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.
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.
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.
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).
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.
I’ve received calls from clients inquiring about moving assets to gold. When I asked them why, three reasons dominated.
This article examines the research conducted by Dimensional to determine the efficacy of an industry or country approach to factor investing.
No surprise: reddit message boards don't lead to alpha generation.
Merger arbitrage is an investment style in which investors seek to buy shares of firms that are acquisition targets with the objective of realizing the difference between the amount for which the target is being acquired and the stock price of the target shortly after the acquisition is announced. The stock price of the target company typically sells below the acquisition price, reflecting the uncertainty of the deal being completed (the arbitrage spread). Betting on mergers is a classic hedge fund arbitrage strategy.
Jiadong Liu and Fotis Papailias contribute to the momentum literature with their study “Time Series Reversal in Trend-Following Strategies,” published in the January 2023 issue of “European Financial Management,” in which they examined the reversal property of various financial assets.
A simple 1/N factor diversification strategy will likely be at least as efficient as more “sophisticated” versions.
For anomalies that are risk-based, that is what we should expect to see because, while risk cannot be arbitraged away, cash flows can reduce the size of the premium. For the anomalies that are behavioral based, it appears that limits to arbitrage are still sufficient to allow them to persist post-publication.
Regardless of the model used, an anomaly for all models is that the empirical evidence demonstrates that stocks with high research and development (R&D) expenses have delivered a premium.
The importance of the role played by short sellers has received increasing academic attention in recent years. Short sellers help keep market prices efficient by preventing overpricing and the formation of price bubbles in financial markets. Market efficiency is important because an efficient market allocates capital efficiently. If short sellers were inhibited from expressing their views on valuations, securities prices could become overvalued and excess capital would be allocated to those firms.
This figure shows the long, short and long-short leg performance of the intangible value factor in comparison to the traditional value factor. The performance is shown for each of the four regions: U.S., Europe, Japan and Asia Pacific between June 1983 and December 2021. The monthly returns are ex-post volatility scaled to 5% p.m
Non-traditional investor preferences play an important role in explaining the cross-section of expected stock returns.
Wide divergences between the valuations of cheap stocks relative to expensive stocks have preceded significant outperformance for value over the subsequent decade, as shown in this figure.
Given that valuations provide information on equity returns, it should not be surprising to learn that valuation spreads provide information on future factor premiums.
In their 1961 paper, “Dividend Policy, Growth, and the Valuation of Shares,” Merton Miller and Franco Modigliani famously established that dividend policy should be irrelevant to stock returns. As they explained it, at least before frictions like trading costs and taxes, investors should be indifferent to $1 in the form of a dividend (causing the stock price to drop by $1) and $1 received by selling shares. This must be true, unless you believe that $1 isn’t worth $1. This theorem has not been challenged since, at least in the academic community.
This chart on creating shareholder value through ESG engagement is useful when evaluating if ESG practices boost valuations.
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