Our study explores two well-known anomalies that seem to be inconsistent with one another. Investors underreact to extreme quarterly earnings surprises resulting in returns drift that may persist for several quarters. This behavioral bias suggests that investors believe that extreme earnings surprises are mostly transitory during the earnings announcement period, but modify their beliefs later as new information arrives in subsequent quarters. In contrast, investors overreact to extreme performance of mutual funds; they pour more money into mutual funds that have recent outstanding performance and withdraw funds from mutual funds that have recently experienced extreme low performance. As these extreme patterns in performance tend to reverse in subsequent quarters, this behavior by investors suggests they erroneously consider most of the extreme performance to be permanent. We do not attempt to explain this inconsistency for retail investors but provide a potential explanation for this behavior among professional investors.
{"title":"Two Inconsistent Behavioral Biases","authors":"J. Livnat, D. Pei, D. Segal","doi":"10.3905/joi.2022.1.233","DOIUrl":"https://doi.org/10.3905/joi.2022.1.233","url":null,"abstract":"Our study explores two well-known anomalies that seem to be inconsistent with one another. Investors underreact to extreme quarterly earnings surprises resulting in returns drift that may persist for several quarters. This behavioral bias suggests that investors believe that extreme earnings surprises are mostly transitory during the earnings announcement period, but modify their beliefs later as new information arrives in subsequent quarters. In contrast, investors overreact to extreme performance of mutual funds; they pour more money into mutual funds that have recent outstanding performance and withdraw funds from mutual funds that have recently experienced extreme low performance. As these extreme patterns in performance tend to reverse in subsequent quarters, this behavior by investors suggests they erroneously consider most of the extreme performance to be permanent. We do not attempt to explain this inconsistency for retail investors but provide a potential explanation for this behavior among professional investors.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"13 - 26"},"PeriodicalIF":0.6,"publicationDate":"2022-06-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46176731","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}
I compare five aspects of investing large educational endowments and public employee pension funds: operating environment and culture, institutional characteristics, expense ratio, risk habitat, and risk-adjusted performance. The most significant measurable differences between the two types of investing institutions are: 1) the amount they spend on investment management and 2) the degree of risk they take. In terms of risk-adjusted performance, endowments have underperformed public funds by a small margin for the 13 years ending June 30, 2021. There is no evidence that endowment managers have an edge over public fund managers of a type or magnitude that might translate to a performance advantage.
{"title":"richard ennis’s insights Are Endowment Managers Better Than the Rest?","authors":"Richard M. Ennis","doi":"10.3905/joi.2022.1.232","DOIUrl":"https://doi.org/10.3905/joi.2022.1.232","url":null,"abstract":"I compare five aspects of investing large educational endowments and public employee pension funds: operating environment and culture, institutional characteristics, expense ratio, risk habitat, and risk-adjusted performance. The most significant measurable differences between the two types of investing institutions are: 1) the amount they spend on investment management and 2) the degree of risk they take. In terms of risk-adjusted performance, endowments have underperformed public funds by a small margin for the 13 years ending June 30, 2021. There is no evidence that endowment managers have an edge over public fund managers of a type or magnitude that might translate to a performance advantage.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"7 - 12"},"PeriodicalIF":0.6,"publicationDate":"2022-06-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48570686","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.095
Laurence B. Siegel, Stephen C. Sexauer
While investment theory and technology offer rational ways to deal with uncertainty, it is more human simply to run away from it. One place people run to is mythology, in this case investment mythology. Myths include misunderstanding the role of central banks and monetary policy; exaggerating the impact of technologies such as index funds, artificial intelligence/machine learning, and “green” energy; and believing either that markets will provide the historical rate of return forever, or the opposite, that there will never be any more growth. The authors tackle seven myths that challenge investors today, plus one (“a half”) that is part myth and part truth.
{"title":"Debunking 7½ Myths of Investing","authors":"Laurence B. Siegel, Stephen C. Sexauer","doi":"10.3905/joi.2022.31.4.095","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.095","url":null,"abstract":"While investment theory and technology offer rational ways to deal with uncertainty, it is more human simply to run away from it. One place people run to is mythology, in this case investment mythology. Myths include misunderstanding the role of central banks and monetary policy; exaggerating the impact of technologies such as index funds, artificial intelligence/machine learning, and “green” energy; and believing either that markets will provide the historical rate of return forever, or the opposite, that there will never be any more growth. The authors tackle seven myths that challenge investors today, plus one (“a half”) that is part myth and part truth.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"95 - 111"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46543043","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.040
Erik Knutzen
Private market investing has evolved dramatically during the past three decades, from small alternative allocations made by the most sophisticated investors into significant components of many programs’ strategic asset allocations. During this period, the number of publicly traded companies in developed markets has declined precipitously, accompanied by a substantial increase in the amount of economic activity taking place in private markets—financed by both equity and debt—and across corporate and real asset structures. This article surveys this evolution and describes its key drivers, including evolving investor behavior, disruptive innovations, financial disintermediation, and regulatory changes. It also looks to the future of private market investing, seeking to lay out the key trends likely to drive further growth: the pursuit of higher returns, continued innovation in the growing private markets ecosystem, and a blurring of the current public/private distinction as investors increasingly evaluate investments across a spectrum of liquidity.
{"title":"Private Markets—From Alternative to Mainstream: Evolution during the Past 30 Years and Key Trends and Challenges for the Decades to Come","authors":"Erik Knutzen","doi":"10.3905/joi.2022.31.4.040","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.040","url":null,"abstract":"Private market investing has evolved dramatically during the past three decades, from small alternative allocations made by the most sophisticated investors into significant components of many programs’ strategic asset allocations. During this period, the number of publicly traded companies in developed markets has declined precipitously, accompanied by a substantial increase in the amount of economic activity taking place in private markets—financed by both equity and debt—and across corporate and real asset structures. This article surveys this evolution and describes its key drivers, including evolving investor behavior, disruptive innovations, financial disintermediation, and regulatory changes. It also looks to the future of private market investing, seeking to lay out the key trends likely to drive further growth: the pursuit of higher returns, continued innovation in the growing private markets ecosystem, and a blurring of the current public/private distinction as investors increasingly evaluate investments across a spectrum of liquidity.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"40 - 53"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42015200","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.011
Richard M. Ennis
Advocates of alternative investments (alts), such as private equity, real estate, and hedge funds, ascribe various benefits to alts. These include volatility dampening, low correlation with stocks and bonds, and powerful diversifying effects. Some say that it is alts’ supposed defensive character that has prevented them from keeping up with stocks and bonds during the bull market following the Global Financial Crisis of 2008 and that there is reason to believe alts will be particularly good performers in the event stocks experience a bear market. None of these claims stands up to critical analysis.
{"title":"Richard Ennis’s Insights: The Fairy Tale of Alternative Investing","authors":"Richard M. Ennis","doi":"10.3905/joi.2022.31.4.011","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.011","url":null,"abstract":"Advocates of alternative investments (alts), such as private equity, real estate, and hedge funds, ascribe various benefits to alts. These include volatility dampening, low correlation with stocks and bonds, and powerful diversifying effects. Some say that it is alts’ supposed defensive character that has prevented them from keeping up with stocks and bonds during the bull market following the Global Financial Crisis of 2008 and that there is reason to believe alts will be particularly good performers in the event stocks experience a bear market. None of these claims stands up to critical analysis.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"11 - 16"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44404574","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.001
Brian R. Bruce
{"title":"Editor’s Letter","authors":"Brian R. Bruce","doi":"10.3905/joi.2022.31.4.001","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.001","url":null,"abstract":"","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"1 - 2"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42138615","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.076
S. Chava, J. Guerard
In 1992, in the initial year of this journal’s publication, Guerard and Takano reported mean-variance efficient portfolios for the Japanese and US equity markets and showed that the use of a regression-weighted composite model of earnings, book value, cash flow, sales, and their relative variables outperformed their respective equity benchmarks by approximately 400 basis points annually. Two years later, Markowitz and Xu tested the composite model strategy and found that its excess returns were statistically significant from a variety of models tested and that the composite model strategy was not the result of data mining. For the 30th anniversary issue, the authors of this article report robust regression modeling results for the 2001–2020 period using the latest features in R and the latest commercially available multi-factor models for portfolio selection. Quantitative investing requires constant implementation and discipline to maximize client wealth. The authors’ results suggest that stock selection models can be effectively employed to deliver excess returns.
{"title":"The Development of Mean-Variance Efficient Portfolios: 30 Years Later","authors":"S. Chava, J. Guerard","doi":"10.3905/joi.2022.31.4.076","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.076","url":null,"abstract":"In 1992, in the initial year of this journal’s publication, Guerard and Takano reported mean-variance efficient portfolios for the Japanese and US equity markets and showed that the use of a regression-weighted composite model of earnings, book value, cash flow, sales, and their relative variables outperformed their respective equity benchmarks by approximately 400 basis points annually. Two years later, Markowitz and Xu tested the composite model strategy and found that its excess returns were statistically significant from a variety of models tested and that the composite model strategy was not the result of data mining. For the 30th anniversary issue, the authors of this article report robust regression modeling results for the 2001–2020 period using the latest features in R and the latest commercially available multi-factor models for portfolio selection. Quantitative investing requires constant implementation and discipline to maximize client wealth. The authors’ results suggest that stock selection models can be effectively employed to deliver excess returns.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"76 - 94"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49122701","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.113
J. Grant
The author proposes that the Economic Value Added (EVA) Revolution of the past is still the EVA of the present regarding the fundamentals of wealth creation and destruction. As such, the economic profit approach to securities analysis and portfolio management is a robust framework for making sell-side recommendations and buy-side decisions. EVA style analysis has been shown to generate abnormal returns (alpha) on corporate actions such as acquisitions, share repurchases (buybacks), stock splits, and dividend announcements. In turn, EVA style dynamics present investors with another potential opportunity to earn alpha or risk-adjusted returns. The author concludes that investor portfolios are not all passive or all active, but they are a mix of passive–active strategies. EVA style with its focus on the financial characteristics of value creators and destroyers is recommended as the bottom-up, fundamental component of the active strategy.
{"title":"The EVA Revolution Revisited: A Return to the Fundamentals of Wealth Creation","authors":"J. Grant","doi":"10.3905/joi.2022.31.4.113","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.113","url":null,"abstract":"The author proposes that the Economic Value Added (EVA) Revolution of the past is still the EVA of the present regarding the fundamentals of wealth creation and destruction. As such, the economic profit approach to securities analysis and portfolio management is a robust framework for making sell-side recommendations and buy-side decisions. EVA style analysis has been shown to generate abnormal returns (alpha) on corporate actions such as acquisitions, share repurchases (buybacks), stock splits, and dividend announcements. In turn, EVA style dynamics present investors with another potential opportunity to earn alpha or risk-adjusted returns. The author concludes that investor portfolios are not all passive or all active, but they are a mix of passive–active strategies. EVA style with its focus on the financial characteristics of value creators and destroyers is recommended as the bottom-up, fundamental component of the active strategy.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"113 - 134"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45379898","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.063
Thomas M. Idzorek, P. Kaplan
Key theories of financial economics seem to be at odds with one another and with observed personalized portfolios. The Popularity Asset Pricing Model serves as a unifying theory by allowing for both rational and irrational investors, individual risk and return expectations, a multitude of pecuniary and non-pecuniary characteristics to impact asset prices, and investors to derive utility from non-pecuniary characteristics. The authors develop a benchmark-relative fund-of-funds alpha-tracking error utility function that directly incorporates an investor’s non-pecuniary preferences, including environmental, social, and governance–oriented preferences. Maximizing the utility function leads to a personalized portfolio that tilt toward characteristics that the investor likes and away from characteristics the investor dislikes while maximizing alpha and minimizing tracking error.
{"title":"Forming ESG-Oriented Portfolios: A Popularity Approach","authors":"Thomas M. Idzorek, P. Kaplan","doi":"10.3905/joi.2022.31.4.063","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.063","url":null,"abstract":"Key theories of financial economics seem to be at odds with one another and with observed personalized portfolios. The Popularity Asset Pricing Model serves as a unifying theory by allowing for both rational and irrational investors, individual risk and return expectations, a multitude of pecuniary and non-pecuniary characteristics to impact asset prices, and investors to derive utility from non-pecuniary characteristics. The authors develop a benchmark-relative fund-of-funds alpha-tracking error utility function that directly incorporates an investor’s non-pecuniary preferences, including environmental, social, and governance–oriented preferences. Maximizing the utility function leads to a personalized portfolio that tilt toward characteristics that the investor likes and away from characteristics the investor dislikes while maximizing alpha and minimizing tracking error.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"63 - 75"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45175876","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 : 2022-05-20DOI: 10.3905/joi.2022.31.4.054
Donald J. Peters
Investment management is a wonderful and rewarding career. A portfolio manager works to help clients fulfill their financial objectives. However, the business becomes tougher every single year and is a meritocracy. Staying in the profession requires continuous improvement and membership on a great team.
{"title":"Thriving Amid the Ravages of Creative Destruction in the Investment Management Industry","authors":"Donald J. Peters","doi":"10.3905/joi.2022.31.4.054","DOIUrl":"https://doi.org/10.3905/joi.2022.31.4.054","url":null,"abstract":"Investment management is a wonderful and rewarding career. A portfolio manager works to help clients fulfill their financial objectives. However, the business becomes tougher every single year and is a meritocracy. Staying in the profession requires continuous improvement and membership on a great team.","PeriodicalId":45504,"journal":{"name":"Journal of Investing","volume":"31 1","pages":"54 - 61"},"PeriodicalIF":0.6,"publicationDate":"2022-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45650964","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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