Investing Expertise

Are investment advisors worth the price? In the August 2012 version of their paper entitled “The Impact of Financial Advisors on the Stock Portfolios of Retail Investors”, Marc Kramer and Robert Lensink investigate the impact of financial advisors on individual investor portfolio returns, risk, trading frequency and diversification. For sampled investors, the sponsoring bank standardizes strategic asset allocation advice, but the advisors made available to investors by the bank have great latitude in recommending specific stocks. While all investors are eligible for advice, each elects either an advisory relationship (randomly selected advisors) or self-directed trading. The study emphasizes controlling for any self-selection bias associated with the type of investors who seek advice, and focuses on common stock holdings to avoid any conflicts associated with mutual fund incentives. Using demographics and complete histories of common stock positions and trades for 5,661 individual advised and self-directed Dutch investors during April 2003 through August 2007 (193,418 monthly returns), they find that: Keep Reading

“CFOs vs. CEOs as Inside Traders” describes research finding that, based on data from before the Sarbanes-Oxley Act (SOX), investors should assume that Chief Financial Officers (CFO) are better inside traders than Chief Executive Officers (CEO). Does this finding hold after SOX? In the August 2012 update of their paper entitled “CEOs, CFOs, and COOs: Why Are Certain Insiders’ Trades More Informative?”, Heather Knewtson and John Nofsinger examine insider trading performance of CEOs, CFOs and Chief Operating Officers (COO) spanning SOX implementation. They measure trading performance based on 50-day future returns for overlapping portfolios formed daily to capture executive stock purchases (more informative than sales) unique to category (the other two categories not trading that day) within the past 50 days. They consider both equal and dollar value weightings of qualifying trades. They estimate trading alpha based on a four-factor (market, size, book-to-market, momentum) model of stock returns. They consider subsamples based on pre-SOX versus post-SOX, and CEOs with and without experience as CFO. Using executive trading disclosures, contemporaneous returns for associated stocks and risk factor data during 1992 through 2009, they find that: Keep Reading

Do top-performing mutual funds reliably continue to be top performers. In their June 2012 semiannual report entitled “Does Past Performance Matter? S&P Persistence Scorecard”, Standard and Poor’s summarizes performance persistence statistics for U.S. mutual funds overall and for funds grouped by capitalization focus of holdings. They measure persistence of the top 25% (quartile) and top half of funds across multiple subsequent years and frequency of migration of all performance quartiles from one multi-year interval to the next. Using annual performance data for a broad sample of U.S. mutual funds during March 2002 through March 2012, they find that: Keep Reading

Which consensus forecast of U.S. economic indicators is best? How does the U.S. equity market react to consensus forecast errors? In their April 2012 paper entitled “Market Reaction to Information Shocks: Does the Bloomberg and Briefing.com Survey Matter?”, Linda Chen, George Jiang and Qin Wang investigate the accuracy of, and equity futures market reactions to, competing Bloomberg and Briefing.com survey-based forecasts for the values of scheduled weekly, biweekly, monthly and quarterly economic announcements. They focus on 14 announcements commonly treated as important: Building Permits, Capacity Utilization, Case-Shiller 20-city Index, Consumer Confidence, Consumer Price Index, Durable Goods Orders, Existing Home Sales, GDP Advance, Leading Indicators, Non-farm Payrolls, Personal Spending, Producer Price Index, Retail Sales and Unemployment Rate. They introduce standardization to compare errors across different indicator scales. Using consensus forecasts and announced values of 59 economic indicators, along with contemporaneous high-frequency price and volume data for the nearest S&P 500 futures contract (as available), over the period January 1998 through August 2010, they find that: Keep Reading

Where can investors find the best stock market forecasters: academia, banks, government? In the March 2012 draft of his paper entitled “On the Forecasting Quality of Professionals”, Aron Veress compares the stock market forecasting accuracies of different professional groups (academics, commercial bankers, investment bankers, government employees and non-financial professionals) who participate in the semi-annual Livingston Survey, both to each other and to quantitative predictors. He focuses on forecasts of the S&P Composite Index return at horizons of roughly one month and six months after publication of survey reports (early June/December of each year). He considers also a naive forecasting approach that invests in stocks or cash according to which has the higher preceding return. Using results from 120 semi-annual surveys and contemporaneous data for the S&P Composite Index and commonly used financial/economic U.S. stock market predictors, he finds that: Keep Reading

What do three prominent academic experts conclude when they review the body of evidence for and against the Efficient Markets Hypothesis (EMH), and therefore the potential benefit of speculation? In the April 2011 version of their paper entitled “Review of the Efficient Market Theory and Evidence”, Andrew Ang, William Goetzmann and Stephen Schaefer review the theoretical and empirical literature on EMH, with focus on implications for active investment management. They consider a range of markets and tests of both prices and investment managers, noting that EMH has evolved to consider the costs of collecting, analyzing and exploiting market information (trading frictions, financing costs, manager fees). Based on this literature review, they conclude that: Keep Reading

How do pension funds, arguably representative of sophisticated and conservative investors, use real estate as an alternative investment? In their January 2012 paper entitled “Value Added From Money Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate”, Aleksandar Andonov, Piet Eichholtz and Nils Kok investigate the allocation, costs and performance of pension funds with respect to real estate investments. Using self-reported investment data for 884 U.S., Canadian, European and Australian/New Zealand pension funds during 1990 through 2009, they find that: Keep Reading

Do stock analysts elected to All-American (AA) status by institutional voters (via Institutional Investor magazine) reliably out-pick other analysts? In the December 2011 update of their paper entitled “Are Stars’ Opinions Worth More? The Relation Between Analyst Reputation and Recommendation Values”, Lily Fang and Ayako Yasuda examine the average performance of stock recommendations of AA analysts and other analysts as distinct groups. They further differentiate top-rank AAs (first and second place winners) from bottom-rank AAs (third-place and runners-up). They define “strong buy” and “buy” stock ratings as buy recommendations and “hold,” “sell” and “strong sell” ratings as sell recommendations. They focus on distinguishing skill from luck and information value from pure influence. They consider adjustments for five risk factors: market, size, book-to-market, momentum and technology sector. Competing portfolios hold recommended stocks for fixed intervals relative to public release dates with equal recommendation weighting and daily rebalancing. Using analyst recommendation data and associated stock returns for 1994 through 2009 (roughly 3,000 analysts and 20,000 stock recommendations per year), they find that: Keep Reading

Is strategic asset class allocation or active management paramount for U.S. university endowment investment performance? In the October 2011 draft of their paper entitled “Do (Some) University Endowments Earn Alpha?”, Brad Barber and Guojun Wang explore the investment performance of U.S. university endowments with regard to overall alpha, performance persistence and sources of superior performance. They assess three groups of universities: Ivy League; other elite universities based on high average math SAT entrance scores; and, the balance of universities. They measure alpha as the residual return (from specific asset selection and tactical asset class allocation) after accounting for the combined returns of best-fit constant (strategic) asset class allocations to five indexes representing U.S. stocks (S&P 500 Index), non-U.S. stocks (MSCI non-U.S.), U.S. bonds (Barclays Capital Aggregate Bond Index), hedge funds (Hedge Fund Research Fund‐Weighted Composite Index) and private equity (Cambridge Associates U.S. Private Equity Index). Using annual voluntarily reported university endowment investment returns, benchmark index returns and math SAT score statistics for incoming freshmen during 1991 through 2010 (279 endowments report in all 20 years), they find that: Keep Reading

Do analysts who work for hedge funds make good calls? In their November 2011 paper entitled “Do Buy-side Recommendations Have Investment Value?”, Steven Crawford, Wesley Gray, Bryan Johnson and Richard Price III profile analysts employed by mutual funds, hedge funds and other investment firms and examine whether these experts make good trading recommendations. Using personal data and 2,135 long and short U.S. common stock investment propositions from over 1,100 participants in the SumZero community of buy-side investment professionals (mostly associated with hedge funds) during March 2008 through December 2010, and contemporaneous institutional holdings from SEC Form 13F filings, they find that: Keep Reading