ActiveBeta Indexes E-Book

Khalid Ghayur

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 279

Veröffentlichungsjahr: 2010

Beschreibung

An informative guide offering new and innovative ways to think about active management and investing

ActiveBeta Indexes presents exciting new research that shows how above-market returns can be achieved in a low-cost, transparent, and efficient fashion. Active Betas reflect fundamental investment principles that have long been the foundation of active equity returns, but are commonly masqueraded as investment skill, or alpha. This groundbreaking book lifts the veil to uncover the common sources of active returns and reveals their beta-like properties.

Developed by leading investment practitioners at Westpeak Global Advisors, ActiveBeta Indexes introduces Active Beta sources and explains how the behavior of short- and long-term earnings growth gives rise to systematic sources of active equity returns.

• Details a new index framework and research findings that could change the face of active portfolio management
• Presents patent-pending innovations for constructing style indexes and informationally-efficient active portfolios
• Explores the historical performance of ActiveBeta Indexes

Wealth advisers, consultants, pensions and endowments, and other institutional investors will find the intellectual honesty of ActiveBeta Indexes a refreshing perspective on the active management industry. They will also find it a useful guide to a more strategic allocation of their risk and management fee budgets – a growing necessity in these challenging times.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Preface

THE PROBLEM

THE SOLUTION

ACTIVEBETA INDEX APPLICATIONS

OUR CONTRIBUTION

STRUCTURE OF THE BOOK

Acknowledgements

SECTION One - Background

CHAPTER 1 - The Evolution of Market Indexes and Index Funds

THE EARLY DAYS OF INDEXING

THE INCEPTION OF THE MUTUAL FUND INDUSTRY

ENTER ACADEMIA

THE ADVENT OF INDEX/PASSIVE MUTUAL FUNDS

INDEX MUTUAL FUNDS FOR THE PUBLIC

CONCLUSION

CHAPTER 2 - The Evolution of Equity Style Indexes

EMPIRICAL CHALLENGES TO FINANCIAL THEORIES

THEORETICAL EXPLANATIONS OF ANOMALIES

ESTABLISHING EQUITY STYLES

EQUITY STYLE INDEX METHODOLOGY

PITFALLS OF CURRENT EQUITY STYLE INDEXES

CONCLUSION

SECTION Two - ActiveBeta Conceptual Framework

CHAPTER 3 - Introducing Active Betas

DEFINING ACTIVE BETAS

IDENTIFYING THE DRIVERS OF EQUITY RETURNS

VERIFICATION

EXPLORING THE BEHAVIOR OF RETURN DRIVERS

CHAPTER 4 - Behavior of Short-Term Earnings Expectation and the Link with Price Momentum

ANALYSIS METHODOLOGY

RELATIONSHIPS STUDIED

DECOMPOSING MOMENTUM RETURNS

CONCLUSION

APPENDIX: REGRESSION ANALYSIS AND CORRELATION COEFFICIENT

CHAPTER 5 - Behavior of Long-Term Earnings Expectation and the Link with Value

RELATIONSHIPS STUDIED

INVESTMENT HORIZON OF VALUE STRATEGIES

IMPLICATIONS FOR STOCK RISK PREMIUM

DECOMPOSING VALUE RETURNS

CONCLUSION

CHAPTER 6 - Pricing and Persistence of Systematic Sources of Active Equity Returns

PRICING OF THE SYSTEMATIC SOURCES OF ACTIVE EQUITY RETURNS

PERSISTENCE OF THE SYSTEMATIC SOURCES OF ACTIVE EQUITY RETURNS

MOMENTUM, VALUE, AND RISK AVERSION

ACTIVEBETA FRAMEWORK: A SUMMARY OF RELATIONSHIPS

SECTION Three - ActiveBeta Indexes

CHAPTER 7 - ActiveBeta Index Construction Methodology

INVESTMENT PROCESS INDEXES

OBJECTIVES OF INVESTMENT PROCESS INDEXES

CONFLICTING OBJECTIVES

TRANSPARENCY, UNDERSTANDING, AND RATIONALE OF THE ACTIVEBETA MOMENTUM INDEX

ACTIVEBETA INDEX CONSTRUCTION PROCESS

DIFFERENCES IN CONSTRUCTION BETWEEN ACTIVEBETA INDEXES AND OTHER PUBLIC STYLE INDEXES

ACHIEVING OBJECTIVES

CONCLUSION

APPENDIX: ACTIVEBETA INDEX CONSTRUCTION PROCESS EXAMPLE

CHAPTER 8 - Historical Performance of ActiveBeta Indexes

ACTIVEBETA INDEX CONSTRUCTION PROCESS OVERVIEW

ACTIVEBETA INDEX PERFORMANCE: HIGHLIGHTS

ACTIVEBETA INDEX PERFORMANCE: DETAILED ANALYSIS

ACTIVEBETA INDEX EXPOSURES

CONCLUSION

CHAPTER 9 - ActiveBeta Index Applications

STYLE INVESTING : A NEW FRAMEWORK

PERFORMANCE ATTRIBUTION: DECOMPOSING ACTIVE MANAGER RETURNS

PORTFOLIO STRUCTURING: REVISITING THE ALPHA-BETA RETURN SEPARATION

PERFORMANCE BENCHMARKING

RESEARCH AND ANALYSIS

INVESTMENT VEHICLES

SECTION Four - ActiveBeta Customizable Solutions

CHAPTER 10 - Alternative Solutions for Capturing Active Betas

ACTIVEBETA CUSTOM INDEXES

ACTIVEBETA CUSTOM SOLUTIONS

A WORD ON TRADITIONAL ACTIVE MANAGEMENT

CONCLUSION

CHAPTER 11 - Concluding Remarks

Disclosures

Bibliography

About the Authors

Index

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For a list of available titles, please visit our Web site at www.WileyFinance.com.

Copyright © 2010 by Khalid Ghayur, Ronan G. Heaney, Stephen A. Komon, and Stephen C. Platt. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The material contained in this book is for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. The information contained herein shall not be construed as financial or investment advice on any subject matter. Neither the authors, their employer, Westpeak Global Advisors, L.P., nor the publishers and their related entities warrant the accuracy of information provided herein, either expressed or implied, for any particular purpose. Nothing contained in this book is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this material should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

ActiveBeta® is a registered trademark of Westpeak Global Advisors, L.P.

The methodologies outlined in the book to create ActiveBeta Indexes, ActiveBeta Custom Indexes, and ActiveBeta Portfolios are the patent-pending intellectual property of Westpeak Global Advisors, L.P.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone], or fax [phone].

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Library of Congress Cataloging-in-Publication Data:

ActiveBeta indexes : capturing systematic sources of active equity returns / Khalid Ghayur ... [et al.].

p. m. - (Wiley finance series)

Includes bibliographical references and indexes.

eISBN : 978-0-470-63297-0

1. Stock price indexes. 2. Investments. I. Ghayur, Khalid.

HG4636.A328 2010

332.63’ 222-dc22

2010000763

To my wonderful wife, Laura. I thank youfor all your love and support.To the joy of our lives, Charles and Sophia. The book isfinished. We can jam and hip-hop again!Khalid Ghayur

To my family from whom I have learned so much.Kari, you have taught me common sense. Sinead, you haveinspired me with your kindness. Brendan, you have shown mehow to Wii. Niamh, you have made me dance, and love it!Ronan G. Heaney

To Lori, for being my very supportive best friend, andStevie, for reminding me why all this matters.I love you both.Stephen A. Komon

To Kim, Madeline, Sarah, and Brady, with love—because youstruggle to understand what Daddy does all day, yet youfaithfully share in the sacrifices.Stephen C. Platt

Foreword

The investment industry is at a crossroads. Never has this fact been more apparent than during the market environment of the past few years. Investors and portfolio managers have seen some of their most cherished investment beliefs fall like dominoes, one after the other. Should we still invest in equities for the long run, given that bonds, and even cash, can outperform stocks for extended periods of time? What are the implications for asset allocation decisions, and what portion of a portfolio should equities comprise? Does any benefit exist to diversifying equity holdings internationally, considering how little diversification benefits were actually offered by international allocations during the recent downturn? And, is there really a consistent trade-off between risk and expected return?

But, one of the biggest challenges to the investment profession is the issue of style investing. How did we end up with growth and value as the canonical dichotomy of investing? Do these current styles reflect legitimate methods employed by active equity managers? If not, are there better ways of defining investment styles?

To a large degree, style investing is a product of empirical observation, in contrast to the theoretically motivated Capital Asset Pricing Model and Efficient Market Hypothesis. While Benjamin Graham did make good use of accounting relationships, economic arguments, and good, old-fashioned common sense to support the wisdom of value investing, it is difficult to understand how investing in growth stocks emerged as its alter ego. This lack of theoretical foundation, and the apparent inconsistency of the value/growth dialectic over time, has bred a new generation of critics—including the authors of this volume—who argue that style investing is based more on hindsight than on foresight.

Khalid Ghayur and his team have taken a different tack with regard to equity styles. The ActiveBeta® Framework described in this book begins with the eminently sensible premise that generic investment styles arise from common (or, in academic jargon, systematic) sources of active returns. As such, Active Betas are, first and foremost, a concept. Do systematic sources of active equity returns exist? If so, what are they and why do they persist over time?

By starting with theory, and then providing extensive empirical research to support their hypothesis, Kal and his colleagues reduce the chances of data-snooping that so easily bias and mislead those who rely purely on empirical observation. By focusing on common sources of active equity returns—in particular, the systematic behavior of cash flows and discount rates—the ActiveBeta Framework is able to capture the investment processes of not only value and growth managers, but also of active core managers. In fact, this focus leads naturally to the conclusion that growth is not nearly as compelling a counterweight to value as is momentum. Moreover, with a proper definition of independent styles, Kal and company show that the combination of value and momentum is a better reflection of the style of core managers than just the market-capitalization-based, or size-based, market index. In addressing these issues, Active Betas provide a more transparent and relevant classification of investment approaches than the traditional classifications.

This new framework yields surprisingly broad implications for both active and passive investors, forcing us to look at old problems through new lenses. What is the nature of active equity management returns? Do active equity managers truly add value? Do they have idiosyncratic skill or are they providing only beta-like systematic sources of active return? If Active Betas are truly more representative factors in equity returns than the usual suspects, the answers to these questions—and the fees currently being charged by a number of portfolio managers—will need to be revised.

In developing the Adaptive Markets Hypothesis, I have highlighted the evolutionary nature of the financial markets, and in the dynamic world of professional equity management, the ability to adapt is paramount for survival. Active Betas are an example of the evolution of the investment industry. By providing new answers to some of the oldest questions about investing, this innovative framework offers the investment community a chance to reinvent itself.

On a personal note, I have had the pleasure of interacting with Kal, Ronan, Steve, and Steve for several years as a board member of Westpeak Global Advisors, and I can attest to the passion and expertise they bring to their research. They challenge themselves to find the truth, even when it conflicts with received wisdom. This book, and the ActiveBeta Framework, is the fruit of their labor. I hope you find it as insightful as I did.

ANDREW W. LO

Preface

What if a significant portion of active management returns were driven by systematic sources of active equity returns? What if these systematic active return sources could be captured more efficiently, transparently, and cost-effectively in a passive index structure? Introducing ActiveBeta® Indexes!

THE PROBLEM

The idea for ActiveBeta Indexes, as a conceptual framework and an investment product, developed out of conversations that took place at the start of 2008 between Westpeak Global Advisors and a large pension fund. The investment problem being confronted by this fund was as follows. The equity portion of the fund was equally split between passive index replication and active management. The large size of the fund required an investment in a substantial number of active managers in order to diversify individual manager investment process and business risk. For the three and five years ending 2007, the active managers employed by the fund delivered only benchmark returns, as a group, but the fund paid alpha fees for this outcome. Disappointed by the overall performance of their active managers, the fund’s Investment Committee decided to move to a 70 percent allocation to passive index replication. A smaller allocation to active management would allow the fund to concentrate investments in the most skilled active managers, reduce the noise that a large group of active managers inherently creates, and allocate active management fees and risk budgets more efficiently.