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Do Rising Rates Spell Doom For REITs?
- Much of the conventional wisdom on investing is simply wrong. Investors shouldn’t automatically accept such “wisdom” as fact, but ask for the evidence supporting it.
- All information is not “value relevant” information.
- If rising rates reflect strong economic growth, the expected returns to REIT investments might also be good. This could be a reflection of stronger demand or a falling risk premium.
The Long And Short Of The Low-Volatility Anomaly
- Much, if not most, of the low-volatility anomaly can be explained by the poor performance of high-volatility stocks, not the outperformance of low-volatility stocks.
- Excess returns from long low-volatility and short high-volatility portfolios have a limited lifespan. After that, excess returns are largely subsumed by high transaction costs.
- Study: Among high-volatility stocks, those with low short interest actually experience extraordinary positive returns.
Does Taking Corporate Credit Risk Add Value?
- Don’t be tempted by higher yields because there are more efficient ways to take on risk.
- The lower a bond’s credit rating, the higher its correlation with equities. It’s essentially equity risk in disguise.
- Higher-yielding bonds don’t make the most effective diversifiers, and they tend to make worst-case losses even worse.
Do Lower Investment-Grade Municipal Bonds Add Value?
- Investors who need better returns than high-quality bonds will provide should adjust their portfolio’s equity allocation, not stretch for yield.
- Credit risk in lower-rated bonds is mostly equity risk in disguise.
- Building an individual bond portfolio allows investors to avoid mutual fund fees while tailoring credit and term risk to their specific situation.
Why We Love Premium Bonds And You Should Too
Thu, Jun. 26 • 23 Comments
- The higher annual interest payments received for premium bonds offset the amortization of the premium paid for them.
- Higher coupon premium bonds are less sensitive to the negative effect of rising interest rates.
- Purchasing premium bonds allows investors to avoid onerous tax implications created by buying discount bonds.
The Role Of Credit Risk In Exchange-Traded Notes
Tue, Jun. 24 • 6 Comments
- Comparatively little attention has been paid to the role of counterparty risk in exchange-traded notes.
- Study: Based on real market quotes, there is no evidence that investors are pricing for substantial credit risk in ETNs.
- Investors should be sure to examine not only an ETN's expense ratio, but also the implied cost of its credit risk.
Decreasing Returns To Scale In Actively Managed Mutual Funds
Thu, Jun. 19 • 8 Comments
- The past performance of active managers is no predictor of their future performance.
- Study: Decreasing economies to scale can explain the lack of persistence in performance among active managers.
- Fund managers have become more skillful over time, but this higher skill level has not been translated into better performance.
The Hurdles Are Getting Higher For Active Management
Tue, Jun. 17 • 26 Comments
- For active managers to be successful, they must have victims they can exploit. These victims are likely to be individual investors.
- Passive investors receive benefits from the role active managers play in making financial markets efficient without paying the costs.
- For individual investors who recognize that active management is a loser’s game, all the trends are favorable.
Do Day Traders Evidence Skill?
- On average, individual investors lose money from trading. Not all of those losses can be explained by trading costs.
- Even the most skilled investors have a hard time generating alpha (risk-adjusted excess returns) after all expenses are accounted for.
- Study: Less than 1 percent of day traders on the Taiwan Stock Exchange are able to outperform consistently.
Does Private Equity Deliver Alpha
Wed, Jun. 11 • 12 Comments
- Private equity (PE) has grown tremendously over the past 30 years.
- Growth is a result of American pension funds searching for alternatives to public equity markets.
- Private equity doesn’t provide risk adjusted returns.
Has The Realized Equity Premium Been Shrinking?
Editors' Pick • Wed, Jun. 4 • 30 Comments
- Claude Erb has done a series of papers in which he examines the various premiums — size, value, momentum, and beta.
- His most recent one focused specifically on the equity risk premium.
- While it’s certainly possible that the equity risk premium could revert to its historical mean, mean reversion of valuations is far from a certainty.
Has The Small-Cap Premium Collapsed?
- Over the last five years, the dramatic outperformance of U.S. small-cap stocks has the media warning investors about their future performance.
- Most of the outperformance of small caps is due to the very large outperformance of a very small number of small-cap stocks that are no longer small cap.
- Small-cap premium has come down a bit, but there’s no evidence of small caps being highly overvalued.
Is Cohen & Steers Really The King Of REITS?
Fri, May. 30 • 16 Comments
- Recent article inspired a review of historical records to see if Cohen & Steers should be considered a "master of the universe".
- Compared two Cohen & Steers domestic real estate funds against Vanguard's REIT.
- The results indicate that, perhaps, Cohen & Steers should abdicate the throne.
Do Dividends Lower Stock Prices? Part II
Wed, May. 28 • 534 Comments
- Some investors have a hard time accepting that when a company pays a dividend, the payment results in a permanent, relatively lower price.
- As long as a company earns more than it pays out in dividends, the stock price will eventually increase to above the price it was before the dividend was paid.
- If you believe dividends don’t lower the price by the amount of the dividend, you also must believe that not paying them would not raise the price.
Myths About Momentum: Part II
- When momentum experiences occasional crashes, it’s the short side that causes the losses.
- It’s also important to understand that all premiums are volatile, with their volatility being a multiple of the premium itself.
- In bear markets, forced selling by margin calls can lead to momentum, as can short squeezes in bull markets.
Myths About Momentum: Part I
- A new paper discusses the facts and the myths surrounding the momentum factor.
- The momentum premium has been evident in U.S. equity data for over 200 years.
- The momentum premium has been both persistent over time and pervasive across countries, geographic regions, and asset classes.
Is Momentum Overgrazed?
- Claude Erb has also explored at the question of the momentum premium being overgrazed.
- Erb explains that while the large-cap momentum premium has declined, it’s still well above the equity risk premium.
- Erb concludes that relative to other equity market opportunities, momentum does not appear to be overgrazed.
Is The Stock Market 'Overgrazed'?
Tue, May. 13 • 72 Comments
- A new paper by Claude Erb notes that over time the beta, size and value premiums have all declined.
- The paper questions whether or not the trades are too crowded with investors demanding too much from a limited supply.
- Erb notes that there is no way to know if markets have been “overgrazed” — though declining trends at least raise the suspicion that they have been.
Should You Include International Bonds In Your Portfolio? - Part II
- Vanguard found that with appropriate hedging of currency risk, investment in the broad international bond market can be less volatile than an investment in the broad U.S. bond market.
- They also noted that the volatility of currencies can overwhelm any diversification benefit that international bonds may bring to a diversified portfolio.
- Diversification of risk is an extremely important part of a prudent strategy.
Should You Include International Bonds In Your Portfolio? - Part I
- There are two main types of fixed income risks that investors should consider diversifying: credit and interest rate.
- U.S. investors can eliminate the need for diversification of credit risk by limiting their holdings to those that carry the full faith and credit of the U.S. government.
- When limiting holdings to U.S. government credits, in terms of credit risk, international diversification doesn't provide any benefit.
Should People Listen To John Hussman's Forecasts?
Tue, May. 6 • 100 Comments
- Stock forecasters are just a part of the market noise investors should ignore.
- One of the biggest problems with forecasts is that many present a well-thought-out case, providing insightful analysis, often accompanied by interesting charts.
- Forecasters aren’t telling you anything that other sophisticated investors (such as pension plans, hedge funds, mutual funds) are unaware of.
May, The Silly Season, Is Upon Us
- The sell in May and go away strategy is just another in the long list of investment myths.
- It is true that stocks have provided greater returns from November through April than they have from May through October.
- It is also true that since 1926, there has still been an equity risk premium from May through October.
Do Dividends Lower Stock Prices?
Wed, Apr. 30 • 222 Comments
- As long as a company earns more than it pays out in dividends, it’s likely that the stock price will eventually increase to above the price it was before the dividend was paid.
- Dividends return the company’s capital to its shareholders, reducing the value of the company.
- Dividends are not a free lunch.
The Efficient Market Hypothesis, Fact Or Fiction? Part 4
Fri, Apr. 25 • 139 Comments
- Markets aren't perfectly efficient. They fail at all three forms (weak, semi-strong, and strong) of the EMH, and markets aren’t perfectly rational.
- The EMH provides us with important insights into how competitive forces work in setting asset prices.
- The EMH also guides investors to the strategy that’s most likely to allow them to achieve their financial goals.
The Efficient Market Hypothesis, Fact Or Fiction? Part 3
Thu, Apr. 24 • 17 Comments
- Active investors make the market efficient by attempting to gain a competitive advantage in terms of information.
- Competition among all the highly skilled competitors makes it very difficult to gain any competitive advantage.
- The revolution in computer technology has allowed the testing of various strategies based on computation intensive research that wouldn’t have been possible until fairly recently.
The Efficient Market Hypothesis, Fact Or Fiction? Part 2
Wed, Apr. 23 • 53 Comments
- Each year the SPIVA results are virtually the same — a large majority of active managers underperform their benchmarks.
- Another demonstration of the failure of active management to generate alpha is to look at the returns of the two leading advisors to pension plans, SEI and Russell.
- Academic studies have found that there is no persistence in pension plan performance beyond the randomly expected — past performance isn’t a reliable predictor of future performance.
The Efficient Market Hypothesis, Fact Or Fiction? Part 1
- The efficient market hypothesis is a hypothesis that provides an important organizing principle that helps us understand how markets function and prices are set.
- EMH asserts that financial markets are informationally efficient.
- As anomalies have been uncovered, there’s mounting criticism of the EMH.
What Exactly Is Risk: Part II
- The expected return of a portfolio should never be considered as a single point, but instead, should be considered as a potential distribution of outcomes.
- Tracking error, black swan and maverick risk are a few other ways to define the risk that investors and advisors face.
- Standard deviation isn't the only risk investors and advisors should consider when developing a financial plan and investment policy statement.
What Exactly Is Risk?
Thu, Apr. 17 • 83 Comments
- Not being able to precisely define risk is a problem for both advisors and investors.
- A common definition for risk is standard deviation, or a measure of volatility.
- Unfortunately, two investments with similar standard deviations can experience entirely different distribution of returns.
Confusing Familiarity With Safety: International Investing And Currency
- Investors often don't properly diversify because they think international investing is risky. U.S. equities are mistakenly assumed to be the "safest."
- Even if the U.S. is the safest, that does not mean investors should have all their eggs in one basket.
- Financial economists recommend that investors add international assets to their portfolios, because they actually reduce risk.
Emerging Markets, Should They Be In Your Portfolio?
- From 2011-2013, the MSCI Emerging Markets Index about broke even, underperforming the S&P 500. Investors are once again fleeing.
- Emerging equity markets have been more volatile than developed markets. However, volatility has been falling.
- Current valuations suggest that emerging markets will provide higher returns than either the U.S. or other developed markets.
Portfolio Rebalancing: The Whys And The Hows
Tue, Apr. 8 • 20 Comments
- Ideally, to eliminate style drift investors should rebalance daily. However, because the real world involves costs, investors should reduce, not eliminate, style drift to an acceptable level.
- Investors should rebalance wherever there is sufficient cash to make the effort worthwhile, thus eliminating any tax issues and either eliminating or minimizing trading costs.
- An investor’s investment policy statement (IPS) should include targeted asset allocations as well as minimums and maximums and a rebalancing table.