Professional articles and academic papers on performance analysis. Attribution analysis seeks to compare the return from a fund with the return from a benchmark, and to explain the differences by decomposing the excess return into its component parts. Some of our most popular research on attribution analysis considers performance attribution methodology from first principles, providing... a primer on attribution analysis and models. Others white papers and reports focus on particular models, such as the Brinson Model, fixed income return attribution, equity attribution analysis, or the dissecting of hedge fund returns. A key aspect of performance is of course reporting to clients, and here the CFA provides guidance for effective investment reporting with its Principles for Investment Reporting model, known as GIPS (Global Investment Performance Standards) and encapsulated in the GIPS Handbook. A proper attribution of returns illuminates the contribution made by active managers, enabling judgements to be formed of whether excess returns have arisen from skill or luck. For most investment strategies, however, an extended period of time is required before such judgements can be made with any confidence.
Institutions are continuously seeking ways to improve their portfolio's risk return profile. This paper compares and contrasts those vehicles and demonstrates that certain institutions that are comfortable with the implications of investing in those vehicles should carefully consider them.
A client recently asked an intriguing question: “Do style factors behave differently after a yield-curve inversion?” Intuitively, one might think they would. Particularly if a recession were looming, investors might turn to stocks that are less volatile, lower beta, more profitable, less leveraged, etc. We studied the impact…
The 2019 edition of the LCP Investment Management Fees Survey shows that fees have once again fallen in many of the key asset classes used by UK institutional investors. The average fee for an active global equity mandate of £50m has fallen by 11% since 2017. There have also been notable fee reductions in multi-asset…
One key measure of successful active management lies in the ability of a manager or a strategy to outperform their peers repeatedly. Consistent success is the one way to differentiate a manager’s luck from skill. The S&P Persistence Scorecard shows that few funds consistently outperformed their peers; 11.4% of domestic…
The excess returns associated with Value and Momentum result from convergent and divergent processes, respectively. Value stocks are systematically underpriced and gradually converge on their fair value over time. Momentum stocks start out fairly valued or slightly overvalued, and go on to become more overvalued in the short…
To help assess the performance of their private equity portfolios, institutional investors need to examine how the asset class and constituent managers are performing at the asset class-level compared to asset class-specific measures such as the relevant investment opportunity set and peer groups.
This paper provides an overview of S&P Dow Jones Indices’ methodology for defining the U.S. mid-cap equity universe. It outlines the so-called “mid-cap premium,” analyzing it from factor and sector perspectives. It shows that active managers have underperformed the S&P MidCap 400, historically. It highlights how mid-…
If indices can represent passively implemented returns in a given universe, then the risk/return profiles among various indices in the same universe should be similar. In large-cap U.S. equities, the S&P 500® and Russell 1000 have had similar risk/return profiles (9.65% versus 9.73% per year, respectively, since Dec. 31…
This study considered the performance of actively managed U.S.-based equity and fixed-income funds, and the individuals managing them since 2003. Across three statistical tests, we find no significant performance difference between male and female fund managers, nor differences in fund performance for offerings run by mixed-…
In our annual Mind the Gap study, we’ve updated our process for combining data for investor returns. The basic idea hasn’t changed: Compare asset-weighted internal rate of return calculations with category averages to see what was missed along the way. However, we’ve made three refinements aimed at more precisely capturing…
The performance of U.S. value over the last decade has led many to wonder whether the value premium has been completely eroded. We analyze this question by decomposing the relative returns of cheap stocks in order to understand what has driven this change in performance. Our return decomposition suggests value stocks’…
Join experts from FTSE Russell and DWS as they review how tilt-tilt indexes work, analyse various factor indexes and discuss top/bottom contributors and detractors from a factor, sector, single stock, country or currency perspective.
Revisiting the issue of return predictability, we show there is substantial predictive power in combining forecasting variables. We apply correlation screening to combine twenty variables that have been proposed in the return predictability literature, and demonstrate forecasting power at a six-month horizon. We illustrate…
The outperformance of companies with higher women-in-leadership (WIL) metrics has led to the development of so-called gender lens investing. Total publicly available equity and fixed-income offerings within this emerging sector have grown to over $2.4 billion in assets under management (AUM). So what are the characteristics…
We can only estimate the distribution of stock returns but from option prices we observe the distribution of state prices. State prices are the product of risk aversion – the pricing kernel – and the natural probability distribution. The Recovery Theorem enables us to separate these so as to determine the market’s forecast…
Asset-based fees, under which managers are compensated with a percentage of assets under management, have been the dominant compensation structure used in the investment management industry. Although there is little evidence that suggests institutional investors will dramatically alter their standard asset-based fee…
This paper presents an equilibrium model of stock return extrapolation in the presence of stochastic stock return volatility. The model is highly tractable, leading to closed-form solutions for the stock price, its dynamics, variance risk premium as well as providing analytic option pricing formulas that nest the Heston…
Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross section of book- to-market ratios, we find an out-of-sample return forecasting R-squared as high as 13% at the annual frequency (0.9% monthly). We document similar out-of-sample…
This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting where the presence of marketwide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that…
Selection bias under multiple backtesting makes it impossible to assess the probability that a strategy is false (Bailey et al. [2014]). This has two implications: 1) “Most claimed research findings in empirical Finance are likely false” (Harvey et al. [2016]) 2) Most quantitative firms invest in false positives. Selection…
