Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for July 2020 (Final)

Momentum Investing Strategy (Strategy Overview)

Allocations for July 2020 (Final)
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Value Premium

Is there a reliable benefit from conventional value investing (based on the book-to-market value ratio)? these blog entries relate to the value premium.

Combining Value and Momentum Across Asset Classes

The value premium and the momentum effect are arguably complementary drivers of financial asset pricing dynamics, with the latter alternatively creating and extinguishing the former. Does empirical evidence support this view across asset classes? In the February 2009 version of their paper entitled “Value and Momentum Everywhere”, Clifford Asness, Tobias Moskowitz, and Lasse Pedersen investigate the interplay of value and momentum across asset classes worldwide, as follows: (1) stocks within four major countries; (2) country equity indexes; (3) government bonds; (4) currencies; and, (5) commodities. They calculate momentum based on return over the past 12 months, excluding the most recent month, for all asset classes. They estimate value based on measures commonly used for each asset class (such as book-to-market ratio for stocks). Using price and value characteristics data for broad samples of these asset classes, they conclude that: Keep Reading

Performance of Fundamental-weighted Indexes in Europe

Capitalization-weighted stock indexes arguably incorporate a performance drag by overweighting overvalued stocks and underweighting undervalued stocks. In their February 2009 paper entitled “Fundamental Indexing: An Analysis of the Returns, Risks and Costs of Applying the Strategy”, Roel Houwer and Auke Plantinga examine the raw and risk-adjusted returns of hypothetical indexes of European stocks weighted by dividend, book value, revenue and operating income. They take the capitalization-weighted Stoxx 600 Index as a benchmark. Using monthly stock returns and firm fundamental data for the Stoxx 600, along with relevant risk-adjustment data, for the period 1993-2007, they conclude that: Keep Reading

19th Century Test of the Size and Value Factors

Are the size effect and the value premium peculiar to 20th century markets, or are they enduring characteristics of equity market behavior? In the January 2009 preliminary version of their paper entitled “The Asset Pricing Anomalies in 19th Century Britain”, Qing Ye, Charles Hickson and John Turner measure the size and value anomalies using an original 19th century dataset. Using monthly stock prices and annual dividends for 1,051 stocks traded on the London Stock Exchange during March 1825 to December 1870, they conclude that: Keep Reading

Four Factors and Two Regimes

Do returns associated with the four famous factors (market, size, book-to-market, momentum) vary systematically with the state of the market (such as bull or bear)? In their January 2009 paper entitled “The Effect of Market Regimes on Style Allocation”, Manuel Ammann and Michael Verhofen investigate how returns for the four factors differ between market states as determined by a multivariate two-state model of the overall equity market. Using U.S. stock market and factor data spanning 1927-2004, they conclude that: Keep Reading

Expansive Value vs. Growth Update

How does the value premium fare when analysis appends data from the last few years to the data used in seminal studies? Does it persist, both in the U.S. and worldwide? In their October 2008 paper entitled “Value vs. Glamour: A Global Phenomenon”, the Brandes Institute refines and extends the duration of past value-growth research and expands its reach to global equity markets. The research focuses on price-to-book value ratio (P/B) as the principal value indicator, but also considers price-to-cash flow ratio (P/CF) and price-to-earnings ratio (P/E). Using stock returns and firm fundamentals for a broad sample of U.S. companies over the period April 1968-April 2008, and comparable data for 23 other country equity markets over the period June 1980-June 2008, they conclude that: Keep Reading

The Countercyclical Value Premium?

Does the value premium vary systematically with the state of the economy? More specifically, do value and growth stocks respond differently to negative macroeconomic shocks? In their September 2008 paper entitled “Value versus Growth: Time-Varying Expected Stock Returns”, Huseyin Gulen, Yuhang Xing and Lu Zhang investigate the relationship between economic conditions (recession or expansion) and the value premium. Using monthly returns for a broad sample of stocks over the period 1954-2007 (648 months), along with contemporaneous firm fundamentals and macroeconomic data, they conclude that: Keep Reading

A Retrospective Value-Growth Contest

Do equity investors systematically overpay for growth? In the September 2008 draft of their paper entitled “Clairvoyant Value and the Value Effect”, Robert Arnott, Feifei Li and Katrina Sherrerd compare the past prices of stocks with the discounted value of their actual subsequent cash flows (clairvoyant value) to measure the extent to which the market correctly anticipates firm growth. Using stock price and firm fundamentals data from the end of 1956 through the end of 2007 (51 years), they conclude that: Keep Reading

Enhancing Momentum Returns with Style

Do growth and value investing styles have momentum? If so, can investors/traders enhance momentum trading returns by accounting for the stylishness of stocks (the degree to which they fit into either a growth or value style)? In their August 2008 paper entitled “Style Investing, Co-movement and Return Predictability”, Sunil Wahal and Deniz Yavuz measure returns from the combination of stock momentum and stock stylishness. They consider momentum portfolio formation and holding intervals of three, six and 12 months, with an intervening skipped month. They define stock stylishness (but do not use that term) as the degree of stock price co-movement with either growth stocks or value stocks over the past three months. Using monthly returns, book-to-market ratios and market capitalizations for a broad set of stocks over the period 1965-2006, they conclude that: Keep Reading

Value Premium and Size Effect in Australia

Do stocks in Australia confirm pervasiveness of the value premium and the size effect? In their August 2008 paper entitled “Size and Book-to-market Factors in Australia”, Michael O’Brien, Tim Brailsford and Clive Gaunt measure the value premium and the size effect in the Australian market. Using company-specific accounting information from annual reports and contemporaneous stock prices for 98% of all Australian listed firms during 1982-2006 (25 years), they conclude that: Keep Reading

Institutional Trading, Returns and Strength of Anomalies

Are there exploitable differences in returns for stocks with heavy versus light institutional trading activity? In his March 2008 paper entitled “Trader Composition and the Cross-Section of Stock Returns”, Tao Shu analyzes the impact of institutional trading activity on the returns of individual stocks and on the strength of the momentum effect, post earnings-announcement drift (PEAD), the value premium and the investment effect. He calculates institutional trading activity at a quarterly frequency by dividing the aggregate absolute change in reported institutional holdings of a stock by the contemporaneous total quarterly trading volume for the stock. Using holdings data as reported via SEC Form 13F and associated stock trading volume and return data for the period 1980-2005, he concludes that: Keep Reading

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