Editor’s Letter

Welcome to the latest edition of The Journal of Investing.

To begin the issue, Levy and Roll tackle the problem of mutual fund selection. They propose a fund performance measure that incorporates a simple idea: shrinkage should be applied to gross return parameters, but not to fees, which are known. Their proposed Shrinkage Adjusted Sharpe ratio (SAS) substantially improves the prediction of out-of-sample performance relative to existing methods.

Next, DiCiurcio, Wu, and Wang look at the issue of using historical averages to predict earnings growth expectations. The authors find that world GDP, US GDP, and equity payout ratios have successfully predicted revenue growth through time and also provide evidence that the labor cost and trade intensity predict corporate profit margins.

In our next article, Ong finds a negative correlation between geographical diversification of private equity (PE) funds and PE fund returns. He shows the relationship between geographical diversification and PE fund returns actually follow an inverted U shape function.

Next, Chen takes a look at Index tracking. Various methods to track an index have been used throughout the past 40 years but tracking an index using a small number of its constituents remains a problem. The author proposes an artificial intelligent method—particle swarm optimization (or PSO) to select the most effective stocks to track a target index most closely.

Lim and Ng then use an unsupervised machine learning method of time-series clustering using Dynamic Time Warping (DTW). They show that using this method helps overcome correlation convergence issues during periods of downside event risks.

Next, Crook tackles the difficulty that endowment portfolio managers face due to low interest rates and high inflation. He constructs a novel return hurdle for foundations that is forward-looking and market-based. This return hurdle indicates that the total and excess returns necessary to meet typical foundation portfolio objectives are near all-time highs.

Gomes, Le, and Williams-Raumbaud follow with an article that addresses the safe-haven, hedging, and diversifying properties of gold for investors located in various countries and under various economic scenarios. Their results show that gold is relevant for strategic asset allocation as it may offer investors protection against significant equity market corrections

We conclude the issue with Neumann, who examines the importance of bankruptcy risk in modeling and forecasting REITs. He then constructs an asset pricing model, which includes bankruptcy risk as a factor, to predict REIT returns.

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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