Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for January 2022 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for January 2022 (Final)
1st ETF 2nd ETF 3rd ETF

Investing Expertise

Can analysts, experts and gurus really give you an investing/trading edge? Should you track the advice of as many as possible? Are there ways to tell good ones from bad ones? Recent research indicates that the average “expert” has little to offer individual investors/traders. Finding exceptional advisers is no easier than identifying outperforming stocks. Indiscriminately seeking the output of as many experts as possible is a waste of time. Learning what makes a good expert accurate is worthwhile.

Mutual Fund/Institutional Strategy Fund Performance and Performance Persistence

How have active equity investment managers performed over the past three decades? In his November 2021 paper entitled “Active Equity Management, 1991-2020”, Gene Hochachka examines whether: (1) active equity managers as a group beat their benchmarks over the last 30 years; and, (2) active equity manager relative performance is persistence. By active equity managers, he means:

  • Live and dead U.S. mutual funds tracked by Morningstar Direct and not classified as an index fund or fund-of-funds, segmented into US LargeCap, US MidCap, US SmallCap and Foreign (International) LargeCap.
  • Institutional strategies tracked as self-reported by Mercer Global Investment Manager Database and not classified as passive in mid-2021, segmented into US LargeCap, US MidCap, US SmallCap, US Small/MidCap, US AllCap and International LargeCap.

Fund/strategy and benchmark returns are for calendar years, including dividends/distributions, and are gross of all fees and expenses. Some analyses compare net-of-expense fund/strategy and net-of-expense benchmark returns. Using the specified annual returns during 1991 through 2020, he finds that: Keep Reading

Active Investment Managers and Market Timing

Do active investment managers as a group successfully time the stock market? The National Association of Active Investment Managers (NAAIM) is an association of registered investment advisors. “NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week (usually Wednesday). Responses can vary widely [200% Leveraged Short; 100% Fully Short; 0% (100% Cash or Hedged to Market Neutral); 100% Fully Invested; 200% Leveraged Long].” The association each week releases (usually on Thursday) the average position of survey respondents as the NAAIM Exposure Index (NEI).” Using historical weekly survey data and Thursday-to-Thursday weekly dividend-adjusted returns for SPDR S&P 500 (SPY) over the period July 2006 through mid-December 2021 (807 surveys), we find that: Keep Reading

Endowments Now Just Passive Stock Market Investors?

Does actual performance support the view that university endowments are exemplary stewards of multi-asset class portfolios? In his November 2021 paper entitled “The Modern Endowment Story: A Ubiquitous U.S. Equity Risk Premium”, Richard Ennis re-examines aggregate allocations and performance of U.S. educational endowments. Specifically, he:

  • Estimates effective aggregate endowment asset class allocations over different recent sample periods via multiple regressions of endowment returns versus returns of three indexes: Bloomberg Aggregate U.S. bonds; Russell 3000 stocks; and, currency-hedged MSCI ACWI ex-U.S. stocks.
  • Applies these effective allocations to construct benchmark portfolios of these three indexes for the different sample periods.

Using investment data for over 100 U.S. educational endowments with assets over $1 billion during the 13 years ending June 2021, he finds that: Keep Reading

Online, Real-time Test of AI Stock Picking

Will equity funds “managed” by artificial intelligence (AI) outperform human investors? To investigate, we consider the performance of AI Powered Equity ETF (AIEQ). Per the offeror, the EquBot model supporting AIEQ: “…leverages IBM’s Watson AI to conduct an objective, fundamental analysis of U.S. domiciled common stocks, including Special Purpose Acquisitions Corporations (“SPAC”), and real estate investment trusts (“REITs”) based on up to ten years of historical data and apply that analysis to recent economic and news data… Each day, the EquBot Model…identifies approximately 30 to 200 companies with the greatest potential over the next twelve months for appreciation and their corresponding weights, targeting a maximum risk adjusted return versus the broader U.S. equity market. …The EquBot model limits the weight of any individual company to 10%. At times, a significant portion of the Fund’s assets may consist of cash and cash equivalents.” We use SPDR S&P 500 (SPY) as a simple benchmark for AIEQ performance. Using daily and monthly dividend-adjusted closes of AIEQ and SPY from AIEQ inception (October 18, 2017) through October 2021, we find that: Keep Reading

Do ETFs Following Gurus/Insiders Work?

Do exchange-traded funds (ETF) that attempt to mimic holdings of hedge fund gurus and/or firm insiders offer attractive performance? To investigate, we consider seven ETFs, four live and three dead, in order of introduction:

    • Invesco Insider Sentiment (NFO) – focuses on stocks attracting interest of insiders such as company executives, fund managers and sell side analysts. This fund is dead as of February 2020.
    • Invesco BuyBack Achievers (PKW) – tracks the Nasdaq US BuyBack Achievers Index, comprised of stocks of U.S. firms with a net decline in shares outstanding of 5% or more in the last 12 months.
    • Direxion All Cap Insider Sentiment (KNOW) –  tracks the S&P Composite 1500 Executive Activity & Analyst Estimate Index, comprised of U.S. stocks that have favorable analyst ratings and are being acquired by firm insiders (top management, directors and large institutions). This fund is dead as of October 2020.
    • AlphaClone Alternative Alpha – (ALFA) – tracks the proprietary AlphaClone Hedge Fund Masters Index, comprised of U.S. securities held by the highest ranked managers of  hedge funds and institutions.
    • Global X Guru Index (GURU) – tracks the Solactive Guru Index, comprised of the highest conviction ideas from a select pool of hedge funds.
    • Direxion iBillionaire (IBLN) –  tracks the proprietary iBillionaire Index, comprised of 30 U.S. mid and large cap securities. This fund is dead as of April 2018.
    • Goldman Sachs Hedge Industry VIP (GVIP) – tracks the proprietary GS Hedge Fund VIP Index, comprised of stocks appearing most frequently among the top 10 equity holdings of fundamentally driven hedge fund managers.

We use SPDR S&P 500 (SPY) as a simple benchmark for all these ETFs. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the above guru/insider-following ETFs and SPY as available through September 2021, we find that: Keep Reading

Optimal Approach to Investment Research

What is the best way to conduct quantitative investment research? In his September 2021 presentation package entitled “Escaping The Sisyphean Trap: How Quants Can Achieve Their Full Potential”, Marcos Lopez de Prado outlines the optimal way to tackle such research. Based on his experience, he concludes that: Keep Reading

Researcher Motives

Do motives of financial market researchers justify strong skepticism of their findings? In his brief August 2021 paper entitled “Be Skeptical of Asset Management Research”, Campbell Harvey argues that economic incentives undermine belief in findings of both academic and practitioner financial market researchers. Based on his 35 years as an academic, advisor to asset management companies and editor of a top finance journal, he concludes that: Keep Reading

Should the “Anxious Index” Make Investors Anxious?

Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters. The American Statistical Association and the National Bureau of Economic Research conducted the survey from 1968-1989. Among other things, the survey solicits from experts probabilities of U.S. economic recession (negative GDP growth) during each of the next four quarters. The survey report release schedule is mid-quarter. For example, the release date of the third quarter 2021 report is August 13, 2021, with forecasts through the third quarter of 2022. The “Anxious Index” is the probability of recession during the next quarter. Are these forecasts meaningful for future U.S. stock market returns? Rather than relate the probability of recession to stock market returns, we instead relate one minus the probability of recession (the probability of good times). If forecasts are accurate, a relatively high (low) forecasted probability of good times should indicate a relatively strong (weak) stock market. Using survey results and quarterly S&P 500 Index levels (on survey release dates as available, and mid-quarter before availability of release dates) from the fourth quarter of 1968 through the third quarter of 2021 (212 surveys), we find that:

Keep Reading

GMO Forecast Accuracy Test

A subscriber suggested an update of “GMO’s Stunningly Accurate Forecast?” with out-of-sample testing of GMO forecasts. To investigate, we test GMO’s 7-Year asset class real return forecasts of December 31, 2010, July 31, 2013 and June 30, 2014. We first match the 11 GMO asset classes covered in these forecasts to exchange-traded funds (ETF), as follows:

  1. U.S. equities (large cap) – SPDR S&P 500 ETF Trust (SPY).
  2. U.S. equities (small cap) – iShares Russell 2000 ETF (IWM).
  3. U.S. high quality – Invesco S&P 500 Quality ETF (SPHQ).
  4. International equities (large cap) – iShares MSCI EAFE ETF (EFA).
  5. International equities (small cap) – iShares MSCI EAFE Small-Cap ETF (SCZ).
  6. Emerging equities – iShares MSCI Emerging Markets ETF (EEM).
  7. U.S. bonds (government) – iShares 20+ Year Treasury Bond ETF (TLT).
  8. International bonds (government) – SPDR Bloomberg Barclays International Treasury Bond ETF (BWX).
  9. Emerging bonds – iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB).
  10. Inflation-indexed bonds – iShares TIPS Bond ETF (TIP).
  11. Short-term U.S. Treasuries (30 days to 2 years) – iShares 1-3 Year Treasury Bond ETF (SHY).

We adjust monthly ETF returns for inflation using monthly changes in U.S. Consumer Price Index (CPI). We then calculate real compound annual growth rates (CAGR) for each over specified forecast horizons. Using GMO forecasts, dividend-adjusted ETF prices and CPI data during December 2010 through July 2021, we find that: Keep Reading

Are WisdomTree Modern Alpha ETFs Attractive?

Is the WisdomTree approach to exchange-traded fund (ETF) cost efficiency and performance potential (Modern Alpha) attractive? To investigate, we compare performance statistics of six WisdomTree ETFs, all currently available, to those of “easy substitute” (widely used and very liquid) benchmark ETFs, as follows:

  1. WisdomTree U.S. Total Dividend Fund (DTD), with SPDR S&P 500 ETF Trust (SPY) as a benchmark.
  2. WisdomTree U.S. Earnings 500 Fund (EPS), with SPY as a benchmark.
  3. WisdomTree Europe Hedged Equity Fund (HEDJ), with Vanguard FTSE Europe Index Fund ETF Shares (VGK) as a benchmark.
  4. WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY), with iShares Core U.S. Aggregate Bond ETF (AGG) as a benchmark.
  5. WisdomTree U.S. Multifactor Fund (USMF), with iShares Russell Mid-Cap ETF (IWR) as a benchmark.
  6. WisdomTree 90/60 U.S. Balanced Fund (NTSX), with 90%-10% SPY-iShares 7-10 Year Treasury Bond ETF (IEF) as a benchmark.

We focus on average return, 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 July 2021, we find that: Keep Reading

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