Showing papers in "The Journal of Investing in 2000"
TL;DR: In this paper, the authors investigate both the financial and social performance of companies included in socially responsible and traditional investment portfolios and find that companies that successfully pass a social screen (screened-in companies) outperform screened-out companies on a variety of social performance measures: employee relations, diversity, product (customer), community relations, environment, non-U.S. operations, and governance.
Abstract: Socially responsible investment is a growing movement. The authors ask how we can evaluate social performance. They investigate both the financial and social performance of companies included in socially responsible and traditional investment portfolios. Companies that successfully pass a social screen (screened-in companies) outperform screened-out companies on a variety of social performance measures: employee relations, diversity, product (customer), community relations, environment, non-U. S. operations, and governance. Screened-in and screened-out companies perform about the same financially and in market terms.
71 citations
TL;DR: In this article, the authors test two value strategies on the Domini Social Index (DSI) as Compustat return data and find that a rebalancing strategy of ranking DSI stocks by valuation each quarter yields an 18.9% average annualized return versus an average of 16.7% for three value benchmarks.
Abstract: The author tests two value strategies on the Domini Social Index (DSI) as Compustat return data. He finds that a rebalancing strategy of ranking DSI stocks by valuation each quarter yields an 18.9% average annualized return versus an average of 16.7% for three value benchmarks for the time period fourth quarter 1990 through first quarter 1999. The DSI Shaper ratio was 0.99 versus a benchmark average of 0.93. A buy-and-hold strategy has good nominal returns (17.5%), but a below-benchmark Sharpe ratio of 0.85.
59 citations
TL;DR: In this article, the returns of portfolios are compared to a traditional investment vehicle using several methods of asset allocation and the strategies are examined in the context of investor regret and it is determined that the investor following these strategies is likely to be quite pleased regardless of the asset allocation method.
Abstract: The returns of portfolios are compared to a traditional investment vehicle using several methods of asset allocation. The strategies are examined in the context of investor regret and it is determined that the investor following these strategies is likely to be quite pleased regardless of the asset allocation method.
24 citations
TL;DR: In this article, the efficiency ratio as a performance measure is based on the ex post efficient frontier underlying the investment environment, which is related to the Sharpe ratio but improves on it, consistent with modern portfolio theory.
Abstract: The efficiency ratio as a performance measure is based on the ex post efficient frontier underlying the investment environment. Consideration of return potential offers some absolute judgment provided by other performance measures. The absolute performance of the benchmark can also be assessed. The efficiency ratio is related to the Sharpe ratio, but improves on it, consistent with modern portfolio theory. Application to mutual funds in the U. S. stock market demonstrates its superior performance measurement.
22 citations
TL;DR: The level of implied volatility in the U.S. equity market, as represented by the market volatility index of the Chicago Board Options Exchange, is a good indicator of the level of fear or greed as discussed by the authors.
Abstract: The level of implied volatility in the U.S. equity market, as represented by the market volatility index of the Chicago Board Options Exchange, is a good indicator of the level of fear or greed in U.S. and global capital markets. When investors are fearful, the VIX level is significantly higher than normal. Market participants require additional compensation in the form of above-average excess returns for riskier assets. The authors find that global equity markets outperform the respective bond markets after periods of relatively high expected volatility in the U.S. market. Similarly, U.S. and international equity markets underperform bonds after periods of unusually low implied volatility. Using implied volatility as an asset allocation factor would have added significant value over the last thirteen years.
20 citations
TL;DR: In this article, the authors focus on the value of financial advisors; the contributions of strategic asset allocation, tactical asset allocation and security selection; and the interpretation of asset allocation figures; they do not enhance their value by misinterpreting Brinson, Hood, and Beebower9s 93.6% figure.
Abstract: Financial advisors provide great value as managers of investors and managers of investments; they do not enhance their value by misinterpreting Brinson, Hood, and Beebower9s 93.6% figure. This article focuses on the value of financial advisors; the contributions of strategic asset allocation, tactical asset allocation, and security selection; and the interpretation of asset allocation figures.
19 citations
TL;DR: In this article, a content analysis-based portfolio screening model was developed that successfully mimicked the environmental screening decisions made by six socially responsible mutual funds in the United States and correctly predicted 90% of a combined total of 50 environmental screening decision for funds whose combined net assets represented over 50% of the total industrywide assets invested as of August 30, 1997.
Abstract: Traditional research pertaining to the social screening of portfolio firms has rarely gone beyond a description of its conceptual underpinnings. This empirical investigation looks at the real-life practice of implementing an environmental screen and yields a number of interesting observations regarding the environmental screening decision processes of socially responsible mutual funds in the United States. Employing a taxonomy of corporate social responsibility concepts developed via a recent survey of socially responsible mutual funds in the United States, a content analysis-based portfolio screening model was developed that successfully mimicked the environmental screening decisions made by six funds. The model correctly predicted 90% of a combined total of 50 environmental screening decisions for funds whose combined net assets represented over 50% of the total industrywide assets invested as of August 30, 1997.
18 citations
TL;DR: In this paper, the role of human evolution in the investment decision process is explored using insights from the field of evolutionary psychology, and the authors present evidence that suggests that herding, overconfidence, loss aversion, and heavy reliance on concrete, personal, and affective information may have evolutionary roots.
Abstract: This article aims to stimulate inquiry into the role that human evolution plays in the investment decision process. Using insights from the field of evolutionary psychology, the author presents evidence that suggests that herding, overconfidence, loss aversion, and heavy reliance on concrete, personal, and affective information may have evolutionary roots. The investment implications of these behaviors include security price overrreaction, excessive stock trading, higher-than-expected risk premiums, and greater stock price sensitivity to concrete and imaginable events.
18 citations
TL;DR: In this paper, the authors examined the investment performance of 292 U.S. equity pension funds in three major style categories for two consecutive twelve-quarter time periods, including survivors and non-survivors.
Abstract: The authors examine the investment performance of 292 U.S. equity pension funds in three major style categories for two consecutive twelve-quarter time periods, including survivors and non-survivors. They offer three major conclusions. First, the choice of an equity benchmark affects the magnitude of alpha. Second, it is difficult to find investment managers within equity styles who consistently add value relative to the S&P 500 and the appropriate style benchmark. Finally, there is no evidence that the number of funds outperforming that appropriate style benchmark index (after fees) exceeds random chance. Including non-survivors and applying selected control variables does not affect the basic results.
18 citations
TL;DR: In this article, the authors tout the three Ps: philosophy, process, and performance of global asset allocation, and examine whether equity market correlations have been increasing; the relationship of investment horizons to the benefit of international diversification; country-industry and value-growth comparisons; and optimal currency hedging strategies.
Abstract: In this overview of global asset allocation opportunities, the authors tout the “three Ps:” philosophy, process, and performance. The questions they examine along the way include: the performance of global asset allocation; whether equity market correlations have been increasing; the relationship of investment horizons to the benefit of international diversification; country-industry and value-growth comparisons; and optimal currency hedging strategies. “Only by studying world equity markets in conjunction with the economic, social, and political aspects of world affairs” can portfolio managers be informed on this issue, they say.
17 citations
TL;DR: In this article, the authors lay out the truth about how many times it takes to obtain adequate diversification in a domestic equity portfolio, and the truth is that it takes much more than 15 stocks.
Abstract: Most of us have heard the statement “90% of available diversification is achieved with a 15-stock portfolio.” Very few, if any, of us behave as though we believe this statement, and there9s good reason why—it9s not true. This article lays out the truth about how many times it takes to obtain adequate diversification in a domestic equity portfolio. It9s much more than 15.
TL;DR: In this paper, the P-E ratio of S&P 500 stocks is found to be fairly well explained by future (ex post) movements of corporate earnings and interest rates.
Abstract: The P-E ratio of S&P 500 stocks is found to be fairly well explained by future (ex post) movements of corporate earnings and interest rates. Stock markets appear to foresee as far as eight years with reasonable accuracy. This finding suggests that the P-E ratio is of limited use as a measure of stock valuation.
TL;DR: This article showed that portfolios that aim to diversify across countries and across industries provide better reward-to-risk ratios than the traditional asset allocation strategies that select country positions and then index local broad market indexes.
Abstract: This article shows that portfolios that aim to diversify across countries and across industries provide markedly better reward-to-risk ratios than the traditional asset allocation strategies that aim to select country positions and then index local broad market indexes. Country asset allocations are distinctly different under each strategy. The results hold across nationality of investors, across alternative benchmarks, and across alternative currency hedging strategies.
TL;DR: In this article, the authors show that the maxim evolved from a false interpretation of Adam Smith's ideas and philosophy, and that it masquerades as a well-defined and unambiguously measurable concept.
Abstract: This article deals with the overriding objective of maximizing shareholder wealth. We show that the maxim evolved from a false interpretation of Adam Smith9s ideas and philosophy, and that it masquerades as a well-defined and unambiguously measurable concept. We also argue that, even if it were a well-defined concept, it still should not be an overriding goal of business activity, especially when its short-term long-term consequences are being explicitly studied.
TL;DR: In this article, the authors compared projected after-tax retirement incomes from average-cost and low-cost non-qualified annuities and, respectively, a low cost index fund and an average cost mutual fund, and concluded that the average cost annuity almost always provides less income than an index fund.
Abstract: For a range of projected bond and stocks returns and a range of investment horizons, this study compares projected after-tax retirement incomes from average-cost and low-cost non-qualified annuities and, respectively, a low-cost index fund and an average-cost mutual fund. It concludes that the average-cost annuity almost always provides less income than an index fund. For investment horizons shorter than twenty years, the annuity usually provides less income than an average-cost mutual fund. In short, the average annuity9s costs exceed its benefits.
TL;DR: Momentum traders buy stock (often on margin) as prices rise and sell as prices fall as discussed by the authors, trying to obtain the benefits of a call option--upside participation with limited risk on the downside without any payment of an option premium.
Abstract: Momentum traders buy stock (often on margin) as prices rise and sell as prices fall. In essence, they are trying to obtain the benefits of a call option--upside participation with limited risk on the downside--without any payment of an option premium. The strategy appears to offer a chance of huge gains with little risk and minimal cost, but its real risks and costs become known only when it9s too late--after the strategy has failed, and taken markets down with it.
TL;DR: In this article, the authors examine the investment style ratings that Morningstar assigns to mutual funds, changes in those style ratings over time, and style performance data and find evidence that the direction of style drift is biased toward the style with the highest return.
Abstract: This article looks for evidence that mutual funds change their investment strategy or style in an attempt to improve performance. The author examines the investment style ratings that Morningstar assigns to mutual funds, changes in those style ratings over time, and style performance data. He finds evidence that the direction of style drift is biased toward the style with the highest return; the bias is statistically significant; and the bias is consistent over time. The study provides evidence that style drift by mutual funds is intentional, not random, and that portfolio managers actively manage the style drift of their portfolios.
TL;DR: In this paper, the authors define portfolio risk as the variability of the difference in return between the portfolio and the benchmark, and quantifying the actual and potential volatility of relative returns can gain valuable insight into the performance of their portfolios.
Abstract: Although portfolio risk is typically measured by the standard deviation of returns, when performance is compared against a specified benchmark risk can also be described as the variability of the difference in return between the portfolio and the benchmark. By quantifying the actual and potential volatility of relative returns, clients and portfolio managers can gain valuable insight into the performance of their portfolios. Understanding risk from this point of view helps explain why clients and managers evaluate strategic alternatives and their impact on portfolio returns differently.
TL;DR: In this paper, the authors examined an extensive sample of U.S. and U.K. listed closed-end funds and found that short portfolios with deep premiums outperform the benchmark and long portfolios, provided transaction costs are moderate to high.
Abstract: Can discounts and premiums on closed-end equity funds be used to earn positive excess returns over a benchmark index? Research in the U.S. market has found that investors could have earned higher returns than a benchmark of U.S. stocks by purchasing shares of closed-end funds with discounts. This research examines an extensive sample of U.S. and U.K. listed closed-end funds September 4, 1998, through 1991, including transaction costs, an important element in evaluating portfolio performance that is absent from previous work. While long portfolios with deep discounts outperform a benchmark index, provided transaction costs are low, the surprise is that short portfolios with deep premiums outperform the benchmark and long portfolios, provided transaction costs are moderate to high.
TL;DR: In this article, the authors use a common data set to evaluate different approaches, illustrating a common-sense approach that provides a close-enough representation of these results, concluding that much of the debate has missed the major point of asset allocation.
Abstract: In the process of debating asset allocation numbers, the discussion has lost touch with simple common sense. The authors use a common data set to evaluate different approaches, illustrating a common-sense approach that provides a close-enough representation of these results. They conclude that much of the debate has missed the major point of asset allocation.
TL;DR: In this article, the authors examine the return implications of a set of scenarios representing choices and circumstances found in the real world of investing, and show that the importance of factors such as cost, market timing, and security selection in determining investment outcomes understates the importance that the normal long-term allocation to stocks, bonds, and cash is of "overwhelming" importance in determining longterm investment returns.
Abstract: A commonly held view is that the normal long-term allocation to stocks, bonds, and cash is of “overwhelming” importance in determining long-term investment returns. This view understates the importance of factors such as cost, market timing, and security selection in determining investment outcomes. The author demonstrates this point by examining the return implications of a set of scenarios representing choices and circumstances found in the real world of investing.
TL;DR: In this article, Collins and Porras find that their visionary firms outperform a less visionary comparison group and the market index through 1990, but the relationship weakens for the years following, and using market capitalization and SIC code benchmarks, find little support for the superiority of these companies prior to or after the Collins-Porras study.
Abstract: In 1994, James Collins and Jerry Porras extolled the virtues of a selected group of visionary companies in Built to Last. Whether these visionary companies are good of investments is not clear. Collins and Porras find that their visionary firms outperform a “less visionary” comparison group and the market index through 1990. We can confirm Collins and Porras9s results on a raw and risk-adjusted basis for the years prior to the completion of their work, but the relationship weakens for the years following. And using market capitalization and SIC code benchmarks, we find little support for the superiority of these companies prior to or after the Collins-Porras study.
TL;DR: In this paper, the authors extend the analysis to 21 countries included in the MSCI World universe as of June 1998 and show that across the vast majority of countries evaluated that analysts' earnings forecasts are upwardly biased; simple forecasting techniques frequently outperform the analysts; and investors incorporate the overoptimistic analysts' forecasts into prices.
Abstract: Most of the studies that have evaluated the earnings forecasts of analysts have limited their investigation to the US market. This paper extends the analysis to 21 countries included in the MSCI World universe as of June 1998. This study shows that across the vast majority of countries evaluated that (1) analysts’ earnings forecasts are upwardly biased; (2) simple forecasting techniques frequently outperform the analysts; and (3) investors incorporate the overoptimistic analysts’ forecasts into prices. Consequently, analysts’ earnings forecasts give rise to exploitable investment opportunities. This study provides insights into indentifying these opportunities and also highlights the extent to which these opportunities differ across countries.
TL;DR: The authors examines the viability of absolute return strategies for institutional investors and concludes that hedge funds are a good alternative to international equities and private equity, and proposes a hedge fund-based absolute return strategy for hedge funds.
Abstract: Over the last 15 years institutional investors have broadly embraced two new asset classes: international equities and private equity. Recently, institutions have begun to consider another new asset class: absolute return strategies known as hedge funds. This paper examines the viability of absolute return strategies for institutional
TL;DR: In this paper, the authors convey their belief that strategic asset and currency positions should be determined separately, and that a partially hedged benchmark generally represents a prudent alternative to the widely used unhedged benchmark.
Abstract: The question of policy level currency exposure continues to generate discussion in the pension management community. Too often, plan sponsors relegate the issue to unhedged (and, less frequently, hedged) benchmark absolutisms. The authors convey their belief that strategic asset and currency positions should be determined separately, and that a partially hedged benchmark generally represents a prudent alternative to the widely used unhedged benchmark.
TL;DR: In this paper, the authors consider whether investors can obtain the benefits of global diversification by purchasing the equity of U.S. multinational corporations, and they find that USMNC returns tend to move with the swings of the U. S. market, irrespective of the location of their foreign operations.
Abstract: The authors consider whether investors can obtain the benefits of global diversification by purchasing the equity of U.S. multinational corporations. They find that USMNC returns tend to move with the swings of the U.S. market, irrespective of the location of their foreign operations, so they provide little in the way of global diversification. Other investment vehicles available to U.S. investors such as ADRs are more highly correlated with the returns in foreign markets.
TL;DR: In this paper, the authors compared the performance of mutual funds to appropriate benchmarks on a monthly basis over a five and a half year period, and found that value outperformed growth funds relative to their benchmarks and was noticeably superior to that of value funds across all capitalization levels.
Abstract: This article compares the performance of mutual funds to appropriate benchmarks on a monthly basis over a five and a half year period. A number of interesting tendencies seem to hold regardless of capitalization or style. Small-, mid-, or large-cap funds have tended to outperform their relevant benchmark when their dominant capitalization sector has underperformed. Large-cap funds have had the highest returns but the worst performance relative to benchmarks. Just the opposite has been true for small-caps. Value outperformed growth funds relative to their benchmarks has been noticeably superior to that of value funds across all capitalization levels.
TL;DR: In this article, the authors examined the relationship between analysts' forecast accuracy and brokerage firm affiliation and found that the lowest individual forecast is more accurate than either the mean of all contemporaneous forecasts or the mean by large brokerage firms, and large brokerage firm analysts are more accurate only when their forecasts are lower than those of small brokerage firms.
Abstract: This article reexamines the relationship between analysts’ forecast accuracy and brokerage firm affiliation. The lowest individual forecast is found to be more accurate than either the mean of all contemporaneous forecasts or the mean of all contemporaneous forecasts by large brokerage firms, and large brokerage firm analysts are more accurate only when their forecasts are lower than those of small brokerage firms. The lower the small brokerage firm forecasts relative to large brokerage firm forecasts, the more forecast accuracy can be improved by incorporating small brokerage firm forecasts. The conclusion is that an analyst9s expected forecast accuracy is more closely related to whether that analyst9s forecast is lower or higher than other analysts’ forecasts than to the analyst9s brokerage firm affiliation.
TL;DR: The majority of stock fraud occurs in micro-cap or penny-stock issues as mentioned in this paper and these thinly capitalized companies often do not file periodic audited financial statements with the SEC.
Abstract: The prolonged bull market has garnered the interest of an amazing variety of small investors. Many invest in small startups hoping to discover the next Intel, Cisco Systems, Dell computers, or Microsoft. Unfortunately, the bull market has also created a new breed of con artists who create investment scams aimed at neophyte investors. The majority of stock fraud occurs in microcap or penny-stock issues. Unlike NASDAQ or NYSE stocks, these thinly capitalized companies often do not file periodic audited financial statements with the SEC. This article examines the microcap stock fraud schemes through which swindlers have deceived many ingenuous investors. It then presents a fraud case of Eltro-optical Systems. Finally, it offers some suggestions that may prevent the swindlers to defraud novitiates.
TL;DR: The authors suggests that the low dividend yield and high price-to-earnings ratio on the S&P 500 imply that investors have reduced their required return on equities, probably because they have become more comfortable with equity investments.
Abstract: It is reasonable to expect the recent performance of the domestic equity markets to continue? This article suggests that the low dividend yield and high price-to-earnings ratio on the S&P 500 imply that investors have reduced their required return on equities, probably because they have become more comfortable with equity investments. Going forward, equities are likely to earn less than the 11% compounded return enjoyed since 1926. Institutions may need to reevaluate their goals and investment strategies to better assure they maintain fund purchasing power net of spending.