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Factor Investing in Emerging Market Credits

We examine factors in a novel dataset on the cross-section of emerging market hard currency corporate bonds. We find that the size, low-risk, value, and momentum factors predict future excess returns. Single-factor and multi-factor portfolios obtain economically and statistically significant premiums. Further, alphas remain significant after controlling for exposures to developed market credit factors. The factor portfolios benefit from bottom-up allocations to countries, sectors, ratings, and maturity segments, as well as from bond selection within these segments. Higher risk-adjusted returns of factor portfolios also can be found within liquid subsamples of the market. <b>TOPICS:</b>Fixed income and structured finance, emerging markets, analysis of individual factors/risk premia, portfolio construction <b>Key Findings</b> ▪ We examine factors in the cross-section of emerging market hard currency corporate bonds and find that the size, value, momentum, and low-risk factors predict future excess returns. ▪ Factor portfolios yield significant alphas in the Capital Asset Pricing Model, and a multi-factor portfolio that allocates equally to the four factors shows even stronger results, due to the low pairwise correlations among the individual factors. ▪ Alphas remain significant versus developed market credit factors, and the results hold within countries, sectors, ratings, maturities, and liquid subsamples.

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The Error of Tracking Error: Why Active Indexing Makes Sense

<h3>Abstract</h3> <h3>Objective</h3> To synthesise the evidence on the overall and differential effects of interventions based on diet and physical activity during pregnancy, primarily on gestational weight gain and maternal and offspring composite outcomes, according to women’s body mass index, age, parity, ethnicity, and pre-existing medical condition; and secondarily on individual complications. <h3>Design</h3> Systematic review and meta-analysis of individual participant data (IPD). <h3>Data sources</h3> Major electronic databases from inception to February 2017 without language restrictions. <h3>Eligibility criteria for selecting studies</h3> Randomised trials on diet and physical activity based interventions in pregnancy. <h3>Data synthesis</h3> Statistical models accounted for clustering of participants within trials and heterogeneity across trials leading to summary mean differences or odds ratios with 95% confidence intervals for the effects overall, and in subgroups (interactions). <h3>Results</h3> IPD were obtained from 36 randomised trials (12 526 women). Less weight gain occurred in the intervention group than control group (mean difference −0.70 kg, 95% confidence interval −0.92 to −0.48 kg, I<sup>2</sup>=14.1%; 33 studies, 9320 women). Although summary effect estimates favoured the intervention, the reductions in maternal (odds ratio 0.90, 95% confidence interval 0.79 to 1.03, I<sup>2</sup>=26.7%; 24 studies, 8852 women) and offspring (0.94, 0.83 to 1.08, I<sup>2</sup>=0%; 18 studies, 7981 women) composite outcomes were not statistically significant. No evidence was found of differential intervention effects across subgroups, for either gestational weight gain or composite outcomes. There was strong evidence that interventions reduced the odds of caesarean section (0.91, 0.83 to 0.99, I<sup>2</sup>=0%; 32 studies, 11 410 women), but not for other individual complications in IPD meta-analysis. When IPD were supplemented with study level data from studies that did not provide IPD, the overall effect was similar, with stronger evidence of benefit for gestational diabetes (0.76, 0.65 to 0.89, I<sup>2</sup>=36.8%; 59 studies, 16 885 women). <h3>Conclusion</h3> Diet and physical activity based interventions during pregnancy reduce gestational weight gain and lower the odds of caesarean section. There is no evidence that effects differ across subgroups of women.

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Private Equity Benchmarking for Asset Owners and Investment Managers

This works focuses on the challenges posed by benchmarking private equity performance and the solutions that have evolved in practice. The paper puts the practical approaches used by investors into four general categories, and describes the relevant characteristics that distinguish each category, the typical circumstances in which they normally arise, and the areas in which each presents opportunities for improvement. The authors’ perspective is neutral as to which method is preferred or superior, recognizing that each one presents particular advantages and challenges. The intent is to demonstrate the relationship among the different approaches that eventually should rest on similar underlying principles of objectivity, efficiency, and transparency. The intended audience includes institutional asset owners with significant allocations to private equity, that need to adequately measure the value added to their portfolio by direct and fund investment, as well as investment managers who need to track how the performance of their strategies and implementations compares to that of their peers. <b>TOPICS:</b>Private equity, performance measurement <b>Key Findings</b> ▪ Analyze the ways the investment industry has evolved to tackle the challenges with private equity benchmarking in practice. ▪ Reduce the reliance on subjective measures like appraisal values and heuristic groupings, and focus on objective measures like cash flows, transacted values, and efficient benchmark portfolios. ▪ Evolve beyond static measures of performance to those that suggest the confidence intervals that differentiate between skill and luck.

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Is Tactical Allocation a Winning Strategy?

In this study, we evaluated the absolute and risk-adjusted performance of tactical allocation mutual funds and benchmarked them to various benchmark indexes from January 1994 to October 2016. We found that tactical allocation mutual funds underperformed all benchmark indexes and had lower absolute and risk-adjusted performance during the period. Tactical allocation funds, however, had lower risk or standard deviation of returns compared to all asset categories with the exception of bonds. We also computed seven-factor alpha and found that tactical allocation funds had significantly negative alpha during the entire period, including during the 2008 financial crisis. Our findings indicate that tactical allocation funds did not outperform the benchmarks, and investors would have been better off with passively managed funds that followed benchmark indexes. <b>TOPICS:</b>Mutual funds/passive investing/indexing, performance measurement, risk management, financial crises and financial market history <b>Key Findings</b> ▪ Tactical allocation mutual funds underperformed all benchmark indexes and had lower absolute and risk-adjusted performance from January 1994 to October 2016. Investors would have been better off with passively managed funds that followed benchmark indexes. ▪ For most investors, sticking to a long-term strategic allocation is the best course of action. ▪ Although we found that tactical allocation funds do not deliver superior performance on a risk-adjusted basis, our results should be interpreted with caution. We did not examine variation in asset class sensitivity among funds, and whether this might be related to alpha generation.

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