Editor’s Letter

We open the Winter issue with an article by Mozes and Steffens, presenting a model for predicting whether value stocks will outperform growth stocks and whether value stocks’ outperformance will be positively or negatively correlated with equity markets. They find that investors may be able to improve their factor returns and reduce their portfolio volatility by dynamically calibrating their value stock factor exposures. Livnat and Zhang examine the value relevance of the timing of earnings announcement dates relative to prior expectations. They explain that their results can be used by investors to earn abnormal returns, by security analysts in revising their forecasts, and by option traders when earnings announcement dates cross option expiration dates. Platt, Cai, and Platt investigate whether a portion of the declining hedge fund return premium over mutual funds and other investment vehicles is related to the flow of capital into hedge funds. Additionally, they inquire whether either market-neutral or directional funds may be able to avoid the lower returns that come with rising assets.

Next, Wills proposes a new structure for asset owners seeking portfolio returns. He recommends thinking about where the next period of above-average returns will come from and where the greatest risk factors exist that can damage the capital base, rather than focusing primarily on manager selection. Arthur and Rabarison studied U.S. domestic equity fund data from 1999 through 2009 for mutual fund risk-shifting behavior relative to their mid-year performance. Their study implies that actual rankings are still important for the best mid-year performers and being among the winners is different from being the top winner. Therefore, by opting for actively managed funds, investors may want to take a closer look at who the best active manager actually is. De and Clayman look at the relationship between the ESG (environmental, social, and governance) ratings of a company and its stock returns, volatility, and risk-adjusted returns in the post-2008 financial crisis era and find that asset managers can utilize the association between corporate ESG ratings and stock return, volatility, and risk-adjusted return to enhance their stock-picking and portfolio-construction abilities.

Lamponi presents a data-driven categorization of investable assets that shows that the separation of equities and bonds is reflected in the data-driven categorization, while more complex investments and, in particular, alternative investments are exposed to a range of diverse risk factors. Kudoh, Miazzi, and Yamada present study results proving how the low-correlation enhancement can add significant value to the most common alternative beta strategies, such as minimum variance, risk parity, and even equal weighting. Beccacece and Cantù apply Markowitz’s model to compare diamonds with Italian real estate and also German real estate, in order to investigate the diversification contribution of diamonds to a portfolio of financial assets. We conclude the issue with Shulman’s reflection on the ephemeral life of an emerging fund manager in response to the massive transformation the investment industry has been undergoing.

As always, we welcome your submissions. We value your comments and suggestions, so please email us at journals{at}investmentresearch.org.

TOPICS: ESG investing, analysis of individual factors/risk premia, portfolio constructio

Brian Bruce

Editor-in-Chief

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