixed income right now

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.