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Myths About Momentum: Part I

Date09 Jun 2014

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Today begins a two-part series on momentum and the myths that surround it. Momentum is the phenomenon that explains how securities, which have performed well relative to peers (winners), on average, continue to outperform, and securities, that have performed relatively poorly (losers), tend to continue to underperform. Jegadeesh and Titman are credited with the first...

Is Momentum Overgrazed?

Date09 Jun 2014

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My previous post addressed the issue, “Is the stock market overgrazed?” It raised questions about the forward-looking expectations for the beta, size and value premiums that have existed historically. Researcher Claude Erb showed that each of these premiums has been declining over time, leading to at least the suspicion that they have been “overgrazed.” *Erb noted...

What’s the best incentive scheme for fund managers?

Date09 Jun 2014

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Here’s an argument hedge fund marketers make to tout hedge funds’ superiority over mutual funds. They point out that unlike mutual fund managers, who are paid solely based on assets under management, hedge fund managers also receive incentive compensation. The typical hedge fund compensation scheme is 2/20, or 2 percent of assets under management plus...

Why do investors keep buying actively managed funds?

Date09 Jun 2014

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An overwhelming body of evidence shows that actively managed mutual funds underperform their appropriate risk-adjusted benchmarks. In addition, little to no evidence points to persistence of performance beyond the randomly expected, which means past performance isn’t prologue. That’s the reason for one of the great puzzles in finance: Why do investors continue with such great...

Can past performance predict future performance?

Date09 Jun 2014

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Most investors are well aware of the SEC’s warning that past performance isn’t an indicator of future performance. That warning often leads to questions like: “If past performance isn’t predictive, why do you believe that the past outperformance of value stocks over growth stocks and small stocks over large stocks is predictive?” The answer lies...

Has The Small-Cap Premium Collapsed?

Date09 Jun 2014

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Today begins a two-part series exploring premiums, starting with the size premium. With the dramatic outperformance of U.S. small-cap stocks over the past several years, we’ve had many stories in the financial media warning investors about their future performance. Since valuations are the best predictors of future returns that we have, we can examine the...

Is Cohen & Steers Really The King Of REITS?

Date09 Jun 2014

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Articles such as the recent post on Seeking Alpha that referred to Cohen & Steers as the “King of REITs” stir my interest – though, perhaps, not in a typical way. The article noted that “Cohen & Steers has been around since 1986 and is the first investment company to specialize in investing in listed real estate...

Finer Points Of Momentum Factor

Date09 Jun 2014

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Compared with risk factors in investing—such as the market, value or size—momentum has offered investors the highest Sharpe ratio. However, momentum does have a dark side, as it has had some of the worst crashes. The large gains associated with the momentum factor come at the expense of a very high excess kurtosis (fat tail)...

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