This article analyzes several valuation metrics’ predictive power on subsequent 1- and 10-year total returns across multiple periods and developed market countries. I evaluated the ratio of market capitalization to gross domestic product, dividend yield, dividend discount model, and Shiller’s CAPE for US data. Succinctly, this research has demonstrated predictive power at the 10-year horizon across countries and valuation metrics after adjusting for overlapping observations. We highlight that there is no strong predictive power across the entirety of the data set for countries with multiple centuries of data. In fact, there is a definitive structural shift in the data across countries within the 20th and 21st centuries. Detractors have focused on the recent failure of these models to predict subsequent returns, often citing that the shift from dividends to share repurchases has caused a structural shift in the data, and that lower interest rates warrant higher equity multiples. I acknowledge the recent failures, but I find these criticisms to be overstated.
{"title":"Exploring the Predictive Power of Valuation Metrics on Subsequent Market Returns","authors":"Sean C. Tillman","doi":"10.3905/jwm.2022.1.181","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.181","url":null,"abstract":"This article analyzes several valuation metrics’ predictive power on subsequent 1- and 10-year total returns across multiple periods and developed market countries. I evaluated the ratio of market capitalization to gross domestic product, dividend yield, dividend discount model, and Shiller’s CAPE for US data. Succinctly, this research has demonstrated predictive power at the 10-year horizon across countries and valuation metrics after adjusting for overlapping observations. We highlight that there is no strong predictive power across the entirety of the data set for countries with multiple centuries of data. In fact, there is a definitive structural shift in the data across countries within the 20th and 21st centuries. Detractors have focused on the recent failure of these models to predict subsequent returns, often citing that the shift from dividends to share repurchases has caused a structural shift in the data, and that lower interest rates warrant higher equity multiples. I acknowledge the recent failures, but I find these criticisms to be overstated.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"15 - 33"},"PeriodicalIF":0.0,"publicationDate":"2022-07-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45088903","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In their Winter 2021 article, “Further on the Returns to Non-Traded REITs,” Joshua Mallett and Craig McCann claimed to have found significantly lower performance for non-traded real estate investment trusts (REITs) as compared to the performance that investors would have earned in a portfolio of traded REITs. The authors’ analysis suffers from at least four fundamental errors. First, the article erroneously compares the performance of non-traded REITs to a mutual fund that is closed to new investors and that tracks an index of publicly traded REITs. Second, it inappropriately combines data about two types of non-traded REITs: “lifecycle REITs” and “NAV REITs.” Third, it uses a limited time period ending before the COVID pandemic. Fourth, the article arbitrarily discounts the appraised value of the non-traded REITs in its sample.
{"title":"Non-Traded REIT Performance: A Response to Mallett and McCann","authors":"Thomas M. Selman","doi":"10.3905/jwm.2022.1.180","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.180","url":null,"abstract":"In their Winter 2021 article, “Further on the Returns to Non-Traded REITs,” Joshua Mallett and Craig McCann claimed to have found significantly lower performance for non-traded real estate investment trusts (REITs) as compared to the performance that investors would have earned in a portfolio of traded REITs. The authors’ analysis suffers from at least four fundamental errors. First, the article erroneously compares the performance of non-traded REITs to a mutual fund that is closed to new investors and that tracks an index of publicly traded REITs. Second, it inappropriately combines data about two types of non-traded REITs: “lifecycle REITs” and “NAV REITs.” Third, it uses a limited time period ending before the COVID pandemic. Fourth, the article arbitrarily discounts the appraised value of the non-traded REITs in its sample.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"102 - 108"},"PeriodicalIF":0.0,"publicationDate":"2022-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48964845","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 made significant changes to the required minimum distribution (RMD) schedule for individual retirement accounts and defined contribution retirement plans. Microsoft Excel spreadsheet calculators are developed to calculate annual RMD cash flows throughout retirement for those who are retired and for those who are planning to retire. Unlike internet calculators, the spreadsheet calculators allow savings to earn monthly interest throughout retirement. Further, the calculators are easy to use and allow individuals to forecast long horizon RMD distributions for subsequent tax or reinvestment planning purposes.
{"title":"Required Minimum Distribution Spreadsheet Calculators Based on the SECURE Act of 2019","authors":"Tom Arnold, J. Earl, C. Marshall","doi":"10.3905/jwm.2022.1.177","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.177","url":null,"abstract":"The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 made significant changes to the required minimum distribution (RMD) schedule for individual retirement accounts and defined contribution retirement plans. Microsoft Excel spreadsheet calculators are developed to calculate annual RMD cash flows throughout retirement for those who are retired and for those who are planning to retire. Unlike internet calculators, the spreadsheet calculators allow savings to earn monthly interest throughout retirement. Further, the calculators are easy to use and allow individuals to forecast long horizon RMD distributions for subsequent tax or reinvestment planning purposes.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"9 - 14"},"PeriodicalIF":0.0,"publicationDate":"2022-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44692845","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Investment risk has many dimensions beyond the macroeconomic, industry, and firm gradients. This article reports on a study of investor response to various levels of corporate exposure to environmental, societal, and governance risk, which is frequently referred to as sustainability. The article also studies the correlation between sustainability and economic moats. Investor response is measured using Morningstar’s Analyst ratings and Quantitative ratings. The extent to which loads and annual expenses impact analyst and MOAT ratings is also explored. We document the surprising negative relationship between mutual fund sustainability and Morningstar’s Analyst ratings and Quantitative ratings. By comparison, there is an anticipated positive relationship between fund Sustainability ratings and Morningstar Economic Moat ratings (MOAT ratings). Although Analyst ratings are swayed by loads and expense ratios, MOAT ratings are insensitive. Fortunately, paying loads and higher expense ratios does not result in higher MOAT ratings.
{"title":"Analyst Ratings and MOAT Ratings Sensitivities to ESG Risk and Fund Charges","authors":"C. E. Chang, T. Krueger, H. Witte","doi":"10.3905/jwm.2022.1.176","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.176","url":null,"abstract":"Investment risk has many dimensions beyond the macroeconomic, industry, and firm gradients. This article reports on a study of investor response to various levels of corporate exposure to environmental, societal, and governance risk, which is frequently referred to as sustainability. The article also studies the correlation between sustainability and economic moats. Investor response is measured using Morningstar’s Analyst ratings and Quantitative ratings. The extent to which loads and annual expenses impact analyst and MOAT ratings is also explored. We document the surprising negative relationship between mutual fund sustainability and Morningstar’s Analyst ratings and Quantitative ratings. By comparison, there is an anticipated positive relationship between fund Sustainability ratings and Morningstar Economic Moat ratings (MOAT ratings). Although Analyst ratings are swayed by loads and expense ratios, MOAT ratings are insensitive. Fortunately, paying loads and higher expense ratios does not result in higher MOAT ratings.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"55 - 70"},"PeriodicalIF":0.0,"publicationDate":"2022-07-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44241116","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Private wealth managers are often challenged to help reluctant clients make investment decisions in nondiscretionary accounts. Investors may be hesitant, or even too eager, about the price and timing of specific investments. This investor behavior challenges wealth managers on a daily basis. We designed an experiment to seek out remedies in the setting of a university student–managed investment fund with novice undergraduate student investors. Over 3 years, more than 400 investment decisions were made. More than 220 decisions would not have been made were it not for our suggested remedy. Our sample includes more than 100 individual investors and a portfolio size of $1 million in real funds. Our solution for hesitancy is offering cash covered puts for investment purchases and covered calls for investment liquidations. We find that having a third option of buying or selling with covered options largely alleviates decision-making anxiety for our sample investors. As a bonus, this option trading activity made the portfolio significantly more profitable during this 3-year experimental period from 2017 through 2019.
{"title":"Reluctant Investors: A Behavioral Experiment","authors":"Denver H. Travis, M. Dicle","doi":"10.3905/jwm.2022.1.175","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.175","url":null,"abstract":"Private wealth managers are often challenged to help reluctant clients make investment decisions in nondiscretionary accounts. Investors may be hesitant, or even too eager, about the price and timing of specific investments. This investor behavior challenges wealth managers on a daily basis. We designed an experiment to seek out remedies in the setting of a university student–managed investment fund with novice undergraduate student investors. Over 3 years, more than 400 investment decisions were made. More than 220 decisions would not have been made were it not for our suggested remedy. Our sample includes more than 100 individual investors and a portfolio size of $1 million in real funds. Our solution for hesitancy is offering cash covered puts for investment purchases and covered calls for investment liquidations. We find that having a third option of buying or selling with covered options largely alleviates decision-making anxiety for our sample investors. As a bonus, this option trading activity made the portfolio significantly more profitable during this 3-year experimental period from 2017 through 2019.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"115 - 131"},"PeriodicalIF":0.0,"publicationDate":"2022-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41940840","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we examine the performance of a simple and popular risk parity investment portfolio, the so-called All-Weather portfolio. We examine a period of 15 years, from 2005 to 2020, which include the 2008 Global Financial Crisis and the 2020 Stock Market Crash. We find that the All-Weather portfolio outperforms other portfolios in the long run and during the two crisis periods. Its superior performance is determined by the correlation structure among various asset classes, the risk parity asset allocation weights, and such “luck factors” as the bull market for bonds during the sample period. The Monte Carlo simulation analysis of the optimal target weights for dynamic risk parity asset allocation reveals that the optimal target weights in the All-Weather portfolio do exist. Our findings shed some important insights on the All-Weather investment strategies for academia and investors, especially for small and individual investors.
{"title":"Can an All-Weather Investment Strategy Survive in “Bad” Weather?","authors":"Yixi Ning, Sean Yang, Wangzhi Zheng","doi":"10.3905/jwm.2022.1.174","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.174","url":null,"abstract":"In this article, we examine the performance of a simple and popular risk parity investment portfolio, the so-called All-Weather portfolio. We examine a period of 15 years, from 2005 to 2020, which include the 2008 Global Financial Crisis and the 2020 Stock Market Crash. We find that the All-Weather portfolio outperforms other portfolios in the long run and during the two crisis periods. Its superior performance is determined by the correlation structure among various asset classes, the risk parity asset allocation weights, and such “luck factors” as the bull market for bonds during the sample period. The Monte Carlo simulation analysis of the optimal target weights for dynamic risk parity asset allocation reveals that the optimal target weights in the All-Weather portfolio do exist. Our findings shed some important insights on the All-Weather investment strategies for academia and investors, especially for small and individual investors.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"71 - 91"},"PeriodicalIF":0.0,"publicationDate":"2022-06-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48282564","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Portfolios with well-diversified monthly returns can have significant long-term exclusion risk. We use 30 sector portfolios with 90 years of returns. Including 10 to 15 of these sectors in an investment portfolio is sufficient to eliminate almost all idiosyncratic risk in monthly returns. We propose a simple measure for exclusion risk for long-term investors. By compounding the monthly returns over our 90-year sample period, we show that portfolios with 10 to 15 sectors are not well diversified for long-term investors; including more sectors significantly reduces the exclusion risk.
{"title":"Exclusion Risk for Long-Term Investors","authors":"Vebjørn Jokstad, Snorre Lindset, Håvard Tryland","doi":"10.3905/jwm.2022.1.172","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.172","url":null,"abstract":"Portfolios with well-diversified monthly returns can have significant long-term exclusion risk. We use 30 sector portfolios with 90 years of returns. Including 10 to 15 of these sectors in an investment portfolio is sufficient to eliminate almost all idiosyncratic risk in monthly returns. We propose a simple measure for exclusion risk for long-term investors. By compounding the monthly returns over our 90-year sample period, we show that portfolios with 10 to 15 sectors are not well diversified for long-term investors; including more sectors significantly reduces the exclusion risk.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"49 - 54"},"PeriodicalIF":0.0,"publicationDate":"2022-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46475457","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-04-30DOI: 10.3905/jwm.2022.25.1.001
Jean L. P. Brunel, Paul Bouchey
{"title":"Editor’s Letter","authors":"Jean L. P. Brunel, Paul Bouchey","doi":"10.3905/jwm.2022.25.1.001","DOIUrl":"https://doi.org/10.3905/jwm.2022.25.1.001","url":null,"abstract":"","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":" ","pages":"1 - 3"},"PeriodicalIF":0.0,"publicationDate":"2022-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48835284","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Edward N. W. Aw, Christina B. Carroll, John Q. Jiang, Gregory Y. Sivin
We examined the benefit of incorporating ESG factors over a more recent period to acknowledge the ongoing investment trend toward ESG. A review of academic literature suggests lack of consensus on the benefit of incorporating ESG factors. We find no evidence that suggests incorporating ESG criteria results in a performance headwind or subordinate return. Furthermore, we find strong evidence of idiosyncratic risk reduction as one moves from firms that are least ESG compliant toward firms that are most ESG compliant. Finally, we conclude that the source of ESG rating can alter the performance of ESG factors.
{"title":"Beyond a Morality Tale: Reassessing ESG Investing","authors":"Edward N. W. Aw, Christina B. Carroll, John Q. Jiang, Gregory Y. Sivin","doi":"10.3905/jwm.2022.1.171","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.171","url":null,"abstract":"We examined the benefit of incorporating ESG factors over a more recent period to acknowledge the ongoing investment trend toward ESG. A review of academic literature suggests lack of consensus on the benefit of incorporating ESG factors. We find no evidence that suggests incorporating ESG criteria results in a performance headwind or subordinate return. Furthermore, we find strong evidence of idiosyncratic risk reduction as one moves from firms that are least ESG compliant toward firms that are most ESG compliant. Finally, we conclude that the source of ESG rating can alter the performance of ESG factors.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"8 - 20"},"PeriodicalIF":0.0,"publicationDate":"2022-04-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44067336","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article presents a framework that solves the post-retirement investment and consumption problem by maximizing the utility of consumption over time. The model produces optimal solutions on asset allocation, consumption, and annuitization in retirement with consideration for longevity/mortality risks. The optimized investment solution is a function of wealth and age that can accommodate for different risk aversions and life expectancies. We find that annuities offer the most utility for investors with higher wealth relative to their guaranteed income and are more effective when purchased within certain age bands. Compared to traditional glide-path type approaches, the optimized solution provides life-time consumption profiles that are superior in both the average and downside cases.
{"title":"Solving the Decumulation Puzzle with Dynamic Asset Allocation and Annuities","authors":"Jianxiong Sun, Hongli Lan","doi":"10.3905/jwm.2022.1.170","DOIUrl":"https://doi.org/10.3905/jwm.2022.1.170","url":null,"abstract":"This article presents a framework that solves the post-retirement investment and consumption problem by maximizing the utility of consumption over time. The model produces optimal solutions on asset allocation, consumption, and annuitization in retirement with consideration for longevity/mortality risks. The optimized investment solution is a function of wealth and age that can accommodate for different risk aversions and life expectancies. We find that annuities offer the most utility for investors with higher wealth relative to their guaranteed income and are more effective when purchased within certain age bands. Compared to traditional glide-path type approaches, the optimized solution provides life-time consumption profiles that are superior in both the average and downside cases.","PeriodicalId":39998,"journal":{"name":"Journal of Wealth Management","volume":"25 1","pages":"135 - 151"},"PeriodicalIF":0.0,"publicationDate":"2022-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44815976","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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