Contrary to economic theory, in recent years funds with an ESG mandate have outperformed the broader market. New research shows that outperformance was caused by increased asset flows to so-called green stocks, raising the prospects for lower returns going forward.
The rising popularity of ESG investing has driven asset flows to green stocks. But new research confirms that the resulting higher valuations forebode lower returns for climate-conscious investors.
New research shows that positive returns to ESG portfolios from 2018-2020 were attributed to increased demand for “green“ stocks, raising the question of whether that outperformance will be sustained.
New research quantifies the implicit cost that investors incur when index funds, such as those tracking the S&P 500, are rebalanced. Those costs may be avoidable by adopting trading strategies that introduce the possibility of tracking error.
Our fiscal deficit, as measured by the debt-to-GDP ratio, has grown to levels that could impede growth, as predicted by financial theory and confirmed by empirical evidence. Moreover, new research shows that our burgeoning deficit could increase risk premiums for both stocks and bonds.
Shiller’s CAPE ratio is the most-cited predictor of long-term equity returns. But new research shows that the “Buffett” indicator does a good job of forecasting, and both ratios predict subdued, long-term returns for stocks.
Historical data shows that stock markets have reacted poorly when the Fed has contracted its balance sheet and reduced liquidity – and the effect is more pronounced when Fed actions deviate from what the market expects.
The historical data has shown that the value premium is smaller for large-cap securities than for small caps. But new research shows that large-cap investors can increase the premium by pursuing an equal-weighted strategy.
Investors seeking higher yields and relatively low risk, and are willing to sacrifice liquidity, will find attractive opportunities in interval funds that invest in senior secured, middle-market loans, such as those offered by Cliffwater.
After a multi-decade pause, the winds of inflation have picked up. Only TIPS have been an effective hedge against inflation. Other asset classes have failed to varying degrees.
The last decade and a half rewarded investors with healthy stock and bond returns. But high valuations, low interest rates and high inflation are signals to reassess risk tolerance and asset allocations.
Because 529 plans are exempt from SEC oversight, they can charge higher fees and use that revenue in ways that do not benefit plan participants. New research shows some states are guilty of this abuse.
The poor performance of factor-driven value strategies over the past decade has raised the question of whether intangible assets, such as patents and proprietary software, are properly treated. New research confirms that intangibles indeed distort valuation metrices, but there is no consensus on how to address the problem.
Macroeconomists have debated whether financial crises are predictable. New research shows that indeed they are – and are caused by the rapid expansions of credit accompanied by asset-price booms.
Economic theory says that “green” stocks – those of companies with a low carbon footprint – should underperform “brown” ones. But in recent years that has not been the case, and new research explains how cash flows to sustainable strategies have driven short-term outperformance.
Actively managed global allocation funds claim that skilled investment managers can produce a superior rate of return compared to traditional index funds. But the reality does not match the hype.
The extreme outperformance of commodities over the last several weeks has sparked interest in this asset class. New research finds that commodities are subject to lottery-like returns, providing information on future performance.
Given the war in the Ukraine, I thought it would be helpful to provide insights for advisors and investors to think about risk and what if any actions should be considered.
The academic evidence against active management is mounting. New research shows that information is incorporated into security pricing far too quickly for investors to profit from it.
Since the initial publication of research documenting active share, its advocates have clung to the belief that the metric could identify funds that would outperform. But the academic evidence has all but disproven that thesis.
Market corrections can cause investors’ stomachs to roil, often leading to panicked selling. Investors might be able to avoid that mistake if they understood that drops of that magnitude occur fairly frequently – they are “normal.”
Quantitative finance is built on the premise that exposure to factors such as value/growth, market capitalization, momentum and profitability/quality explain the variation of performance of diversified portfolios. New research shows that carbon dioxide emissions represent a new factor.
So-called “green” stocks that have a good environmental, social and governance (ESG) profile have lower expected returns. But new research shows that they also have less risk and similar risk-adjusted returns to “brown” stocks.
Is the failure of the value factor over the last decade due to the inability of book value to incorporate so-called “intangible assets,” such as the intellectual property that has propelled companies like Amazon, Alphabet and Apple? New research provides the answer.
Impact investing seeks to achieve social good, but new research shows that it has had a negligible effect on the cost of capital for so-called “brown” companies.
New research shows that some funds that use a factor-based construction process may have over- or under-exposure to industries, sectors, countries and other attributes relative to a market-cap-weighted index.
New research confirms that investing with an environmental, social and governance (ESG) mandate does not lead to higher risk-adjusted returns. But investors will reduce exposure to climate-related risks and get the “psychic” benefit of making a positive impact for society.
New research shows that companies that engender high employee satisfaction are rewarded with higher stock prices and investor returns.
It has been my tradition to informally rate the investment-related books I read in the past year. I have also included some novels and books of general interest. Here is my list of winners and losers.
New research on corporate bonds shows that investors driven by ESG mandates have reduced the cost of capital for “green” companies – thereby achieving their goal of addressing concerns around climate change.
New research shows that the surge of market participation through the Robinhood platform has been driven by young, uninformed users who lack the skill to generate “alpha,” resulting in increased noise and volatility for all investors.
Research shows that funds with positive Morningstar sustainability ratings deliver inferior performance. Nonetheless, funds have sought to increase their holdings of “green” stocks to improve those ratings and have benefited from additional asset flows.
Despite the strong recovery for value stocks since late 2020, they are still priced at historically cheap levels – comparable to their level at the peak of the tech bubble. That is especially true for small-value stocks.
New research shows that aggressively easy monetary policy has driven asset flows to high-yield corporate bonds. Those bonds now offer poor risk-adjusted returns and have made certain interval funds more attractive.
New research documents a case where a U.K.-based investor engaged with companies and got them to respond to environmental, social and governance (ESG) issues, thereby reducing the risks associated with those stocks.
ESG investing has grown in popularity. This has coincided with more comprehensive ESG disclosures by firms in their IPOs and has reduced the historical underpricing. This benefited companies and reduced returns to IPO investors.
New research shows that funds with a good track record of social responsibility have attracted more assets. But that is a historical effect; additional fund flows do not lead to further improvements in social responsibility.
New research shows that mutual funds routinely select the benchmark that provides the greatest degree of outperformance. They even switch benchmarks if a different one will boost their performance numbers.
New research shows that corporate bonds issued by companies with good ESG practices trade with smaller spreads. That is good for those companies, as it lowers their cost of capital. But it means that investors’ returns will be less than for non-green bonds.
New research shows that mutual funds and ETFs with an ESG mandate failed to live up to their promises. Those funds, for example, had worse track records for compliance with labor and environmental laws and were less likely to voluntarily disclose emissions data than non-ESG investments.
Despite the growing popularity of ESG-based investing, new research shows that it has been harder for “green” firms to raise equity or debt capital when compared to “brown” firms.
Spreads have become smaller for corporate bonds among issuers that focus on ESG factors. Future returns for those bonds will be reduced, but issuers with good ESG track records will enjoy a lower cost of capital.
New research shows that private investments in public equities (PIPEs) offer attractive returns, but those are driven by a small number of deals that deliver exceptional returns (“home runs”).
New research confirms that institutional investors, such as mutual funds, outperform the market before fees, and they do so at the expense of retail investors. That is bad news for retail investors and for investors in active mutual funds, who underperform after fees.
A prominent fear facing investors with an ESG mandate is whether they must sacrifice returns to achieve their goals. New research shows that ESG-based municipal bonds deliver the same returns as those without a “green” mandate.
New research shows that the ESG portions of mutual funds underperformed the remainder of the funds and did so with higher risk. But the magnitude of those differences was small.
New research shows that funds that with an ESG mandate have factor exposures that differ significantly from the market, creating a challenge for investors who seek a specific factor loading for their overall allocations.
New research shows that Western countries, which have tighter regulations, have forced companies to move their pollution-related activities to other domiciles. That can be good news for ESG based investors, who reward those companies with a lower cost of capital.
Credit interval funds have become popular among advisors looking to increase the yield on their fixed-income allocations. New research illustrates the difficulty in quantifying the underlying fees in those investments.
ESG proponents claim that “green” high-yield bond returns offer better risk-adjusted returns. New research disproves this claim, although ESG investors do not incur a penalty by owning green bonds.
