General Equity Research Articles

Samuel Johnson. Edited by John H. Middendorf The Lives of the PoetsThe Lives of the Poets. Samuel Johnson. Edited by, John H. Middendorf. The Yale Edition of the Works of Samuel Johnson, vols. 21–23. Edited by, Robert DeMaria Jr. New Haven, CT: Yale University Press, 2010. Pp. xii+1583.

<i>Samuel Johnson</i>. Edited by <i>John H. Middendorf</i> The Lives of the Poets<i>The Lives of the Poets</i>. Samuel Johnson. Edited by, John H. Middendorf. The Yale Edition of the Works of Samuel Johnson, vols. 21–23. Edited by, Robert DeMaria Jr. New Haven, CT: Yale University Press, 2010. Pp. xii+1583.

The persistence of risk levels of general equity funds in an emerging market economy

The persistence of risk levels of local General Equity unit trusts is evaluated. Variations in absolute and market-adjusted returns are measured to determine whether investors can use historical risk as a proxy for future risk levels. The General Equity funds are fairly homogenous, and different funds should exhibit stable risk levels if the fund managers’ investment mandates and investment styles remain stable over time. The results indicate a degree of absolute and market-adjusted risk stability over time. The market-adjusted risk and return relationship remained stable through the 2008 global crises, indicating that, on average, the fund managers maintained their benchmark-related risk exposures. Both the absolute and market-adjusted results indicate no statistically significant relationship between risk and return for the 2000 to 2012 period.

Investigating the sources of performance in South African general equity unit trusts

ABSTRACTThe objective of this study is to analyse the sources of performance in South African domestic equity unit trusts during the period 2002 to 2011. The study was based on Sharpe's (1992) study of the asset allocation of mutual funds in the United State s (US). Five sectors were selected to determine returns due to sector allocation: large-cap resources stocks, large-cap industrial stocks, large-cap financial stocks, mid-cap stocks and small-cap stocks.The study shows that a large part of active returns was due to sector allocation in the case of general and growth equity unit trusts. The contribution of stock selection was negative in most cases. However, in the case of value unit trusts the converse is true. It was also observed that sector allocations were modified frequently in the case of the top-performing unit trusts to capitalize on the relative performance of the different major sectors from time to time.

The persistence of risk levels of general equity funds in an emerging market economy

The persistence of risk levels of local General Equity unit trusts is evaluated. Variations in absolute and market-adjusted returns are measured to determine whether investors can use historical risk as a proxy for future risk levels. The General Equity funds are fairly homogenous, and different funds should exhibit stable risk levels if the fund managers’ investment mandates and investment styles remain stable over time. The results indicate a degree of absolute and market-adjusted risk stability over time. The market-adjusted risk and return relationship remained stable through the 2008 global crises, indicating that, on average, the fund managers maintained their benchmark-related risk exposures. Both the absolute and market-adjusted results indicate no statistically significant relationship between risk and return for the 2000 to 2012 period.

Active Share on the Johannesburg Stock Exchange

Fund managers earn a portion of their fees by out-performing a benchmark, typically an index. To out-perform, they may leverage the fund or engage in scrip lending, but usually they 'stock-pick', taking positions in the market which differ from those of the benchmark, namely: 'active share'. Several factors in the fund’s mandate may constrain the level of active share in a fund, inter-alia: limits on specific equities or sectors, tracking error constraints around the benchmark or limits on short-selling.We find that the percentage of active share on the JSE has declined from around 50% to 15% over the last 20 years, which is consistent with research elsewhere. This indicates that fund managers are unable or unwilling to take active positions. In contrast to other studies, we find no relationship between the level of active share and a fund’s return, raising doubts about the stock picking ability of fund managers. Finally, we observe that some index-tracking funds (with low active share) consistently out-perform around 80% of domestic general equity funds on the JSE over five-year holding periods. These findings challenge the high fees charged by many fund managers.

Facilitating a Multi-Lateral Solution to Water Quality Impairments of the Savannah Harbor

In 2010, the USEPA published a draft total maximum daily load (TMDL) to address nonattainment of dissolved oxygen (DO) criteria in the Savannah Harbor. The draft TMDL calls for severe (7590%) reductions in point source discharges of biological oxygen demand. Rather than assigning wasteload allocation (WLAs) to individual dischargers, USEPA and state regulators provided dischargers with the unusual opportunity to determine among themselves how to best distribute the WLA. It was hoped that this discharger-led process would lead to a solution that is more equitable and acceptable than one imposed by regulatory agencies. The combined discharger group retained Malcolm Pirnie ARCADIS in the summer of 2010 to facilitate the yearlong WLA distribution process. The combined discharger group was highly diverse, with a membership that included large pulp and paper mills, publically-owned treatment plants of varying sizes, and other industries. Natural dichotomies within the group included municipal versus industrial interests, Georgia versus South Carolina interests, and small versus large discharger interests. The group devised a strategy that relied on moving from agreement on general equity principals, then to potential WLA distribution scenarios, and finally to one preferred WLA scenario. Major equity issues that the group identified included:  Every discharger should contribute to the solution.  More impacting facilities should do more.  Past achievements should be rewarded.  There should be equity between the states of Georgia and South Carolina.  Economic hardship should be considered. The discharger group ultimately chose a solution whereby load reductions were made proportional to each facility’s impact on DO under baseline loading conditions. However, load reduction “caps” and technology-based concentration “floors” were also used to help ensure that no discharger received unattainable limits. The chosen solution represents a 396,281 lb/day reduction in ultimate oxygen demand loading from existing permitted conditions, and a 72 percent total load reduction, and would make approximately 98 percent of the progress needed to eliminate the excess DO deficit in the Savannah Harbor.

Integrated water management and environmental justice – public acceptability and fairness in adopting water innovations

Innovations to manage freshwater resources and avert shortages – including conservation through use of reclaimed wastewater, desalination, and demand-side management measures such as increasing block rate structures offer practical, effective remedies for meeting future water demands. We examine the challenges confronting adoption of these innovations that revolve around perceptions of fairness and public acceptability. A major obstacle to these approaches' adoption is environmental justice – that the risk and burden of resource solutions, as well as their benefits – should be borne equitably, despite differences of income or race. We first consider how debates regarding water supply are often disputes over different notions of environmental justice. We then examine general equity debates over adopting various innovations in one US state at the nexus of water demand and supply innovation: California. We contend that fairly adopting these innovations requires embracing open, inclusive, and transparent decision-making processes in which no important constituency is excluded from decisions, and in which different notions of environmental justice are embraced.

Social entrepreneurship in Mexico: a conceptual analysis

Globalisation has evidently accelerated the economic growth in developing countries but it did not lead to a general socio-economic equity in all parts of the demographic settings. Social entrepreneurship has emerged as a viable option to contribute in the solution of important social problems such as poverty and discrimination. Social entrepreneurs are learning to explore opportunities, implement boundless creativity, and ability to harness local resources into building sustainable production systems and develop market structure at the bottom of the economic pyramid alongside the globalisations effects. This paper presents an up-to-date literature review of social entrepreneurship and describes the current situation of social entrepreneurship in Mexico, detecting important gaps between theory and practice, and suggests new lines of action to improve the work done by social entrepreneurs, government and scholars in this country.

Active share on the JSE

ABSTRACTFund managers earn a portion of their fees by out-performing a benchmark, typically an index. To out-perform, they may leverage the fund or engage in scrip lending, but usually they “stock-pick“, taking positions in the market which differ from those of the benchmark, namely: “active share”. Several factors in the fund's mandate may constrain the level of active share in a fund, inter-alia: limits on specific equities or sectors, tracking error constraints around the benchmark or limits on short-selling.We find that the percentage of active share on the JSE has declined from around 50% to 15% over the last 20 years, which is consistent with research elsewhere. This indicates that fund managers are unable or unwilling to take active positions. In contrast to other studies, we find no relationship between the level of active share and a fund's return, raising doubts about the stock picking ability of fund managers. Finally, we observe that some index-tracking funds (with low active share) consistently out-perform around 80% of domestic general equity funds on the JSE over five-year holding periods. These findings challenge the high fees charged by many fund managers.

Asset Pricing in European Real Estate Equity Markets

The study provides insight into the pricing of publicly traded European real estate equities. The Fama-French three-factor model, as well as unconditional and conditional Fama-MacBeth regressions are applied to a sample of 275 real estate equities from 16 European countries over the period 1988 to 2009. The results show that within the real estate equity market, a significant value effect exists, while no small-size effect is present. Real estate equity returns vary significantly with the excess market return and a pan-European value factor. Moreover, returns are driven by a systematic size factor, although this effect is not as pronounced. The findings further indicate a better integration of the European real estate equity market with the general equity market from 1999 onwards. Consistent with other asset pricing studies, no factor risk loading proves to be consistently priced in unconditional asset pricing tests. However, the study reveals the explanatory power of systematic risk factors, especially beta, when conditioned on both general and real estate market states.

Characterisation of South African Equity Unit Trusts Using The Active Share Measure as a Performance Indicator

This study investigates the relationship between the active share, tracking error and investment performance of South African general equity and large cap unit trusts for the period 2003 to 2007. Active share reflects the amount of deviation of a unit trust’s equity holdings from a benchmark. The development of active share over time amongst unit trusts is investigated, as well as the relationship between active share, tracking error, fund size, number of equities in a unit trust and systematic risk as measured by beta. It was found that outperformance, as measured by Jensen’s α and the Omega ratio, was statistically significant for unit trusts in the highest active share quintiles. The relationship between tracking error quintiles and performance was less consistent. A slight increase with time in the active share value was observed — possibly as a result of a move away from resources and large cap shares, which are concentrated in the JSE indices. High active share was found to be associated with a larger number of active positions, a beta against the benchmark of less than one and low numbers of stocks. No relationship between active share and size was found.

Know Your VMS Exposure

One of the ongoing debates in equity market research is the set of common factors that explains the cross section of individual stock returns. With the influential backing of Fama and French [1993], a three-factor model that includes the market, size, and value factors is frequently cited in academic research and widely used in portfolio management. More recently, momentum has joined the list of accepted factors, resulting in references to a four-factor model. Lately, security volatility has begun to be used, along with the factors just mentioned, in describing portfolio risk. The authors introduce a specific measure of the idiosyncratic volatility factor that mirrors the Fama–French methodology, calling it VMS for volatile-minus-stable stocks. VMS is calculated for the entire span of the CRSP database and found to have strong credentials. VMS seems to be more important than SMB (small-minus-big market capitalization) and HML (high-minus-low book-to-market ratio), and similar to UMD (up-minus-down past return) in explaining the covariance structure of stock returns. The relative importance of VMS holds over the entire history for which it can be measured in the U.S. market (1931–2008) and continues to be an important factor in the covariance structure of stock returns in recent decades (1983–2008). Volatility, however, is not very orthogonal to the more well-known factors, a desirable property for new factors. Specifically, VMS is highly correlated to the general market (e.g., volatile stocks outperform stable stocks when the general equity market goes up) despite the fact that the authors measure security volatility in a market-idiosyncratic setting. VMS is also positively correlated with SMB (e.g., volatile stocks tend to outperform when small-cap stocks outperform) despite the Fama–French process of double sorting on market capitalization. Finally, VMS is negatively correlated with HML (e.g., volatile stocks tend to outperform when growth stocks outperform) although this correlation was not pronounced until the last few decades. In contrast to the other Fama–French factors, the average return of the VMS factor has been close to zero over time and negative in recent decades. <b>TOPICS:</b>Portfolio theory, volatility measures, VAR and use of alternative risk measures of trading risk, options

A-Reits: Impact of the Global Financial Crisis

For the past 20 years, the Australian Real Estate Investment Trust (A-REIT) sector has consistently produced returns that have outperformed the general equities market. However, the sector has succumbed to the global financial crisis, with the market capitalisation for A-REITs listed on the ASX dropping 53% in the last 12 months to March 2009 to A$47 billion. The relative loss of value was all the more shocking because it followed a period. The current environment is likely to make many features of the previous model difficult to replicate and will almost inevitably lead to a substantial review of the A-REIT structure. It is certain that some will query whether the current model is sustainable. The paper explores the future of A-REITS including conflict of interest management, the impact of higher levels of gearing and falling property values, the potential for a looming catastrophe in the Australian property market as foreign banks exit with no replacement for the CMBS market, the emergence of a government response to market failure through the Australian Business Investment Partnership, the future of the stapled structure and the possible impact of tax review.

Hedge Fund Indexes Replica

Hedge Funds are private, lightly regulated pooled investments which have the aim of obtaining absolute returns. The name hedge fund (HF from here on) is misleading since the word hedge implies defensive management or insurance against bad times. We can say that there is a common misperception through which one assumes HFs have a market neutral position. This comes from the fact that the original idea of market neutral Hedge Funds from Alfred Winslow Jones (aim at zero exposure to specific equity market factors) has now developed in a larger and impressively growing investment sector. Freedom in the managing process and lack of regulation are probably the main reasons for the heterogeneity and variety of HFs. Another peculiarity of Hedge Funds is that the Fund Manager usually puts his own money at risk participating to the fund with a substantial part of his liquidity; this behaviour is called eating one's own cookies. The private nature and the lack of regulation takes us to the main limit in academic works on HFs: the limited information often plagued with some biases. In this paper a broad and well known set of indexes, the CSFB Tremont Hedge Fund is taken in exam. I chose this one because of its long history and from an academic point of view it seems to be less biased compared to other non-investable indices. This Index is sold outside the USA and has an investable version with a participation of $1,000, clearly with a target also on retail investors. The first step is the description of the main univariate statistics of HFs, from which the drawbacks and advantages encountered in HF investing are highlighted and in particular: non normality (e.g. the so-called negative skewed trading strategies) and autocorrelation (liquidity risk and data smoothing). In order to get rid of autocorrelation a filtration is performed. I apply a four moment CAPM to get the statistical properties of HFs over the simple mean variance framework in order to understand where their abnormal return comes from and to give a better idea about how much their value is when added to a general equity portfolio.The second part is going to provide a brief State of the Art in the Hedge Fund Evaluation Research. I apply the Style Analysis to replicate the CSFB Tremont Hedge Fund Index by setting up reasonable common location factors and putting a gearing factor by variance targeting. Before doing the linear replica I check for multicollinearity and statistical significance in the location factors adopting the approximated t-statistic proposed in Lobosco and DiBartolomeo (1997). The model is as general as possible intended to avoid non-linearity (as in Jaganathan et al 1994). The location factors are a wide representation of the alternative risk factors hidden in the CSFB Tremont. In the end of this first replication approach I take the first 6 years of returns and perform 12 months out of sample linear replica. Statistic of the linear replica are given and compared to Index. To justify this passive buy and hold strategy I give CUSUM Test results in order to check if there is stability in the weights of the model. Finally the out of sample statistics for each strategy are given and compared with the CSFB/Tremont Indexes.

Introducing a New Index Versus Active Funds Scorecard for Australia Standard &amp; Poor's Index versus Active Funds Scorecard, Mid-Year 2009

The S&P Index versus Active Funds (SPIVA) Scorecard reports performance of actively managed Australian managed funds corrected for survivorship bias and shows equal - and asset-weighted peer averages. Over a five year horizon, benchmarks have outperformed a majority of actively managed funds across equity and bond fund categories. Shorter horizon results are mixed. The S&P/ASX 200 index has outperformed two-thirds of active Australian general equity funds over the last 5 years. Year-to-date, the S&P/ASX 200 has only outperformed about half of active funds. The S&P/ASX Small Ordinaries index has out-performed just over half of the active Australian small-cap funds in the last five years. Year-to-date, the index has outperformed 60% of the actively managed small cap funds. The UBS Composite 0 Y Bond Index has outperformed 97.22% of actively managed bond funds in the last five years. However, in first six months of 2009, the index has outperformed only 25.81% of actively managed bond funds. Over a five year horizon, approximately 10% to 30% of funds have disappeared. This makes it important to consider survivorship in industry analysis. Equal-weighted returns over five years are lower than assetweighted returns for Australian general equity funds, but higher for Australian small cap funds. This suggests that funds with bigger assets have performed better, on average, in the large cap space, while funds with smaller assets have done better in the small cap space.

High-tech IPOs in the USA, UK and Europe after the dot-com bubble

From 1998 to 2001, the high-tech industry saw a dramatic increase and subsequent sharp decline in market capitalisation during a phenomenon known as the dot-com bubble. During this time there were a large number of private companies that made the decision to go public via an Initial Public Offering (IPO) of stock on the general equities market. After the dot-com crash of 2001, the IPO market for high-tech companies changed dramatically. Far fewer companies went public, and they had much lower first-day returns than those during the bubble. This paper explores the first-day returns of high-tech IPOs in the USA and Europe in the post-bubble era. We compare the results of the 2002?2005 post-bubble period with those of the 1998?2001 dot-com bubble period. We find that the high-tech IPO market was dramatically affected by the dot-com crash and that, after the crash, the number of high-tech IPOs dropped considerably, as did the average first-day returns of these IPOs. Finally, we find that the European high-tech IPO market was not as adversely affected by the dot-com crash as the American market.

Underpricing of European property companies and the IPO cycle: a note

PurposeThe purpose of this paper is to provide evidence for the ongoing significant underpricing of European property IPOs.Design/methodology/approachThe paper provides recent evidence on underpricing for a comprehensive data set of 105 IPOs of European property companies. It starts with an overview of evidence and explanations for the underpricing of property IPOs and evidence for the cyclical nature of IPO activity. It then goes on to describe the methodology and data collection process. The results on initial returns are summarised.FindingsThe paper finds that the current IPO market for property shares has been shown to be hot according to common definitions. Additionally, it is safe to say that the hot property securities market has caused to some extent a hot IPO market with property indices averaging 10.69 per cent during the 100 days prior to the IPO compared to 4.65 per cent for the general equity market indices. However, the recovery in Western European property markets and lack of quality property stock in Eastern European countries has created a large financing need for property companies which can be met by going public. Thus, supply side aspects are more likely than market‐timing characteristics to be the major driver behind the current hot IPO market.Originality/valueThe paper provides evidence for an ongoing significant underpricing of European property IPOs and offers an explanation for why it is appropriate to classify the property stock market as a hot market.

An Investigation into Performance Rankings of the Omega Ratio vs the Sharpe Ratio Applied to South African General Equity Unit Trusts

The Omega function is a relatively newly developed performance measure, falling in the class of downside risk measures. This measure does not make any assumptions regarding the return distributions evaluated, but incorporates the actual return distribution in the calculation.The sensitivity of this measure to simulated changes within the class of stable distributions was investigated, within a range of parameters that was representative of the South African investment environment. The Omega and Sharpe ratios calculated for these distributions were ranked and compared. Even though the rankings were largely similar, discrepancies did occur. On investigation it was found that these discrepancies were caused by the inability of the Sharpe measure to differentiate between increased volatility caused by higher probability weighted gains (or positive skewness) and losses, as the Sharpe ratio penalises funds for volatility.The simulated tests were extended to various distributions, which have different risk profiles and distribution shapes, and ranked. A higher incidence of ranking differences occurred due to the inability of the Sharpe ratio to differentiate between gains and losses, or to correctly account for the risk of positively skewed distributions. Negative Sharpe ratios, caused by the average realized returns being exceeded by the threshold (target) rate, resulted in incorrect rankings.Normally, practical performance evaluation is not initiated with a detailed analysis of the return distributions in order to determine which performance measure is more appropriate. The Omega measure, however, incorporates the distribution into the calculation, which is not the case with the Sharpe measure. If the distributions are normal, the Omega measure gives exactly the same result as the Sharpe measure. However, where return distributions diverge from normality, the Omega measure will incorporate the divergence, whilst the Sharpe measure fails in this regard. The result is a ranking of performance that is more relevant to investor decision-making.

An empirical study of the determinants of net investment flows of South African General Equity unit trusts

The unit trust industry is one of the fastest growing areas in the financial sector. This dramatic growth has raised concern about the level of investors’ knowledge, or lack thereof, relating to the factors associated with investment decisions. This study investigates the factors and dynamics behind cash flows into and from General Equity unit trusts from September 1996 to September 2001, and the extent to which market factors and unit trust characteristics explain the variation in cash flows. The analysis shows a significant positive relationship between cash flows and contemporaneous returns of the General Equity unit trusts and the equity market, while being negatively related to one‐month lagged returns and cash flows. Several of the determinants, including interest rates, fee structures, risk and fund size, are found to be insignificant at a 5% level. The results indicate that investors exhibit an element of profit maximisation, driven by performances and irrationality, in that they give less consideration to fee structures, risk and fund size.

Urban Policy in the Nordic Countries—National Foci and Strategies for Implementation1

In this paper we discuss the emergence and practise of an urban policy in the Nordic countries. We find that although the focus and organization vary among the five countries, there are common trends. Firstly, the emergence of an urban policy has challenged the Nordic welfare model because it emphasizes specific and geographically varied qualities, rather than general equity. Secondly, the emergence of an urban policy has challenged the traditional thinking about “urban” as a necessary evil, and replaced it with the notion of the “urban” as a positive driving force in society's well-being. Thirdly, the way urban policies are conceived and implemented has supplemented planning and regulations with programmes and initiatives involving local actors in governance based ways, but the state still has a strong role to play. The paper discusses these three statements based on a case study of the implementation of urban policies in the five Nordic countries.