Momentum Everywhere, Including Equity Options
Option returns display momentum, meaning that firms whose options performed well in the previous 6 to 36 months are likely to see high option returns in the next month as well.
Can Machine Learning help to select mutual funds with positive alpha?
Can machine-learning methods be used to predict the performance of active mutual funds, specifically in terms of alpha net of all costs? Answer: yes.
The Temptation of Factor Timing
The timing of equity factor premiums has a strong allure for investors because academic research has found that factor premiums are both time-varying and dependent on the economic cycle.
Do Polluters Earn Higher Expected Returns? Yes.
Hence, the major research question examined here is: What is the impact of industrial pollution on market pricing? Short answer: polluters have earned higher returns.
Diseconomies of Scale in Investing
While the research shows that fund managers are skilled, skill doesn’t translate into outperformance due to the diseconomies of scale.
Global Factor Performance: December 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
Untangling Behavioral Finance and the Psychology of Financial Planning
The article discusses the importance of integrating psychology into the field of financial planning and highlights the need to understand and address the psychological aspects of financial decision-making and client relationships.
DIY Trend-Following Allocations: December 2023
Full exposure to domestic equities. Full exposure to international equities. Partial exposure to REITs. No exposure to commodities. No exposure to intermediate-term bonds.
After-Tax Performance of Actively Managed Funds
Ignoring the impact of taxes on the returns of taxable accounts is one of the biggest mistakes that can be made.
Is now a good time to buy bonds?
As pundits wrestle over the cause, implications, and sustainability of the recent massive moves in interest rates, I’ll instead delve into the two terms most often blamed for these shifts in rates: R-star and the Term Structure Premium. Unfortunately, what most want—a measure of them—is unknowable. But we can benefit from understanding the theories and models behind these terms. We can glean guidance on what we need, namely a better understanding of the risks and rewards of buying longer-maturing bonds at current rate levels. I contend that now is a good time to secure future cash flows by buying bonds, although determining the precise amount to invest remains a challenge.
A new twist on momentum strategies: Utilize overlapping momentum portfolios
Momentum investors utilize different timeframes to identify high momentum equities: past 6, 9, 12 months as an example. Obviously, there is a significant degree of overlap in momentum stocks identified across various past time frames. However, there has been little research focused on understanding the characteristics of momentum stocks formed on six and 12 months that overlap one another. The authors refer to the subset as “overlapping” stocks and suggest they constitute the largest proportion of the profitability of the momentum strategy.
Focus on Income Can Undermine Returns: The Case of Covered Calls
Covered calls implemented to deliver higher derivative income should be expected to have (1) lower total returns, (2) higher tax realizations along the path, and (3) a more negatively skewed return profile. Investors who allocate to these strategies for their income alone, without accounting for these other considerations, might have made a devil’s bargain
A New 1042 QRP Team Member Joins Alpha Architect: Erik Chavez
We are pleased to announce that Erik Chavez has joined Alpha Architect and will work alongside Kyle and Doug to support our 1042 QRP ESOP service (qualified replacement property for ESOP rollovers). While new to our team, Erik has been our friend for a long time. Erik is a multiple-time March for the Fallen survivor -- see below when he is part of the MFTF clean-up crew (cirled in blue).
Is ESG Investing Counterproductive?
The article introduces a concept called "impact elasticity," which measures how a firm's environmental impact changes in response to shifts in its cost of capital (the "E" in "ESG"). It finds that the dominant sustainable investing strategy, which favors green firms and punishes brown firms by altering their cost of capital, can be counterproductive.
The Magnificent Seven
When a small subset of companies makes up a large portion of a portfolio, for better or worse their returns will have a greater impact on overall portfolio results.
Is Inflation Ever Going to Go Down?
If inflation surges, how long on average, will it take to subside to a reasonable target rate of 2%?
The Performance of Major Private Equity/LBO Firms
The claims of superior risk-adjusted performance by the PE industry are exaggerated. Given their lack of liquidity, opaqueness, and greater use of leverage, it seems logical that investors should demand something like a 3-4% IRR premium. Yet, there is no evidence that the industry overall has been able to deliver that.
Global Factor Performance: November 2023
Standardized Performance Factor Performance Factor Exposures Factor Premiums Factor Attribution Factor Data Downloads
Organization Capital and the Cross-Section of Expected Returns
This paper focuses on "organization capital," representing intangible assets in a firm's key employees that is not captured by classic value measures such as book-to-market. The authors propose a structural model to analyze the impact of organizational capital on asset prices and argue that shareholders perceive firms with high levels of organizational capital to be riskier than those with more physical capital.
Technology Spillover Impacts Stock Returns
The timelier adoption of new technology and the higher likelihood of large-scale technology adoption make the risk associated with technological innovation more systematic, which in turn increases returns required by investors for technology spillover recipients.