Editor’s Letter

To open this issue, we are very excited to have a debate on the endowment model featuring Richard Ennis and Larry Siegel. We first started doing debates in The Journal of Investing in 1994 with none other than Larry Seigel, who, along with Paul Kaplan, debated Brian Rom and Kathleen Ferguson on risk in portfolios. Our current debate features Richard discussing issues with the endowment model, and Larry supporting the model. Their commentaries and rebuttals are a great read and I encourage all our readers not to miss them.

As we continue with our next section, Berkin explains why momentum works, grouped into behavioral, market frictions, and risk categories, and identifies several conditions when momentum fails. Explanations of momentum’s behavior assist in providing guidance to help investors decide how to proceed going forward. Ma studies the special items in companies’ income statements, focusing on their heterogeneous impacts on stock returns in the North American region. They construct a nonparametric factor based on the sign of special items over time and find that the left tail is associated with the most significant underperformance in the equity market.

In the next article, Scruggs disentangles the effects of global style, industry, and region factors using a comprehensive cross-sectional regression framework analogous to the process employed by many systematic investors. He discusses the reliance of these “pure” factor portfolios on leverage, short positions, or turnover. Shapiro and Zheng discuss the recent outperformance of large, mega-cap stocks in the United States. They evaluate the impacts on small caps in all types of investing: index/passive, factor/smart beta, and active and find that impact of this outperformance is broader to equity portfolios than many investors realize.

To continue, Chakraborty, Grant, Trahan, and Varma conduct a big-data analysis to assess the pricing impact of dividend announcements. They find that alpha returns on dividend-increasing firms were available on the stocks of value-creating growth companies, the stocks of under-investing companies, and especially the stocks of “wise contraction or cyclical restructuring” companies in need of turnaround growth signals. In contrast, alpha returns on dividend decreasing firms were available on the stocks of value-destroying growth companies and the “wise restructuring” companies. To conclude the issue, Chen, Li, and Wang investigate whether the size premium is driven by firm size. By decomposing firm size into horizon-based components, they find that the changes in firm size in prior years, instead of its recent level, drive the size premium. Their analysis also offers new insights into the disappearance of the size premium and the return behaviors of new entrants.

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

TOPICS: Portfolio theory, portfolio construction, foundations & endowments, exchanges/markets/clearinghouses

Brian Bruce

Editor

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