RESEARCH: FOR CURIOUS MINDS
CAN VALUE INVESTORS DO GOOD?
- ESG factors underperformed the Value factor and market since 2009
- Integrating ESG in Value investing decreased returns, but increased risk-return ratios
- Residual ESG factors are likely to generate negative returns given the focus on stakeholders, not shareholders
ESG INVESTING: TOO GOOD TO BE TRUE?
- ESG factors generated positive excess returns since 2009
- Show positive exposure to Low Volatility & Quality and negative exposure to Value & Size
- Factor exposure is likely structural and not temporary
PRIVATE EQUITY: THE EMPEROR HAS NO CLOTHES
- Private equity returns can be replicated with small cap equities
- Small, cheap and levered stocks would have achieved higher returns since 1988
- Valuation and debt multiples are at all-time-highs, lowering expected returns
THE RISE OF ZOMBIE STOCKS
- Zombie firms, where interest payments exceed operating profits, are on the rise
- Zombie stocks perform surprisingly well
- They are expensive, volatile stocks from diverse sectors
LIQUID ALTERNATIVES: ALTERNATIVE ENOUGH?
- Liquid alternatives offer hedge fund strategies in mutual fund format
- The correlations to the S&P 500 have been high, even of market neutral funds
- Diversification benefits have therefore been limited
CHASING MUTUAL FUND PERFORMANCE
- Mutual funds exhibit momentum when measured by their one-year performance
- Momentum disappears when more reasonable fund selection criteria are applied
- Performance does not seem effective for fund selection for a full market cycle
SKEWNESS AS A FACTOR
- Skewness is a feature of stocks with high firm-risks
- Stocks with positive or negative skewness outperform the market
- Can partially be explained by the Size factor
FACTOR ETFS & FUTURES
- Investors can directly access factor returns via ETFs in the US & futures in Europe
- However, neither of these come without some investor concerns
- Realised returns differ substantially from theoretical returns
MEAN-REVERSION ON EQUITY INDEX LEVEL
- Mean-Reversion on index level became profitable post the 1970s, before that Momentum dominated
- The structural shift from Momentum to Mean-Reversion is consistent across markets
- Likely explained by the evolution of financial markets
QUANT STRATEGIES IN THE CRYPTOCURRENCY SPACE
- Cryptocurrencies have reached a market capitalisation of > $150 billion
- Backtesting quantitative strategies is difficult given a limited trading history & universe
- Short-term Momentum works very well, classic factor investing strategies less so
HEDGING MARKET CRASHES WITH FACTOR EXPOSURE
- None of the factors consistently generated positive performance during recent market crashes
- However, almost any factor exposure would have increased the risk-return ratio of an equity-centric portfolio
- Low Volatility and Mean-Reversion would have been most beneficial, Momentum least
FACTORS & BEHAVIOURAL BIASES
- Investors are humans and not the homo economicus
- Investing is influenced by a wide variety of behavioural biases
- Factors can be explained by a single or multiple biases