Magic formula vs. traditional value investment strategies in the Finnish stock market

For the first time in a smaller market setting, we compare the performance of the magic formula pro-posed by Greenblatt (2006) against the most commonly used value investment strategies. We also test whether the cash flow-augmented magic formula is superior to other strategies. We find that while all tested value strategies consistently beat the market in the period 1991–2013, a strategy based on EBIT-to-enterprise-value ratio yields higher risk-adjusted returns on average. Furthermore, while the overall performance of the pure magic formula is not among the best, our findings show that the augmented magic formula yields the highest excess return during bull periods. The results also indicate that the reported abnormal returns are not compensation for higher level of risk.© the Authors & Association of Business Schools Finland, 2016.fi=vertaisarvioitu|en=peerReviewed

Index tracking with utility enhanced weighting

Passive index investing involves investing in a fund that replicates a market index. Enhanced indexation uses the returns of an index as a reference point and aims at outperforming this index. The motivation behind enhanced indexing is that the indices and portfolios available to academics and practitioners for asset pricing and benchmarking are generally inefficient and, thus, susceptible to enhancement. In this paper we propose a novel technique based on the concept of cumulative utility area ratios and the Analytic Hierarchy Process (AHP) to construct enhanced indices from the DJIA and S&P500. Four main conclusions are forthcoming. First, the technique, called the utility enhanced tracking technique (UETT), is computationally parsimonious and applicable for all return distributions. Second, if desired, cardinality constraints are simple and computationally parsimonious. Third, the technique requires only infrequent rebalancing, monthly at the most. Finally, the UETT portfolios generate consistently higher out-of-sample utility profiles and after-cost returns for the fully enhanced portfolios as well as for the enhanced portfolios adjusted for cardinality constraints. These results are robust to varying market conditions and a range of utility functions

Index tracking with utility enhanced weighting

Passive index investing involves investing in a fund that replicates a market index. Enhanced indexation uses the returns of an index as a reference point and aims at outperforming this index. The motivation behind enhanced indexing is that the indices and portfolios available to academics and practitioners for asset pricing and benchmarking are generally inefficient and, thus, susceptible to enhancement. In this paper we propose a novel technique based on the concept of cumulative utility area ratios and the Analytic Hierarchy Process (AHP) to construct enhanced indices from the DJIA and S&P500. Four main conclusions are forthcoming. First, the technique, called the utility enhanced tracking technique (UETT), is computationally parsimonious and applicable for all return distributions. Second, if desired, cardinality constraints are simple and computationally parsimonious. Third, the technique requires only infrequent rebalancing, monthly at the most. Finally, the UETT portfolios generate consistently higher out-of-sample utility profiles and after-cost returns for the fully enhanced portfolios as well as for the enhanced portfolios adjusted for cardinality constraints. These results are robust to varying market conditions and a range of utility functions

Otimização robusta de portfólios: Avaliação da eficiência sob condições de risco e incerteza na abordagem de estado de baixa do mercado.

O objetivo desta tese é apresentar uma nova proposta para formação de portfólios robustos a partir da análise estocástica de eficiência de ações de empresas negociadas na Bolsa de Valores, Mercadorias e Futuros de São Paulo (BM&FBovespa). Para isto, informações dos ativos em períodos de baixa do mercado (worst state) foram agrupados por meio do agrupamento hierárquico (hierarchical clustering), e então submetidos a uma análise estocástica de eficiência por meio do modelo Chance Constrained Data Envelopment Analysis. Por fim, para se obter a ideal participação de cada ativos, estes foram submetidos a um modelo clássico da alocação de capital. Os portfólios formados com o método proposto foram analisados e comparados a outros formados por diferentes modelos. A utilização em conjunto de tais abordagens abastecidas de informações de pior estado do mercado permitiu a formação de portfólios robustos que apresentaram um maior retorno acumulado no período de validação, resultaram em portfólios com menores valores beta, e ainda permitiram a inserção de variáveis fundamentalistas na formação dos portfólios

Fundamental momentum as an investment timing indicator for value portfolios

The problem associated with value shares is that they may remain undervalued for an extended period of time. Therefore, determining when to buy value shares has been the focus of many investors and academics. Studies have determined fundamentals provide valuable information when selecting shares while price momentum provides a decent timing indicator. This research examines a novel share selection approach which seeks to combine fundamentals with momentum to obtain a leading timing indicator.This research seeks to determine if the fundamental momentum indicator can successfully and consistently separate value winners from value losers. The value portfolios were formed using a composite valuation measure made of three separate indicators. The Value portfolio was then ranked based on the strength of the fundamental momentum indicator.This research identified that Leverage Factor and Current Ratio momentum was able to separate value winners from losers in a consistent manner. However, only Current Ratio momentum was capable of creating portfolios which could consistently outperform the market. Therefore, this research identified that fundamental momentum could be used as a timing indicator when acquiring value shares.Dissertation (MBA)--University of Pretoria, 2012.Gordon Institute of Business Science (GIBS)unrestricte

Estimativas de Horizontes de Tempo para aplicação de DEA em seleção de Carteira de Ações e para manutenção da Carteira Selecionada.

A Análise Envoltória de Dados tem sido aplicada na seleção de carteiras de ações com bons resultados. Entretanto, existem lacunas nesta aplicação, quanto a estimativas de horizontes de tempo de coleta de dados para a seleção e de tempo de manutenção da carteira selecionada. A pesquisa propõe um modelo de programação matemática binária de minimização de erros quadrados para estimar estes horizontes, que é sua principal contribuição. A validação dos resultados do modelo ocorre pela simulação dos índices de retorno anuais estimados da carteira que utiliza ambos os horizontes estimados e de outras carteiras que não os utilizam, para posteriores comparações por testes de hipótese. A simulação de resultados mostra que a carteira com ambos os horizontes estimados tem os índices superiores, em média 6,99% ao ano, a todas as carteiras formadas para comparações. Os testes de hipótese confirmam a superioridade dos resultados dos índices do modelo proposto em níveis estatisticamente significativos. Isso nas comparações com carteiras que não utilizam nenhum dos horizontes estimados. As mesmas comparações com carteiras que utilizam ao menos um dos horizontes estimados indicam que os índices da carteira com ambos os horizontes continuam superiores, entretanto, com redução do percentual de significância estatística de superioridade neste caso

Decision-making in the fund management industry: Empirical evidence from European fund managers, buy-side analysts and sell-side analysts

This thesis responds to calls from prominent academics for research on the so-called investment management ‘black box’ of decision-making practices in capital markets.Motivated by four overarching research objectives, the study examines the following key areas of investment management praxis: (1) the backgrounds, personal traits and investment management proclivities that tend to influence the decision-making practices of portfolio managers, buy-side analysts and sell-side analysts; (2) the utility of intrinsic and relative accounting valuation techniques for pricing equities; (3) the utility of single and multi-factor risk-adjusted finance models for pricing equities; and (4) the utility of sell-side research in buy-side equity decision-making.Adopting a mixed-methods research philosophy, the study conducted in-depth semi-structured interviews with 10 high-ranking European fund managers, and collected 339 completed structured questionnaires from portfolio managers, buy-side analysts and sell-side analysts around the world, to build on the ‘black box’ perspectives provided by Brown et al. (2015), Bradshaw (2011), Ramnath et al. (2008), Brown (1993), Schipper (1991) and Arnold & Moizer (1984).The main findings reveal that capital market participants are: (1) ambivalent to human capital. The interview findings indicate that portfolio managers view gender, experience, age, education and graduate skills to be important workplace attributes that tend to positively influence buy and sell-side investment management practices, but comparatively, for example, the questionnaire findings reveal huge gender disparity exists across buy and sell-side firms even though the evidence reveals females frequently outperform their male counterparts; (2) ambivalent to accounting theory. Investment managers use DCF and P/E techniques as the mainstay of their accounting-based valuation practices, but seldom take advantage of convenient short-cut approaches to intrinsic valuation, such as RIV or AEG; (3) ambivalent to modern finance theory. Investment managers use CAPM a lot, but seldom use CCAPM, ICAPM, APT or other stylised single or multi-factor finance models to price equity stocks; and (4) ambivalent to sell-side equity research. Portfolio managers and buy-side investment managers believe it is currently unfit for purpose, citing sell-side bias and dysfunctional sell-side incentive schemes as the primary attributing factors. Some of the more notable manifestations of their ambivalence towards the sell-side include: (a) ‘binning’ sell-side analysts’ reports with disquieting regularity; (b) distrustful of analysts’ earnings forecasts, stock recommendations and price targets, yet expressing confidence in their periodic earnings updates and revisions; (c) incredulous, per se, towards sell-side ‘industry knowledge’, yet accepting of ‘specialised’ sell-side industry knowledge, (d) wary of Institutional Investor All-Star sell-side status rankings, yet believing innate ability, work experience, education, age and sometimes gender equip some sell-side analysts with a comparative, even star-like, advantage in analysing certain stocks.The findings also identify a need to: (1) redefine theoretical explanations of ‘value premiums’ because apocryphal stories in the accounting and finance literature (Penman, 2011; and Fama and French, 1992/3) about ‘value’ stocks and ‘growth’ stocks can sometimes mislead1 investors; (2) re-assess the value-relevance of theoretical market efficiency (Fama (1970) because the evidence indicates that capital markets are becoming more efficient as new technologies begin to permeate the investment management industry – which in turn has implications for the ‘active’ and ‘passive’ investment management paradigms; (3) recognise the emerging educational importance of big data reduction and computer algorithm skills, lest under-graduate and post-graduate education1 Arguably, ‘value’ stocks are simply ‘cheap’ or ‘bargain’ stocks.falls out of step with employers’ fast changing needs; and (4) recognise that gender diversity is extremely lacklustre across the investment management industry; and (5) re-assess the value-relevance of conference calls and private communications with company management because some investment managers distrust them, preferring to observe and judge management and/or their communications from a distance