A performance evaluation of portfolio managers: tests of micro and macro forecasting

This study examines the performance of Irish domiciled funds over the period 1988 to 2000. The study specifically examines whether Irish portfolio managers, particularly in light of the small and thinly traded domestic market, can effectively partake in micro or macro forecasting. Four alternative models are used to jointly assess micro and macro forecasting, while a fifth non-parametric model is used to solely examine market timing effects. The results reveal consistent evidence of poor micro forecasting/stock selection ability across the funds examined. The macro forecasting results are more varied, with some evidence of positive timing ability in two of the models. In addition, significant correlations are generally found between the funds micro and macro forecasting ability, while diagnostic tests reveal limited evidence of mis-specification in the models used.     

Greenness index: IPO performance and portfolio allocation

This study examines how the greenness of the firm affects the short- and long-term performance of IPOs. To measure the greenness of the firm, we develop the Greenness Index based on the emissions produced. We find that the greenness of the firms operating in services and financial sectors is higher than in other sectors. To examine the short- and long-run performance of IPOs, we classify our sample into high and low green firms. In the short-run, high green firms obtain a lower return than low green firms. However, high green firms perform better than low green firms in the long-run. This study also determines the factors that cause short- and long-run performance, and the results suggest that the firm’s greenness negatively influences initial returns and underperformance of IPOs. Finally, we develop a theoretical model in terms of the portfolio's allocation and assert that investors participate in high-green firms to optimize their portfolio.     

Do ADRs enhance portfolio performance for a domestic portfolio? Evidence from the 1990s

American depository receipts (ADRs) represent an increasingly popular and convenient mechanism for international investing. We analyze ADRs traded throughout the 1990s and find that these securities offer a diversification and portfolio performance benefit when combined with a domestic portfolio (proxied by the S&P 500). While we find that emerging market ADRs are effective instruments for reducing portfolio risk, they do not improve portfolio performance as measured by the Sharpe ratio. Developed market ADRs do improve portfolio performance as measured by the Sharpe ratio. The asset allocation which maximizes the Sharpe ratio is 84 percent domestic stocks, 16 percent developed ADRs, and 0 percent emerging ADRs. Further, due to problems in defining an appropriate market index for ADRs, the Sharpe ratio is viewed to be the preferred performance measure. Other measures such as Jensen’s alpha and the Treynor measure are susceptible to being “gamed” to distort portfolio performance.     

Relative performance of dynamic portfolio insurance strategies: Australian evidence

This paper simulates the performance of synthetic put portfolio insurance and Constant Proportion Portfolio Insurance (CPPI) using Australian data for the period from 1992 to 2000. These strategies are implemented by trading in the index and bills and simulation is conducted across 18 scenarios. We find that while the CPPI dominates in scenarios using daily rebalancing, the synthetic put strategy delivers better outcomes when value based triggers are used. More importantly, although the two per cent market move trigger emerges as the optimal rebalancing choice, overall, neither strategy appears justifiable in terms of achieving downside protection or allowing upside gain.     

Omega performance measure and portfolio insurance

We analyze the performance of the two main portfolio insurance methods, the OBPI and CPPI strategies, using downside risk measures. For this purpose, we introduce Kappa performance measures and especially the Omega measure. These measures take account of the entire return distribution. We show that the CPPI method performs better than the OBPI. As a-by-product, we determine the set of threshold values for these risk/reward performance measures.     

Expected earnings growth and portfolio performance

We form portfolios based on forecasted growth rates in earnings and apply stochastic dominance tests. Low expected-growth rate portfolios dominate high expected-growth rate portfolios. This suggests that the superior return performance of value stocks is not due to omitted risk factors but is a consequence of investors making systematic errors in forming earnings expectations. Fama and French (1992) extend and refine the results of previous studies that report relationships between stock returns and firm characteristics (e.g., Banz (1981), firm size; Rosenberg et al. (1985), book value to market value; Basu (1983) and Jaffe et al. (1989), earnings-to-price ratio; and Keim (1985), dividend yield).     

Asymmetric information and portfolio performance measurement

This note argues that though Dave Mayers and Edward Rice were able to show that the CAPM could be used to detect superior investors in a world of asymmetric information, their demonstration does not resurrect the CAPM as a practical tool for performance measurement. To employ the Mayers-Rice model, an investment advisor would first have to determine that the CAPM holds for uninformed investors. As a means of avoiding the problem of testing the CAPM, a performance measure based only on returns is outlined. The measure is robust in that it would correctly designate superior investors in context of the CAPM, the arbitrage pricing model and many other equilibrium models of security pricing.     

Foreign market portfolio concentration and performance

Using security holdings of 49,857 foreign investors on the Oslo Stock Exchange (OSE), I test whether concentrated investment strategies in international markets result in excess risk-adjusted returns. I find that investors with higher learning capacity increase returns, while investors with lower learning capacity decrease returns from the portfolio concentration. I measure learning capacity as institutional classification, geographical proximity to Norway, and cultural closeness to Norwegian investors (as based on the Hofstede cultural closeness measures). I conclude, consistent with the information advantage theory, that concentrated investment strategies in foreign markets can be optimal (disastrous) for investors with higher (lower) learning capacity.     

Potential performance and tests of portfolio efficiency

The potential performance of an asset set may be obtained by choosing the portfolio proportions to maximize the Sharpe (1966) performance measure. If a portfolio has a Sharpe measure equivalent to the potential performance of the underlying set of assets, then it is efficient. Multivariate statistical procedures for comparing potential performance and testing portfolio efficiency are developed and then evaluated using simulations. Two likelihood ratio statistics are then used to compare stock and bond indices against sets of 20 and 40 portfolios. The procedures are also compared to the Gibbons (1982) methodology for testing financial models.     

Mutual fund performance persistence: Factor models and portfolio size

We re-examine US mutual fund performance persistence. We investigate persistence (i) using both “academic” factor models and “practitioner” index models, (ii) using decile-size recursive portfolios and also portfolios formed from smaller numbers of funds, (iii) using nonparametric bootstrap p-values as well as conventional t-tests and (iv) using both net-of-fee fund returns (net alphas) and gross alphas. Our key result is that positive net alpha performance persistence can be found using small portfolios of funds together with a holding period of 6 months or less, for both practitioner index models and academic factor models.     

Using industry momentum to improve portfolio performance

Minimum-variance portfolios, which ignore the mean and focus on the (co)variances of asset returns, outperform mean–variance approaches in out-of-sample tests. Despite these promising results, minimum-variance policies fail to deliver a superior performance compared with the simple 1/N rule. In this paper, we propose a parametric portfolio policy that uses industry return momentum to improve portfolio performance. Our portfolio policies outperform a broad selection of established portfolio strategies in terms of Sharpe ratio and certainty equivalent returns. The proposed policies are particularly suitable for investors because portfolio turnover is only moderately increased compared to standard minimum-variance portfolios.     

On the performance of the minimum VaR portfolio

Alexander and Baptista [2002. Economic implications of using a mean-value-at-risk (VaR) model for portfolio selection: A comparison with mean–variance analysis. Journal of Economic Dynamics and Control 26: 1159–93] develop the concept of mean-VaR efficiency for portfolios and demonstrate its very close connection with mean–variance efficiency. In particular, they identify the minimum VaR portfolio as a special type of mean–variance efficient portfolio. Our empirical analysis finds that, for commonly used VaR breach probabilities, minimum VaR portfolios yield ex post returns that conform well with the specified VaR breach probabilities and with return/risk expectations. These results provide a considerable extension of evidence supporting the empirical validity and tractability of the mean-VaR efficiency concept.     

A new perspective on performance persistence: evidence using portfolio holdings

We investigate the existence and sources of performance persistence for Australian equity funds, using monthly portfolio holdings data. We find significant persistence among outperforming rather than underperforming funds, which is primarily related to security selection skill, and is associated with growth‐orientated funds. Meanwhile, the relation between persistence and momentum is secondary and nuanced. Further, persistence largely derives from existing holdings, while subsequent active trading contributes only moderately positive returns for both outperforming and underperforming funds. We also find that persistence fades beyond 6 months and vanishes after 24 months. Our findings differ from those for U.S. equity funds and previous Australian studies, implying that persistence may vary with market context and its identification may depend on data availability.     

Conditional performance measurement using portfolio weights: evidence for pension funds

This paper combines the use of portfolio holdings data and conditioning information to create a new performance measure. Our conditional weight-based measure has several advantages. Using conditioning information avoids biases in weight-based measures as discussed by Grinblatt and Titman (J. Business 60 (1993)). When conditioning information is used, returns-based measures face a bias if managers can trade between observation dates. The new measures avoid this interim trading bias. We use the new measures to provide fresh insights about performance in a sample of U.S. equity pension fund managers.     

Asset allocation and portfolio performance: Evidence from university endowment funds

We use university endowment funds to study the relationship between asset allocation decisions and performance in multiple asset class portfolios. Although endowments differ substantially in asset class composition, policy portfolio returns and volatilities are remarkably similar across the sample. The risk-adjusted performance of the average endowment is negligible, but actively managed funds generate significantly larger alphas than passive ones. This is consistent with endowment managers exploiting their security selection abilities by over-weighting asset classes in which they have superior skills. Contrary to both theory and prevailing beliefs, asset allocation is not related to portfolio returns in the cross-section but does indirectly influence performance.     

Individual home bias,portfolio churning and performance

This study investigates economic consequences of individual investors’ home bias and portfolio churning in their personal pension accounts. The empirical analysis is carried out within a Heckman style two-stage framework to account for selection bias with respect to individuals’ investment activity, and to allow for an endogenously determined home bias, portfolio churning and performance. Results indicate that home bias induces a worse risk-adjusted performance. Home-biased individuals’ relatively bad performance originates in insufficient risk-reduction, due to a lack of international diversification. A higher degree of portfolio churning also deteriorates performance, despite the fact that churning is not associated with any direct transaction costs. However, home-biased individuals do not churn portfolios as often as individuals with a larger share of international asset holdings, which diminishes the negative effects of home bias on performance. Overconfidence is driven by a return-chasing behavior, where overconfident individuals favor international assets with high historical returns. Individuals with actual skill are more often men than women, are not tempted by high historical returns, and use international assets for the right reason – diversification.     

A note on the performance of foreign exchange forecasters in a portfolio framework

This note investigates the ability of 22 currency forecasters to predict movements in three major exchange rates. In particular, it examines the profitability of portfolios of forward market positions constructed on the basis of the predictions of each forecaster. The key findings of the paper are that just one panel member proves significantly profitable to follow, and that investing on the basis of the naive alternative prediction of ‘no change’ produces high, though volatile, profits. We conclude that the majority of currency analysts have little ability to predict the future.     

Measuring bond mutual fund performance with portfolio characteristics

This paper studies the performance of U.S. bond mutual funds using measures constructed from a novel data set of portfolio weights. Active fund managers exhibit outperformance before costs and fees generating, on average, gross returns of 1% per annum over the benchmark portfolio constructed using past holdings (approximately the same magnitude as expenses and transaction costs combined). This suggests that fund managers are able to earn back their fees and costs. There is evidence of neutral ability to time different portfolio allocations (sector, credit quality, and portfolio maturity allocations) and only a subgroup of bond funds exhibit successful timing ability. One performance measure based on portfolio holdings predicts future fund performance and provides information not contained in the standard measures. These results provide the first evidence of the value of active management in bond mutual funds.     

Diversification and portfolio theory: a review

Financial Markets and Portfolio Management - Diversification is one of the major components of investment decision-making under risk or uncertainty. However, paradoxically, as the 2007–2009...