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.
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.
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.
Dissecting the Idiosyncratic Volatility Puzzle
Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatility—it is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or inflation) and, therefore cannot be diversified away. On the other hand, the risks of high IVOL stocks can at least be reduced through diversification.
International Value Stocks Offering “More Bang for the Buck”
Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns.
ESG Preferences Negatively Affecting Market Efficiency
While ESG investors can express their values through their investments, they should expect lower returns from their portfolios—though they also will be taking less investment risk.
The Research and Development Factor
The higher returns to high R&D stocks represent compensation for heightened systematic risk not captured in standard asset pricing models.
The Role of ESG in Equity Returns Across Private, Primary, and Secondary Markets
The continued popularity of sustainable strategies could create sufficient cash flows to offset the risk premium in the lower-scoring stocks, at least until an equilibrium is reached.
Implications of Regime-Shifting Stock-Bond Correlation
The correlation between stocks and bonds should be a critical component of any asset allocation decision, as it impacts not only the overall risk of a diversified multi-asset class portfolio but also the risk premia one should expect to receive for taking risk in different asset classes. The problem for investors is that the correlation between stocks and bonds fluctuates extensively across time and economic regimes.
Dissecting the Investment Factor
Investment predicts returns because, given expected profitability, high costs of capital imply low net present value of new capital and low investment, and low costs of capital imply high net present value of new capital and high investment.
Structured Notes Are Financial Fairy Tales
Wall Street’s product machine is continuously pumping out fairy tales; structured products should be avoided.
The Performance of Listed Private Equity
It is important to diversify the risks of private equity. This is best achieved by investing indirectly through a private equity fund rather than through direct investments in individual companies. Because most such funds typically limit their investments to a relatively small number, it is also prudent to diversify by investing in more than one fund. Unfortunately, the evidence we reviewed suggests that diversifying by investing in LPEs is not an effective strategy. And finally, top-notch funds are likely closed to most individual investors.
Value and Profitability/Quality: Complementary Factors
There are various measures of value and quality, with one being Marx’s gross profits-to-assets.
The Quality Factor and the Low-Beta Anomaly
The empirical evidence demonstrates that returns to the low-beta anomaly are well explained by exposure to other common factors, and it has only justified investment when low-beta stocks were in the value regime, after periods of strong market and small-cap stock performance, and when they excluded high-beta stocks that had low short interest.
Reducing the Risk of Momentum Crashes
The empirical research demonstrates that, on average, investing in previous winners and short selling previous losers offers highly significant returns that other common risk factors cannot explain. However, momentum also displays huge tail risk, as there are short but persistent periods of highly negative returns. Crashes occur particularly in reversals from bear markets when the momentum portfolio displays a negative market beta and momentum volatility is high.
Are Sustainable Investors Compensated Adequately?
Academic research has demonstrated that the higher risk associated with less sustainable firms should be compensated by higher returns. It also has shown that more sustainable firms have less investment risk.
And the Winner Is: Examining Alternative Value Metrics
Although the most efficient way to implement a value strategy may need to be clarified, it is clear that value has withstood the test of time and that some implementations are superior to others. The evidence suggests that P/B is not an efficient metric as a standalone criteria. Instead, value strategies that use P/B should include at least a measure of profitability while managing sector - and security-level diversification.
Diving Into the Performance of Factors
Researchers have raised questions and led to research into how many factors are needed, the replicability of originally reported results, and the decay of factor performance over time.
Improving Performance by Avoiding Negatives of Index Replication
There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero tracking error (generally assumed to mean that they incur negligible trading costs).
Negative Screening and the Sin Premium
While most sin stocks in the IC method were also identified as sin in the TA method, there were 57 firm-year cases where a company showed up as sin only in the IC method—these were false positive sin stocks as identified in the IC method.