Given the war in the Ukraine, I thought it would be helpful to provide insights for advisors and investors to think about risk and what if any actions should be considered.
The academic evidence against active management is mounting. New research shows that information is incorporated into security pricing far too quickly for investors to profit from it.
Since the initial publication of research documenting active share, its advocates have clung to the belief that the metric could identify funds that would outperform. But the academic evidence has all but disproven that thesis.
Market corrections can cause investors’ stomachs to roil, often leading to panicked selling. Investors might be able to avoid that mistake if they understood that drops of that magnitude occur fairly frequently – they are “normal.”
Quantitative finance is built on the premise that exposure to factors such as value/growth, market capitalization, momentum and profitability/quality explain the variation of performance of diversified portfolios. New research shows that carbon dioxide emissions represent a new factor.
So-called “green” stocks that have a good environmental, social and governance (ESG) profile have lower expected returns. But new research shows that they also have less risk and similar risk-adjusted returns to “brown” stocks.
Is the failure of the value factor over the last decade due to the inability of book value to incorporate so-called “intangible assets,” such as the intellectual property that has propelled companies like Amazon, Alphabet and Apple? New research provides the answer.
Impact investing seeks to achieve social good, but new research shows that it has had a negligible effect on the cost of capital for so-called “brown” companies.
New research shows that some funds that use a factor-based construction process may have over- or under-exposure to industries, sectors, countries and other attributes relative to a market-cap-weighted index.
New research confirms that investing with an environmental, social and governance (ESG) mandate does not lead to higher risk-adjusted returns. But investors will reduce exposure to climate-related risks and get the “psychic” benefit of making a positive impact for society.
New research shows that companies that engender high employee satisfaction are rewarded with higher stock prices and investor returns.
It has been my tradition to informally rate the investment-related books I read in the past year. I have also included some novels and books of general interest. Here is my list of winners and losers.
New research on corporate bonds shows that investors driven by ESG mandates have reduced the cost of capital for “green” companies – thereby achieving their goal of addressing concerns around climate change.
New research shows that the surge of market participation through the Robinhood platform has been driven by young, uninformed users who lack the skill to generate “alpha,” resulting in increased noise and volatility for all investors.
Research shows that funds with positive Morningstar sustainability ratings deliver inferior performance. Nonetheless, funds have sought to increase their holdings of “green” stocks to improve those ratings and have benefited from additional asset flows.
Despite the strong recovery for value stocks since late 2020, they are still priced at historically cheap levels – comparable to their level at the peak of the tech bubble. That is especially true for small-value stocks.
New research shows that aggressively easy monetary policy has driven asset flows to high-yield corporate bonds. Those bonds now offer poor risk-adjusted returns and have made certain interval funds more attractive.
New research documents a case where a U.K.-based investor engaged with companies and got them to respond to environmental, social and governance (ESG) issues, thereby reducing the risks associated with those stocks.
ESG investing has grown in popularity. This has coincided with more comprehensive ESG disclosures by firms in their IPOs and has reduced the historical underpricing. This benefited companies and reduced returns to IPO investors.
New research shows that funds with a good track record of social responsibility have attracted more assets. But that is a historical effect; additional fund flows do not lead to further improvements in social responsibility.
New research shows that mutual funds routinely select the benchmark that provides the greatest degree of outperformance. They even switch benchmarks if a different one will boost their performance numbers.
New research shows that corporate bonds issued by companies with good ESG practices trade with smaller spreads. That is good for those companies, as it lowers their cost of capital. But it means that investors’ returns will be less than for non-green bonds.
New research shows that mutual funds and ETFs with an ESG mandate failed to live up to their promises. Those funds, for example, had worse track records for compliance with labor and environmental laws and were less likely to voluntarily disclose emissions data than non-ESG investments.
Despite the growing popularity of ESG-based investing, new research shows that it has been harder for “green” firms to raise equity or debt capital when compared to “brown” firms.
Spreads have become smaller for corporate bonds among issuers that focus on ESG factors. Future returns for those bonds will be reduced, but issuers with good ESG track records will enjoy a lower cost of capital.
New research shows that private investments in public equities (PIPEs) offer attractive returns, but those are driven by a small number of deals that deliver exceptional returns (“home runs”).
New research confirms that institutional investors, such as mutual funds, outperform the market before fees, and they do so at the expense of retail investors. That is bad news for retail investors and for investors in active mutual funds, who underperform after fees.
A prominent fear facing investors with an ESG mandate is whether they must sacrifice returns to achieve their goals. New research shows that ESG-based municipal bonds deliver the same returns as those without a “green” mandate.
New research shows that the ESG portions of mutual funds underperformed the remainder of the funds and did so with higher risk. But the magnitude of those differences was small.
New research shows that funds that with an ESG mandate have factor exposures that differ significantly from the market, creating a challenge for investors who seek a specific factor loading for their overall allocations.
New research shows that Western countries, which have tighter regulations, have forced companies to move their pollution-related activities to other domiciles. That can be good news for ESG based investors, who reward those companies with a lower cost of capital.
Credit interval funds have become popular among advisors looking to increase the yield on their fixed-income allocations. New research illustrates the difficulty in quantifying the underlying fees in those investments.
ESG proponents claim that “green” high-yield bond returns offer better risk-adjusted returns. New research disproves this claim, although ESG investors do not incur a penalty by owning green bonds.
New research documents the abject failure of the vast majority of municipal bond funds to outperform a passive benchmark.
New research shows that a company’s history of bad ESG events foretells poor stock performance. That contrasts with other research showing that ESG ratings lack such predictive power.
Choosing a fund or ETF with a positive ESG profile is fraught with risk. New research shows how carefully investors must weigh considerations such as screening criteria, factor exposures, industry concentration and expenses.
New research has uncovered a paradox. Energy firms have been, by far, the most prolific producers of “green” innovations and patents. But those are the stocks that are routinely shunned by ESG investors. Are ESG investors’ goals aligned with their dollars?
Financial theory predicts that stocks of “green” or climate-friendly companies should underperform brown ones, but empirical evidence demonstrates that has not been the case. New research explains that paradox, showing that green stocks have had a temporary benefit from adverse climate-related news.
As predicted by theory, increased investor demand has resulted in higher returns for public stocks with good environmental, social and governance (ESG) characteristics. Unfortunately, that means future returns will be lower for those stocks. New research confirms that this is also the case for private “impact” investments.
Six competing vendors rate how companies perform along ESG standards. But because those ratings differ widely across vendors, investors cannot reliably construct portfolios that meet their personal criteria.
Evaluating an investor’s ability, willingness and need to take risk, and then designing his or her portfolio accordingly, are the most crucial functions of investment/financial planning and the “fintech” software that supports the profession.
Past studies found some evidence of persistence of outperformance in private equity and venture capital. But new research challenges those findings and makes a compelling case that advisors and their clients should proceed with caution in those assets classes, investing only when they are confident they have identified a compelling strategic advantage.
Proponents of the fiduciary standard claim that it will lead to better financial outcomes for clients. But a new study of Canadian advisors, who resemble U.S.-based RIAs but do not adhere to a fiduciary standard, casts doubt on this assertion.
New research shows that bonds from carbon-emitting (“brown”) companies have underperformed those of green companies during last 13 years, but, contrary to theory, they are riskier. Indeed, brown bonds may outperform in the future, as the temporary effect from increased investor demand subsides.
Funds with a socially responsible or environmental, social and governance (ESG) mandate may allow clients to feel good about their investments. But new research shows that they should not expect excess returns.
Since the global financial crisis, a new asset class has emerged that offers attractive yields – single-family rentals (SFRs).
Advocates of ESG investing may be disappointed to learn of a new research study showing that greenhouse gas emissions have had no measurable effect on corporate profitability or equity performance.
Investors following an ESG mandate can achieve their goals only if they can accurately and consistently identify stocks that meet their criteria. But new research shows that those criteria have been subject to arbitrary revisions and that there are wide discrepancies among the vendors providing the data.
High-profile episodes, such as that involving GameStop, have led some to advocate for banning short selling. But new research confirms that short sellers play a valuable role in keeping markets efficient and preventing prices from overshooting their intrinsic value.
Corporate executives often bemoan the cost of high regulation, but new research show that greater federal regulatory scrutiny has historically correlated with better stock performance.