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Aesthetic Investments

Are aesthetic investments other than gold (such as art, gems, stamps and wine) viable portfolio options? These blog entries address investing in these alternative asset classes.

Effects of Firm ESG Rating Changes on Stock Returns

Is growing interest in environmental, social, and governance (ESG) issues among investors and asset managers materially affecting stock selection decisions and associated returns? In the September 2022 version of their paper entitled “The Economic Impact of ESG Ratings”, Florian Berg, Florian Heeb and Julian Kölbel measure impacts of ESG rating changes on associated mutual fund holdings and stock returns. They focus on average abnormal holdings changes and average cumulative abnormal returns from: (1) 12 months before rating change up to the change, and (2) from the ratings change through 24 months after the change. Abnormal returns control for firm leverage, size, book-to-market ratio and profitability, and for stock return beta and momentum. Using quarterly fundamentals and monthly stock returns and ESG-dedicated mutual fund holdings for 3,665 firms with a total of 2,545  MSCI ESG rating upgrades and 2,133 downgrades during February 2013 through September 2020, they find that:

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Aggregated Firm ESG Ratings and Future Stock Market Returns

Do environmental, social, and corporate governance (ESG) ratings aggregated across individual firms predict overall stock market returns? In the July 2022 version of their paper entitled “ESG and the Market Return”, Ran Chang, Liya Chu, Bohui Zhang, Guofu Zhou and Jun Tu investigate whether ESG ratings in aggregate predict overall stock market returns. Specifically, they each month:

  • Combine 38 firm-level ESG subcategory ratings via equal weighting to calculate 38 market-level ESG measures.
  • Apply machine learning tools to these market-level measures to suppress noise and redundancies and generate 14 market-level predictors.
  • Aggregate the 14 predictors into a market-level composite ESG index, and similarly develop market-level environmental, social and governance ESG subindexes.
  • Use full-sample (in-sample) regression to relate ESG index/subindexes to next-month and next-year stock market excess return (value-weighted stock market return minus U.S. Treasury bill yield).
  • Use the first seven years of the sample as the initial training period and the rest of the data as an out-of-sample forecast evaluation period.

Using monthly firm ESG data from Morningstar Sustainalytics and stock market excess returns during August 2009 (ESG measurement inception) through September 2019, they find that: Keep Reading

Are ESG ETFs Attractive?

Do exchange-traded funds selecting stocks based on environmental, social, and governance characteristics (ESG ETF) typically offer attractive performance? To investigate, we compare performance statistics of eight ESG ETFs, all currently available, to those of simple and liquid benchmark ETFs, as follows:

  1. iShares MSCI USA ESG Select ETF (SUSA), with SPDR S&P 500 ETF Trust (SPY) as a benchmark.
  2. iShares MSCI KLD 400 Social ETF (DSI), with SPY as a benchmark.
  3. iShares ESG MSCI EM ETF (ESGE), with iShares MSCI Emerging Markets ETF (EEM) as a benchmark.
  4. iShares ESG Aware MSCI EAFE ETF (ESGD), with iShares MSCI EAFE ETF (EFA) as a benchmark
  5. iShares ESG MSCI USA ETF (ESGU), with SPY as a benchmark.
  6. Nuveen ESG Small-Cap ETF (NUSC), with iShares Russell 2000 ETF (IWM) as a benchmark.
  7. Vanguard ESG U.S. Stock ETF (ESGV), with SPY as a benchmark.
  8. Vanguard ESG International Stock ETF (VSGX), with Vanguard FTSE All-World ex-US Index Fund ETF (VEU) as a benchmark.

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted returns for all specified ETFs since inceptions and for all benchmarks over matched sample periods through June 2022, we find that: Keep Reading

Low-carbon Value Strategy?

Are there conflicts inherent in an investment strategy seeking to impose social preferences on a value style? In their May 2022 paper entitled “No Good Deed Goes Unpunished? Social vs. Investment”, Tzee-man Chow and Feifei Li investigate how a carbon reduction requirement affects construction and performance of a global developed market value stock strategy. They measure firm carbon emissions using end-of-year data from Institutional Shareholder Services (ISS), which supplements publicly available self-reported emissions with analyst reviews/estimates. They lag ISS data by three months and merge it with information for large and medium-sized stocks (top 86% of market value) in each country. Their benchmark value portfolio each year holds the market capitalization-weighted cheapest 10% of stocks based on composite valuation (average standardized book-to-price, cash flow-to-price and sales-to-price ratios and dividend yield). They then lower the carbon intensity of this portfolio via an iterative process of shifting weights from firms with relatively high carbon intensity to those with relatively low carbon intensity to achieve portfolio carbon intensities in the range 100% to 50% of that for the full universe. Using carbon emissions, valuation and price data for the specified stock universe during April 2016 through March 2021, they find that:

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NFT Return Behaviors

What are the return behaviors of non-fungible tokens (NFT), which employ blockchain technology to convey ownership of unique digital or physical items? In their March 2022 paper entitled “The Economics of Non-Fungible Tokens”, Nicola Borri, Yukun Liu and Aleh Tsyvinski assemble a comprehensive dataset of NFT transactions (including digital art/media and objects related to virtual worlds) and create NFT overall market and sector indexes based on a repeat sales method. They then test:

  • NFT market exposure to cryptocurrency market, size, value, momentum and attention factors.
  • NFT market exposure to traditional equity, commodity and currency market factors.
  • NFT market return predictability based on NFT market volatility, index-to-transaction valuation ratio, volume, momentum and attention factors.
  • Individual NFT return predictability based on size and momentum/reversal.

Using blockchain-validated weekly data from major NFT exchanges during January 2018 through December 2021, encompassing about 1.3 million repeat sales, they find that: Keep Reading

Risk and Return of NFT-focused Assets

A non-fungible token (NFT) is a way to record, verify and track on a blockchain ownership of a unique physical or digital asset such as a work of art, a futures contract, a music score, a book or real estate. Are assets related to trading of NFTs good investments? In the October 2021 version of his paper entitled “Non-Fungible Tokens (NFT). The Analysis of Risk and Return”,  Mieszko Mazur examines risk and return characteristics of 22 NFT-focused assets listed on Binance, with emphasis on the 19 with at least one month of history. He first classifies these assets into blockchain, gaming, music, media, decentralized finance (DeFi) and “other” categories. He then looks at their listing-day and longer term returns, volatilities and annualized Sharpe ratios (assuming a zero risk-free rate). He employs bitcoin as a “market” benchmark. Using daily returns for the specified 22 NFT-focused assets as available during mid-April 2019 through August 2021, he finds that: Keep Reading

ESG Realities

How meaningful is the term Environmental, Social, and Corporate Governance (ESG) as a descriptor of firm valuation and investment performance? In his November 2021 paper entitled “ESG: Hyperboles and Reality”, George Serafeim assesses beliefs about ESG, including those involving firm valuation and ESG firm/fund investment performance. Drawing on more than a decade of research, he concludes that: Keep Reading

Accounting for Past Return to ESG Stocks

Does past performance of Environmental, Social, and Corporate Governance (ESG) stocks derive mostly from shift in demand from other stocks to ESG stocks? In his September 2021 paper entitled “Flow-Driven ESG Returns”, Philippe van der Beck examines whether flow of investor dollars toward ESG mutual funds explains aggregate performance of ESG stocks, as follows:

  • Construct an ESG portfolio that aggregates quarterly holdings of U.S. equity mutual funds that assert sustainability mandates.
  • Measure perceived sustainability of each stock by calculating the deviation of its ESG portfolio weight from its market portfolio weight.
  • Estimate the price pressure due to a flow of dollars into ESG mutual funds.
  • Combine perceived stock sustainability and price pressure to explore sensitivity of past ESG portfolio returns to level of dollar flow into ESG mutual funds.

Using mutual fund descriptions (with respect to importance of sustainability in investment decisions) and quarterly Form 13F mutual fund holdings data during 2000 through 2020, and underlying stock prices through the first quarter of 2021, he finds that:

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Raw and Risk-adjusted Returns of NFTs

What returns should investors expect from Non-fungible Tokens (NFT) as an alternative asset class? In the October 2021 revision of their paper entitled “Alternative Investments in the Fintech Era: The Risk and Return of Non-fungible Token (NFT)”, De-Rong Kong and Tse-Chun Lin investigate returns of NFTs, which represent ownership of digital assets via blockchains. NFT markets let owners or collectors deal directly any time via crypto-assets such as Ethereum (ETH). Anyone can review historical bids, offers, sale prices, trading dates and changes of ownership for NFTs, facilitating analysis at the transaction level. They apply this data to construct an NFT price index using a regression model that accounts for both NFT characteristics and underlying network activity. They focus on CryptoPunks crypto-images (tokens) on the ETH blockchain as the earliest and largest collection of NFTs. Using data for 13,712 transactions involving 5,630 unique CryptoPunks tokens as recorded by Larva Labs during June 2017 through May 2021, they find that:

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Pure ESG?

Is it possible to isolate environmental, social and governance characteristics (ESG) effects on stock returns from those of other stock characteristics? In their July 2021 paper entitled “Chasing The ESG Factor”, Abraham Lioui and Andrea Tarelli specify a cross-sectional long-short ESG factor that neutralizes exposures to other firm characteristics, such as size and book-to-market ratio. By creating a pure ESG factor, they are able to isolate ESG alpha and estimate its separate E, S and G contributions. Their approach also suppresses effects of arbitrary ESG rating scales. They further construct an ESG sentiment index based on media attention to ESG-related topics and employ it to understand variations in pure ESG alpha. Using monthly firm ESG ratings from three sources as available during 1991-2019 and associated stock characteristics and returns during December 1992 through December 2020, with tests spanning December 2002 through December 2020, they find that: Keep Reading

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