Editor’s Letter

To open this issue, Smith reports that black-box algorithms now account for nearly a third of all US stock trades. He presents concerns that trading algorithms are particularly dangerous because they are so efficient at discovering statistical patterns, but so utterly useless in judging whether the discovered patterns are meaningful. Du, Wang, and Wang document evidence that intra-industry uncertainty has a positive relation with firm valuation. Specifically, the reduction of intra-industry uncertainty about firm future profitability leads to a decline of firm ME/BE ratios over time. Vandenbroucke gives a qualitative description of an advisory or discretionary investment process that manages the emotional aspect of investing. The process looks beyond the risk-focused paradigm in relation to investor profiling, product positioning, and portfolio construction.

Next, Sturm examines how each sector contributes to the optimal risky portfolio over time and provides evidence that investors mostly price return and risk information efficiently, but find it difficult to price sector-level correlation information efficiently into the optimal risky portfolio. Estrada evaluates the bucket approach for retirement and finds that simple static strategies, which by definition involve periodic rebalancing, clearly outperform bucket strategies and they do so based not just on one, but on four different ways of assessing performance. Clare, Seaton, Smith, and Thomas investigate the relationship between value, growth, and two forms of momentum across a wide range of developed and emerging international equity markets using MSCI total return “smart beta” indices. With the help of momentum-based investment rules, they find that growth can outperform both comparable buy-and-hold and value investment styles, a result that is almost certainly robust to transaction cost considerations.

As we continue, Ge illustrates the damaging effects that sequence risk can have on retirement plans and how asset volatility can exacerbate this risk. The study demonstrates that the 60/40 portfolios with low-volatility components can significantly reduce the uncertainty of retirement investment outcomes in terms of both narrower final wealth ranges and reduced failure rates of retirement portfolios. Sherwood introduces a portfolio construction framework for risk-averse investors that aims to meet, or exceed, a return objective or liability coverage obligation. Skew-risk modeling is designed to enable the investor to efficiently manage a portfolio that has a target return objective.

To conclude the issue, Klevak, Livnat, Pei, and Suslava examine the language of earnings call transcripts in the April–August 2018 period. They find the tone of the conference calls of companies that mention trade tariffs during their call to be more negative than a matched control sample. They also find that investors do not share in the pessimism expressed by call participants.

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

Brian Bruce

Editor-in-Chief

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