Best of 2017: Financial Analysts Journal, CFA Digest, and In Practice

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What can we be taught from downloads of CFA Institute publications in 2017?

Most clearly, investors still struggle to grasp the unintended consequences of the financial coverage experimentation of the final decade.

Perhaps extra surprisingly, the most popular article of 2017 is about skilled ethics, with Vanguard founder Jack Bogle arguing that robust skilled ethics should overcome greed. Hand in hand with this admirable curiosity is increased curiosity about socially responsible investing (SRI) and broader environmental, social, and governance (ESG) themes.

Of the newer funding methods, global factor investing — better known as smart beta — makes an look as properly. (Check out my trilogy of articles curating factor investing resources.) But the lineup shows a healthy skepticism about quantitative approaches, together with data mining, value-at-risk (VAR), and exchange-traded fund (ETF) mispricing.

Traditional investment models, predictive approaches, and drivers of investment returns are actually underneath elevated scrutiny, particularly since fairness valuations took flight thanks partially to some tech shares.

Elsewhere on the recognition listing, readers of CFA Institute publications show an admirable thirst for extra actual and rigorous measuring methods in investment performance, bond yield spreads, equities research, and instrument pricing.

Confusion amongst practitioners about the real-world usefulness of behavioral finance fashions turns out to have an empirical basis. But along with its intuitive attraction, behavioral finance might have essential sensible makes use of in areas as diversified as analyst herding, manager selection, household stock market participation, and investor risk tolerance.

Finally, judging by the renewed curiosity in understanding what constitutes a real value-investing technique somewhat than a “formulaic impostor,” may there be an finish in sight for the extended bear market afflicting worth shares?

Top CFA Institute Financial Analysts Journal® Articles of 2017

Balancing Professional Values and Business Values 

The challenge confronted by CFA charterholders and different monetary business contributors shouldn’t be selecting between skilled values and enterprise values, John C. Bogle says. Rather, it’s balancing that ever-competing pair in a method that locations the very best pursuits of customers and shoppers above our personal company and private pursuits.

Are Cash Flows Better Stock Return Predictors Than Profits?

Although varied earnings assertion–based mostly measures predict the cross-section of inventory returns, direct technique money move measures have even stronger predictive energy, in response to Stephen Foerster, CFA, John Tsagarelis, CFA, and Grant Wang, CFA.

Inefficiencies in the Pricing of Exchange-Traded Funds

Antti Petajisto demonstrates that the costs of exchange-traded funds (ETFs) can deviate considerably from their internet asset values (NAVs), in spite of the arbitrage mechanism that permits licensed contributors to create and redeem shares for the underlying portfolios.

The Long-Run Drivers of Stock Returns: Total Payouts and the Real Economy

Philip U. Straehl and Roger G. Ibbotson present theoretical and empirical proof over 1871–2014 that whole payouts (dividends plus buybacks) are the important thing drivers of long-run inventory market returns.

Global Equity Country Allocation: An Application of Factor Investing

Implementable by exchange-traded funds or index futures, a portfolio based mostly on nation indexes with favorable issue exposures considerably outperforms, each economically and statistically, the world market capitalization portfolio, in response to Timotheos Angelidis and Nikolaos Tessaromatis

Facts about Formulaic Value Investing

The time period “value investing” is more and more being adopted by quantitative funding methods that use ratios of frequent elementary metrics (e.g., ebook worth, earnings) to market value. U-Wen Kok, CFA, Jason Ribando, CFA, and Richard Sloan argue that these methods shouldn’t be confused with worth methods that use a complete strategy in figuring out the intrinsic worth of the underlying securities.

Time to Change Your Investment Model

Feng Gu and Baruch Lev exhibit empirically that the good points from predicting company earnings, or consensus hits and misses — an exercise on the core of most funding methodologies — have been shrinking quick over the previous 30 years.

Active Share and the Three Pillars of Active Management: Skill, Conviction, and Opportunity

This article relates lively share to the fund supervisor’s particular person stock-picking ability, conviction, and alternative. Martijn Cremers proposes a brand new formulation for lively share that emphasizes {that a} fund’s lively share is lowered solely by overlapping holdings with its benchmark.

Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance?

Marie Brière, Jonathan Peillex, and Loredana Ureche-Rangau suggest a brand new decomposition of the variability of SR mutual fund returns that isolates the contribution of SR screening, permitting it to be in contrast with different, conventional sources of efficiency.

Top CFA Digest Summaries of 2017

Five Mysteries Surrounding Low and Negative Interest Rates

Record-low and even unfavorable rates of interest in developed markets are a consequence of financial stimuli to stabilize output. The authors examine the results of this new coverage for the financial system, capital markets, and customers, in addition to its function in combating the current monetary disaster.

Fundamental Analysis and the Cross-Section of Stock Returns: A Data-Mining Approach

Using elementary alerts from monetary statements and a bootstrap strategy, the authors discover that many elementary alerts predict cross-sectional inventory returns even after accounting for knowledge mining. Thus, irregular returns can’t be attributed to random likelihood and are higher defined by mispricing.

Mind the Gap: Inconsistencies between Subjective and Objective Financial Risk Tolerance

Examining a large pattern of traders at a big Italian financial institution, the authors discover the effectiveness of two measurements of threat tolerance — particularly, an investor’s personal evaluation of his skill to bear threat and an examination of the composition of the investor’s portfolio. The authors search for inconsistencies between the 2 metrics and discover that inconsistencies are extra evident in people with sure demographic traits.

Precautionary Savings with Risky Assets: When Cash Is Not Cash

US industrial companies have a tendency to take a position considerably in noncash dangerous monetary belongings — for instance, company debt, fairness, and mortgage-backed securities. Such dangerous belongings make up 38% of the companies’ monetary portfolios or 6% of whole ebook belongings. These belongings are held primarily by financially unconstrained companies and by poorly ruled companies. Nonfinancial companies might thus be working in a “shadow” asset administration business topic to minimal regulation and disclosure necessities.

The Effects of Firms’ Information Environment on Analysts’ Herding Behavior

Analysts transfer as a gaggle towards consensus when these with superior info challenge early earnings forecasts in a firm’s opaque info atmosphere. The authors research the data atmosphere of companies.

Has Momentum Lost Its Momentum?

A buying and selling technique of shopping for winners and promoting losers labored properly for a number of a long time. Since 1999, the irregular constructive returns that had accrued to such a “momentum” technique have disappeared. Rather than being pushed by a shift available in the market dynamic, the change was pushed by — amongst different elements — traders themselves uncovering the abnormality.

It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans

Mutual fund administration firms that present providers to sponsors of 401(okay) financial savings plans exhibit favoritism towards their very own affiliated funds. Underperforming affiliated funds are much less more likely to be faraway from the menu of accessible funding choices in contrast with equally underperforming non-affiliated funds. The funding selections of plan contributors are inclined to counsel that they’re unaware of the potential conflicts of curiosity concerned and proceed to spend money on underperforming funding choices.

Picking Winners? Investment Consultants’ Recommendations of Fund Managers

Institutional traders rent funding consultants to suggest fund managers. Studying the suggestions for US actively managed fairness funds, the authors discover that elements unrelated to previous efficiency are inclined to weigh extra closely on the suggestions. Institutional traders are more likely to observe the suggestions, considerably affecting fund flows. There is not any proof that these suggestions add worth

The Role of Corporate Donations in Chinese Political Markets

Corporations usually attempt to affect politicians and purchase political favors, which can function a competitive benefit. The authors examine company donations and discover their function in a graduation of social exchanges between companies and native leaders in China.

Prospect Theory and Stock Returns: An Empirical Test

Investors who use prospect concept to guage shares in response to their historic return distributions might excessively bid up shares with excessive historic imply returns, low volatilities, and constructive skewness. The authors discover a unfavorable relationship between shares’ prospect concept values and their future returns within the cross-section.

Corporate Scandals and Household Stock Market Participation

Corporate fraud reduces participation within the inventory market, significantly for households within the place the place the fraud happens. Individual households with a excessive diploma of lifetime expertise of company scandals scale back their fairness holdings. Given the important significance of constructive returns on equities for assembly such objectives as training and retirement, company fraud has a unfavorable impact on households’ monetary well-being.

When Cutting Dividends Is Not Bad News: The Case of Optional Stock Dividends

Optional inventory dividends (OSDs) are a novel dividend payout mechanism that induces shareholders to voluntarily select inventory over a money dividend, saving the firm from having to pay priceless money reserves with out this transfer being perceived as unfavorable information.

Value-at-Risk under Lévy GARCH Models: Evidence from Global Stock Markets

Since the subprime mortgage disaster, the reliability of sorts of econometric fashions used within the monetary business has been criticized for failing to seize threat precisely throughout monetary market downturns. The authors take a look at the predictive energy of univariate GARCH-type fashions, initially developed to estimate market volatility, underneath varied error distribution assumptions and make a number of findings.

Say It Again Sam: The Information Content of Corporate Conference Calls

The info content material of convention calls may be explored utilizing a novel metric. The writer compares the phrases within the administration presentation session with these within the Q&A session of company convention calls. He finds that the extra dissimilar the phrases utilized by administration throughout the two periods, the higher the data manufacturing. He additionally finds an enchancment in info manufacturing when analysts are extra engaged throughout the convention name.

The Unintended Consequences of the Zero Lower Bound Policy

In the aftermath of the worldwide monetary disaster of 2007–2008, the US Federal Reserve aggressively pushed down short-term rates of interest to advertise an environment of value stability and an financial atmosphere conducive to sustainable financial progress. The authors talk about the impression of near-zero rates of interest on monetary establishments.

Heterogeneous Liquidity Effects in Corporate Bond Spreads

Exploring the way in which liquidity threat impacts bond spreads, the authors discover that illiquidity contributes to bond spreads nonlinearly. Illiquidity additionally impacts totally different courses of bonds heterogeneously. Although the liquidity impact varies over time, it’s extremely correlated with totally different bonds.

Corporate Social Responsibility and CEO Confidence

Previous research have steered that increased ranges of company social duty (CSR), together with such traits as company status and integrity, have a tendency to supply hedging advantages for companies when they’re confronted by operational points that have an effect on prospects or staff. The authors present that “confident” CEOs usually tend to underestimate the importance and significance of CSR in decreasing the monetary and reputational impression of such occasions.

Top In Practice Summaries of 2017 (CFA Institute Members Only)

The Effect of Social Responsibility Screens on Fund Performance

Socially accountable mutual funds have grown quickly over the previous decade and now characterize greater than US$8 trillion in belongings underneath administration (AUM) within the United States. Despite the recognition of these funds, it’s not at all times clear whether or not and by how a lot their extra-financial screens contribute to fund efficiency.

Detecting ETF Mispricing

Many traders implicitly assume that the worth of exchange-traded funds (ETFs), automobiles that present passive publicity to a basket of securities and real-time liquidity, stays extraordinarily near their internet asset worth (NAV). But is it actually the case?

Value Investing: Do Quant Strategies Measure Up?

Value investing, based mostly on an organization’s elementary intrinsic worth, is one of the preferred and enduring kinds of investing. But can investing methods based mostly merely on formulaic ratios, comparable to book-to-market, ship the efficiency traders anticipate?

Why Global Equity Funds Outperform

Amid widespread evaluation of the efficiency of US fairness funds, solely a handful of research have thought of the efficiency of international fairness funds.

Why Should We Care about Active Share?

Does lively share predict outperformance? Active share shouldn’t be a measure of a supervisor’s ability, however, somewhat, a mathematical measure of the share of the holdings in a fund which might be totally different from the holdings of the fund’s benchmark.

Follow the Cash

Cash move has lengthy been core to conventional worth and progress approaches and to many elementary beta and issue methods. But are the commonest measures of money move utilized by traders truly good predictors of future firm asset values and market values?

Want to debate or ebook CE credit? Take a have a look at the CFA Institute Member App.

The Member App provides our members entry to content material from a number of CFA Institute publications, together with the Financial Analysts Journal, In Practice summaries, and CFA Digest. It options messaging boards for dialogue and the alternate of concepts. Best of all, the app facilitates in-app submission of persevering with training (CE) credit. After downloading, merely log in utilizing your CFA Institute web site credentials (e.g., [email protected] + password).

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

Mark Harrison, CFA

Mark Harrison, CFA, is director of journal publications at CFA Institute, the place he helps a set of member publications, together with the Financial Analysts Journal, In Practice summaries, and CFA Digest. He has greater than 12 years of funding expertise as a portfolio supervisor and securities analyst. Harrison is a graduate of the University of Oxford.

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