Dawson Beutler, Alex Billias, Sam Holt, J. Lerner, TzuHwan Seet
In 2001, Dean Takahashi and Seth Alexander of the Yale University Investments Office developed a deterministic model for estimating future cash flows and valuations for the Yale endowment’s private equity portfolio. Their model, which is simple and intuitive, is still commonly used by investors to this day. However, the model possesses significant shortcomings, including its sensitivity to the assumptions necessary for the model to function and its failure to provide a range of possible portfolio outcomes. Both issues can result in investors developing overconfidence in forecasts, which can result in suboptimal—or even adverse—portfolio management decisions. To address these shortcomings, we propose a novel historical simulation approach that preserves the simplicity and intuition behind Takahashi and Alexander’s approach. However, our model, which leverages historical private equity cash flow data, requires no user assumptions and naturally provides a range of outcomes. We explore this model in some depth, highlighting the model’s power and flexibility across myriad use cases.
2001年，耶鲁大学投资办公室(Yale University Investments Office)的院长高桥(Dean Takahashi)和塞思•亚历山大(Seth Alexander)开发了一个确定性模型，用于估算耶鲁大学捐赠基金私募股权投资组合的未来现金流和估值。他们的模型简单直观，至今仍被投资者普遍使用。然而，该模型具有显著的缺陷，包括对模型运行所必需的假设的敏感性，以及未能提供一系列可能的投资组合结果。这两个问题都可能导致投资者对预测产生过度自信，从而导致次优甚至不利的投资组合管理决策。为了解决这些缺点，我们提出了一种新颖的历史模拟方法，该方法保留了Takahashi和Alexander方法背后的简单性和直觉。然而，我们的模型利用了历史私募股权现金流数据，不需要用户假设，自然会提供一系列结果。我们深入探讨了这个模型，强调了模型在无数用例中的功能和灵活性。
{"title":"Takahashi–Alexander Revisited: Modeling Private Equity Portfolio Outcomes Using Historical Simulations","authors":"Dawson Beutler, Alex Billias, Sam Holt, J. Lerner, TzuHwan Seet","doi":"10.3905/jpm.2023.1.496","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.496","url":null,"abstract":"In 2001, Dean Takahashi and Seth Alexander of the Yale University Investments Office developed a deterministic model for estimating future cash flows and valuations for the Yale endowment’s private equity portfolio. Their model, which is simple and intuitive, is still commonly used by investors to this day. However, the model possesses significant shortcomings, including its sensitivity to the assumptions necessary for the model to function and its failure to provide a range of possible portfolio outcomes. Both issues can result in investors developing overconfidence in forecasts, which can result in suboptimal—or even adverse—portfolio management decisions. To address these shortcomings, we propose a novel historical simulation approach that preserves the simplicity and intuition behind Takahashi and Alexander’s approach. However, our model, which leverages historical private equity cash flow data, requires no user assumptions and naturally provides a range of outcomes. We explore this model in some depth, highlighting the model’s power and flexibility across myriad use cases.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"144 - 158"},"PeriodicalIF":1.4,"publicationDate":"2023-05-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43054392","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, the author uses a common framework to evaluate and compare various equity downside protection strategies including constant proportion portfolio insurance, volatility targeting, and a few option-based strategies in terms of the trade-off between downside protection and upside participation. Using the downside-to-upside performance ratio to measure that trade-off, the author finds that all these strategies offer the same trade-off over the many market cycles from 1996 to 2020. However, strategies with a concave payoff profile (such as put spread collar used in buffered exchange-traded funds or defined outcome exchange-traded funds) offer a better trade-off during the early stage of drawdown and recovery, and strategies with a convex payoff profile such as constant proportion portfolio insurance offer a better trade-off during the late stage of drawdown and recovery. The author’s results and insights allow investors to enhance their understanding of downside protection strategies and select the best strategy for their investment use case.
{"title":"Comparing Downside Protection Strategies","authors":"D. Liu","doi":"10.3905/jpm.2023.1.493","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.493","url":null,"abstract":"In this article, the author uses a common framework to evaluate and compare various equity downside protection strategies including constant proportion portfolio insurance, volatility targeting, and a few option-based strategies in terms of the trade-off between downside protection and upside participation. Using the downside-to-upside performance ratio to measure that trade-off, the author finds that all these strategies offer the same trade-off over the many market cycles from 1996 to 2020. However, strategies with a concave payoff profile (such as put spread collar used in buffered exchange-traded funds or defined outcome exchange-traded funds) offer a better trade-off during the early stage of drawdown and recovery, and strategies with a convex payoff profile such as constant proportion portfolio insurance offer a better trade-off during the late stage of drawdown and recovery. The author’s results and insights allow investors to enhance their understanding of downside protection strategies and select the best strategy for their investment use case.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"116 - 143"},"PeriodicalIF":1.4,"publicationDate":"2023-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42708950","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recent research has proven that the application of mean–variance portfolio selection is justified if, and only if, asset returns follow a skew-elliptical generalized location and scale (SEGLS) distribution. This irrefutably corrects the widespread fallacy that mean–variance analysis can be used only for portfolios with normally or symmetrically distributed constituents. To make this important finding accessible to a wide range of academics and practitioners, the authors of this article present it in a nontechnical form and additionally highlight that, under the SEGLS distribution and some mild axiomatic requirements, mean–variance analysis and many alternative mean-risk approaches deliver the same optimal portfolios. In a numerical study, they illustrate the key features of the novel SEGLS distribution. In an empirical study, they emphasize its practical relevance by gathering existing and providing new evidence in its favor.
{"title":"Rehabilitating Mean–Variance Portfolio Selection: Theory and Evidence","authors":"B. Auer, Frank Schuhmacher, Hendrik Kohrs","doi":"10.3905/jpm.2023.1.492","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.492","url":null,"abstract":"Recent research has proven that the application of mean–variance portfolio selection is justified if, and only if, asset returns follow a skew-elliptical generalized location and scale (SEGLS) distribution. This irrefutably corrects the widespread fallacy that mean–variance analysis can be used only for portfolios with normally or symmetrically distributed constituents. To make this important finding accessible to a wide range of academics and practitioners, the authors of this article present it in a nontechnical form and additionally highlight that, under the SEGLS distribution and some mild axiomatic requirements, mean–variance analysis and many alternative mean-risk approaches deliver the same optimal portfolios. In a numerical study, they illustrate the key features of the novel SEGLS distribution. In an empirical study, they emphasize its practical relevance by gathering existing and providing new evidence in its favor.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"159 - 178"},"PeriodicalIF":1.4,"publicationDate":"2023-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45847281","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Ang, J. Bender, Harindra de Silva, Pim van Vliet
In this webinar, Frank Fabozzi moderated a discussion with four prominent quantitative investment professionals. The experts were asked about their approaches to factor investing, the characteristics they look for in a factor, and which factors they believed in and why. The webinar covered topics such as the viability of value as a factor over the past decade, the role of ESG as a factor, and the possibility of discovering new factors. The difference between factors and signals was discussed, along with the potential for factor timing. The panelists also examined how to incorporate factors into portfolios, identified the biggest challenges facing factor investing, and shared the main findings from research on factor portfolio construction. They also discussed the most promising areas of research in the field, including Machine Learning and the application of factors to private markets. Additionally, the discrepancy between the use of factors in equities versus fixed income was discussed. Overall, the webinar provided a comprehensive overview of the challenges and opportunities associated with factor investing.
{"title":"Factor Investing Webinar","authors":"A. Ang, J. Bender, Harindra de Silva, Pim van Vliet","doi":"10.3905/jpm.2023.1.491","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.491","url":null,"abstract":"In this webinar, Frank Fabozzi moderated a discussion with four prominent quantitative investment professionals. The experts were asked about their approaches to factor investing, the characteristics they look for in a factor, and which factors they believed in and why. The webinar covered topics such as the viability of value as a factor over the past decade, the role of ESG as a factor, and the possibility of discovering new factors. The difference between factors and signals was discussed, along with the potential for factor timing. The panelists also examined how to incorporate factors into portfolios, identified the biggest challenges facing factor investing, and shared the main findings from research on factor portfolio construction. They also discussed the most promising areas of research in the field, including Machine Learning and the application of factors to private markets. Additionally, the discrepancy between the use of factors in equities versus fixed income was discussed. Overall, the webinar provided a comprehensive overview of the challenges and opportunities associated with factor investing.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"264 - 275"},"PeriodicalIF":1.4,"publicationDate":"2023-05-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45785322","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article investigates whether the business relationships between brokerage firms and listed companies influence sell-side analysts’ stock recommendation ratings. Using the recommendation data of A-share listed companies disclosed by China’s domestic brokerage firms from 2004 to 2019, this article finds that sell-side analysts of brokerage firms that have securities underwriting relationships with listed companies are inclined to give those companies investment evaluations that are more-positive than evaluations from non-affiliated analysts. After a series of robustness tests and alleviating endogenous problems, such as the self-selection of underwriting relationships and of the sell-side analysts’ coverage samples, the empirical result remains unchanged. Using an event study method to compare differences in the cumulative abnormal returns of stocks during the event window of the recommendation releases, the authors find that it is information advantage rather than collusion of interests that leads affiliated sell-side analysts to issue more aggressive investment recommendations. Further research shows that “client pressure” will enhance the investment rating enthusiasm of analysts of related brokerage firms, whereas “peer pressure” will not weaken the investment rating enthusiasm of them, thus verifying the robustness of causality. The findings in this article enlighten the regulatory authorities and the capital market about the characteristics of stock recommendations of related brokerage firms’ analysts and the motives behind these recommendations, which is of great significance in protecting the interests of investors.
{"title":"Flattering or Really Understanding? Research on Stock Recommendations by Sell-Side Analysts in China","authors":"Xuewen Long, Zelin Xu","doi":"10.3905/jpm.2023.1.490","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.490","url":null,"abstract":"This article investigates whether the business relationships between brokerage firms and listed companies influence sell-side analysts’ stock recommendation ratings. Using the recommendation data of A-share listed companies disclosed by China’s domestic brokerage firms from 2004 to 2019, this article finds that sell-side analysts of brokerage firms that have securities underwriting relationships with listed companies are inclined to give those companies investment evaluations that are more-positive than evaluations from non-affiliated analysts. After a series of robustness tests and alleviating endogenous problems, such as the self-selection of underwriting relationships and of the sell-side analysts’ coverage samples, the empirical result remains unchanged. Using an event study method to compare differences in the cumulative abnormal returns of stocks during the event window of the recommendation releases, the authors find that it is information advantage rather than collusion of interests that leads affiliated sell-side analysts to issue more aggressive investment recommendations. Further research shows that “client pressure” will enhance the investment rating enthusiasm of analysts of related brokerage firms, whereas “peer pressure” will not weaken the investment rating enthusiasm of them, thus verifying the robustness of causality. The findings in this article enlighten the regulatory authorities and the capital market about the characteristics of stock recommendations of related brokerage firms’ analysts and the motives behind these recommendations, which is of great significance in protecting the interests of investors.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"102 - 131"},"PeriodicalIF":1.4,"publicationDate":"2023-05-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44675878","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
International diversification has hurt US-based investors for over 30 years, but the long-run case for it remains relevant. Both financial theory and common sense favor international diversification, which is buttressed by empirical evidence that is very supportive at longer horizons and for active strategies. Finally, it would be dangerous to extrapolate the post-1990 outperformance of US equities, as it mainly reflects rising relative valuations. If anything, the current richness of US equities may point to prospective underperformance.
{"title":"International Diversification—Still Not Crazy after All These Years","authors":"Clifford S. Asness, A. Ilmanen, Daniel Villalon","doi":"10.3905/jpm.2023.1.489","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.489","url":null,"abstract":"International diversification has hurt US-based investors for over 30 years, but the long-run case for it remains relevant. Both financial theory and common sense favor international diversification, which is buttressed by empirical evidence that is very supportive at longer horizons and for active strategies. Finally, it would be dangerous to extrapolate the post-1990 outperformance of US equities, as it mainly reflects rising relative valuations. If anything, the current richness of US equities may point to prospective underperformance.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"9 - 18"},"PeriodicalIF":1.4,"publicationDate":"2023-04-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47063467","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The aggregate US equity market has outperformed the rest of the world over the past decade. Additionally, correlation across equity markets of different geographic regions has increased over time. With this in mind, many investors question whether non-US equity investment should still play a role in diversified investment portfolios. The authors review the widely used reasons investors consider to support non-US investments and argue that the broader opportunity set and attractive relative valuations remain valid reasons.
{"title":"Investing in International Equities: Lessons from a Decade of Strong US Equity Markets","authors":"P. Cotter, Adam Kobor","doi":"10.3905/jpm.2023.1.488","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.488","url":null,"abstract":"The aggregate US equity market has outperformed the rest of the world over the past decade. Additionally, correlation across equity markets of different geographic regions has increased over time. With this in mind, many investors question whether non-US equity investment should still play a role in diversified investment portfolios. The authors review the widely used reasons investors consider to support non-US investments and argue that the broader opportunity set and attractive relative valuations remain valid reasons.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"19 - 33"},"PeriodicalIF":1.4,"publicationDate":"2023-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48683512","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article investigates the dynamic connectedness between equity returns and investor sentiment indexes in developed markets. The author uses a network methodology to measure stock return connectedness and investor sentiment spillover. The article examines the role of global investor sentiment in affecting stock return connectedness by employing a quantile-on-quantile approach using data from six developed markets ranging from January 1991, to December 2020. The results show that both returns and sentiment are interconnected and that spillovers across the stock indexes were more pronounced during the Global Financial Crisis of 2008. Moreover, the results suggest that global investor sentiment contributes negatively to the connectivity of stock market returns for the central quantiles of sentiment. However, the relationship becomes positive for extremely high sentiment values.
{"title":"Investor Global Sentiment and Stock Returns Connectedness in Developed Markets","authors":"Dorsaf Ben Aissia","doi":"10.3905/jpm.2023.1.487","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.487","url":null,"abstract":"This article investigates the dynamic connectedness between equity returns and investor sentiment indexes in developed markets. The author uses a network methodology to measure stock return connectedness and investor sentiment spillover. The article examines the role of global investor sentiment in affecting stock return connectedness by employing a quantile-on-quantile approach using data from six developed markets ranging from January 1991, to December 2020. The results show that both returns and sentiment are interconnected and that spillovers across the stock indexes were more pronounced during the Global Financial Crisis of 2008. Moreover, the results suggest that global investor sentiment contributes negatively to the connectivity of stock market returns for the central quantiles of sentiment. However, the relationship becomes positive for extremely high sentiment values.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"52 - 80"},"PeriodicalIF":1.4,"publicationDate":"2023-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43106274","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The duration times the credit spread of a bond, denoted DTS, is an effective proxy for its price variance. On an aggregate level, the measure is key to specifying the covariance between bond prices as well. Using a sample of government bond market indices, the author shows that the duration and spread, both on an index level, explain the largest share of the price variance and covariance between government bond markets. The bonds in the indices are denominated in local currency and are hedged against exchange-rate risk. The findings provide new insights for managing bond risk in globally invested portfolios.
{"title":"Global Bond Allocation Using Duration Times Spread","authors":"Marielle de Jong","doi":"10.3905/jpm.2023.1.486","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.486","url":null,"abstract":"The duration times the credit spread of a bond, denoted DTS, is an effective proxy for its price variance. On an aggregate level, the measure is key to specifying the covariance between bond prices as well. Using a sample of government bond market indices, the author shows that the duration and spread, both on an index level, explain the largest share of the price variance and covariance between government bond markets. The bonds in the indices are denominated in local currency and are hedged against exchange-rate risk. The findings provide new insights for managing bond risk in globally invested portfolios.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"144 - 157"},"PeriodicalIF":1.4,"publicationDate":"2023-04-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44921837","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, the authors analyze the impact of environmental, social, and governance (ESG) investing on stock returns. For this purpose, they follow the notion that higher ESG awareness of investors increases the prices of sustainable stocks. If so, one can hypothesize two opposing relationships for the return: a positive short-term effect and a negative long-term effect. To empirically separate between these two effects, they use Google Trend data as a proxy for ESG awareness. Examining data from 2010 to 2020 from the US and the European Economic and Monetary Union (EMU) markets, the authors find empirical evidence supporting both hypotheses. Moreover, the results show on the individual firm level that sustainable stocks have less exposure to an ESG-Factor and thus earn a lower ESG premium. The comparison of both markets shows that the US market is more mature than the EMU market regarding the transition from a state in which investors do not consider ESG to a state in which investors do consider ESG.
{"title":"ESG Risk Premia and the Impact of ESG Awareness: Differences between the US and the EMU Markets","authors":"C. Koziol, S. Kuhn","doi":"10.3905/jpm.2023.1.485","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.485","url":null,"abstract":"In this article, the authors analyze the impact of environmental, social, and governance (ESG) investing on stock returns. For this purpose, they follow the notion that higher ESG awareness of investors increases the prices of sustainable stocks. If so, one can hypothesize two opposing relationships for the return: a positive short-term effect and a negative long-term effect. To empirically separate between these two effects, they use Google Trend data as a proxy for ESG awareness. Examining data from 2010 to 2020 from the US and the European Economic and Monetary Union (EMU) markets, the authors find empirical evidence supporting both hypotheses. Moreover, the results show on the individual firm level that sustainable stocks have less exposure to an ESG-Factor and thus earn a lower ESG premium. The comparison of both markets shows that the US market is more mature than the EMU market regarding the transition from a state in which investors do not consider ESG to a state in which investors do consider ESG.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"158 - 171"},"PeriodicalIF":1.4,"publicationDate":"2023-04-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48765230","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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