Professional Portfolio Managers Research Articles

Social contagion and the survival of diverse investment styles

We examine the contagion of investment ideas in a multiperiod setting in which investors are more likely to transmit their ideas to other investors after experiencing higher payoffs in one of two investment styles with different return distributions. We show that heterogeneous investment styles are able to coexist in the long run, implying a greater diversity than predicted by traditional theory. We characterize the survival and popularity of styles in relation to the distribution of security returns. In addition, we demonstrate that psychological effects such as conformist preference can lead to oscillations and bubbles in the choice of style. These results remain robust under a wide class of replication rules and endogenous returns. They offer empirically testable predictions, and provide new insights into the persistence of the wide range of investment strategies used by individual investors, hedge funds, and other professional portfolio managers.

Excess Return of US Mutual Funds

The paper examines the factors that contribute to the outperformance of mutual funds in relation to the market, with a particular emphasis on the macroeconomic indicators as the key variables of interest. The paper begins by providing a comprehensive literature review on various factors that can impact the performance of mutual funds. The discussion encompasses a wide range of topics, including skill presence, diseconomies of scale, and other challenges associated with generating excess returns for investors.In the second part of the paper, an empirical analysis is conducted using actively managed US mutual funds to establish a relationship between fund performance and macro-variables, specifically focusing on term and credit spreads. Furthermore, the study considers different returns on positive and negative changes in spreads. The sample consists of funds that primarily invest in various sectors within the United States, with the Standard and Poor's 500 (S&P 500) serving as the benchmark. To assess the performance of funds with active strategies, panel data models are applied, with the excess return over the benchmark as the dependent variable. Different subperiods, including the financial crisis and the COVID-19 period, are examined. Notably, the impact of variables during the pandemic period differs significantly from other subperiods. The findings indicate that positive and negative changes in the spread between corporate bond yields have significant and positive effects across almost all periods, which has practical implications for potential investors. It suggests that active professional portfolio managers have been successful in uncertain periods. To control for external shocks and funds' cross-correlation, double-clustered standard errors are employed, and a series of robustness checks confirm the stability of the results.

Group sparse enhanced indexation model with adaptive beta value

Enhanced indexing, which has been used by professional portfolio managers for decades, is a portfolio management strategy that attempts to increase returns by building a portfolio around core, index-like positions and adding tactical tilts toward specific styles or individual stocks. This paper proposes an improved enhanced indexation model by considering the systematic risk, measured by Beta value, and the industry rotation phenomenon. The systematic risk is the risk related to the stock market as a whole and can be reasonably controlled to improve portfolio performance, by actively tracking and forecasting the market trend. Sector rotation refers to the investment strategy of taking money that's invested in one stock market industry and moving it to another, by taking advantage of the historical performances of specific industries during different phases of the cycle. In specific, our model aims to find a small set of industries that is mostly likely to thrive in the anticipated future, which is mathematically realized by dividing stocks into industries and minimizing their norm. To evaluate our strategy, we conducted extensive numerical experiments against some major world indices, e.g. CSI 300, S&P 500, FTSE 100 and Nikkei 225. The experimental result shows that our approach can generate sparse portfolios with excellent out-of-sample excess returns and high robustness after deducting transaction costs.

On the nature and financial performance of bitcoin

Purpose The purpose of this article is to provide some insights on the true nature of bitcoin and to study empirically its performance by using robust models, widely used in the academic literature. Previous studies assess performance with simple measures such as the Sharpe ratio. Such measures are insufficient because they do not take into account the bitcoin’s specificities, such as the possibilities to diversify risk. Design/methodology/approach The authors use quantitative methodologies to assess the performance of financial assets. Performance is defined as a risk-adjusted return. The authors use regression analysis and measure bitcoin’s performance as the constant term (α) of the projection of its returns on the returns of relevant factors of risk. Findings Bitcoin has low correlation with the market index and with factor-mimicking portfolios, which indicates opportunities to diversify risk. The performance of bitcoin (α) is positive and significant; this result is robust across period and world region specifications. Research limitations/implications The true nature of bitcoin is subject of debate and needs further research. Furthermore, other factors should be considered in analysing the bitcoin’s performance, such as those related to investors’ behaviour or political risk. Practical implications The empirical results obtained in this paper may be used by professional portfolio managers to diversify risk and to enhance their portfolio’s performance. Originality/value This paper adds to the literature by arguing that bitcoin has the nature of common stock, and therefore, its performance has to be assessed with models that are relevant for this type of securities. This paper is the first using performance models that adjust returns for relevant sources of risk.

Does the F-score improve the performance of different value investment strategies in Europe?

This study examines whether the performance of different value investment strategies can be improved with Piotroski’s (J Account Res 38:1–41, 2000) F-score screening method for the European stock markets. Our aim is to investigate the ability of the screening method to distinguish between winners and losers among several value investment strategies that use different financial ratios to form portfolios, such as B/M, E/M, D/M, and EBITDA/EV ratios. The results of the study provide compelling evidence that the F-score screening method significantly improves the performance of all investigated investment strategies. The results regarding the superior performance of the high F-score portfolios are robust across investment strategies, various performance measures and risk-adjustment methods. The results are useful for individual investors and professional portfolio managers.

Trading financial indices with reinforcement learning agents

Intelligent agents are often used in professional portfolio management. The use of intelligent agents in personal retirement portfolio management is not investigated in the past. In this research, we consider a two-asset personal retirement portfolio and propose several reinforcement learning agents for trading portfolio assets. In particular, we design an on-policy SARSA (λ) and an off-policy Q(λ) discrete state and discrete action agents that maximize either portfolio returns or differential Sharpe ratios. Additionally, we design a temporal-difference learning, TD(λ), agent that uses a linear valuation function in discrete state and continuous action settings. Using two different two-asset portfolios, the first asset being the S&P 500 Index and the second asset being either a broad bond market index or a 10-year U.S. Treasury note (T-note), we test the performance of different agents on different holdout (test) samples. The results of our experiments indicate that the high-learning frequency (i.e., adaptive learning) TD(λ) agent consistently beats both the single asset stock and bond cumulative returns by a significant margin.

Financial Risk Tolerance of Individual Equity Investors in Indian Stock Market

Financial markets offer a wide choice of asset class and financial instruments to investors to meet their investment objectives. Investors must consider not only the market mood and the required return but must ascertain the risk involved in committing the funds. Apart from this, they must have an accurate measure of their risk tolerance as risk is pervasive in all financial pursuits. The uncertainty surrounding the financial markets gives birth to risk. Therefore, understanding the financial risk tolerance behaviours of individual equity investors in a fast growing economy like India is vital for policy makers, regulators like SEBI, professional portfolio managers and the individual retail investors. The present study employs Grable and Lytton (published in Financial Services Review in the year 1999) thirteen item instrument for assessing financial risk tolerance of 802 respondents. The two risk tolerance categories, namely; Below Average Risk Tolerance Category and Above Average Risk Tolerance Category vary significantly in their attitude and tolerance towards risk with mean FRT scores of 24.01and 33.08 respectively. Of the demographic variables, gender depicts that females are less tolerant to risk primarily in Below Average FRT category. Risk tolerance is also influences by education level. The lower income groups depict lower tolerance towards financial risk supporting the assertion the low income people get naturally risk averse. Risk tolerance substantially increases with increase in investors’ investment experience. It may be inferred that demographic variables play an important role in deciding the financial risk tolerance levels of individual equity investors in India.

The Tale of Two Irrationalities: Why Money Managers Keep Promising What They Cannot Deliver and Why Clients Keep Giving Them Their Money

It appears intuitively plausible that actively managed funds by investment professionals should do better than a naive strategy of buying a market index, which any uninformed person can do at much lower cost than paying a professional manager. However, the evidence points to the contrary: professional managers are not able to beat the index consistently and investors do not cease to patronize the services of those money managers. This paper reviews the overwhelming evidence that average investors engaged in passive indexing can do much better using the naive approach on their own than soliciting the help of professional active portfolio managers. After questioning the ethics of charging fees for active management only to yield below average results, we examine some of the traditional explanations of this enigma. We then offer some behavioral explanations as to why this problem has persisted in the market for so long and discuss some possible behavioral-based policy prescriptions that may help to rectify this apparent market dysfunction.

An Algebraic Model for Hedging Equity Index Portfolios with Stock Index Futures. Evidence from the IBEX 35

This article develops a Hedging Algebraic Model (HAM) for equity index portfolios with stock index futures as an alternative to econometric models (OLS, ECM, and GARCH) and assesses the efficacy of the model when applied to the IBEX 35 for the period 2007-2015. The model is initially formulated based on the efficient market hypothesis and an infinitesimal time horizon. When we relax these assumptions in the empirical analysis and apply the model to the real market with a daily time horizon, we obtain 98.75% efficacy of the hedge, superior to that of the econometric models. The time series of econometric models used to date for the calculation of the optimal hedging ratio do not include the effect of discrete dividend payouts and are based on a series of next-to-expire future prices that are subject to jumps in price, as it is composed of a chained series of futures with different maturities. Although the efficacy of econometric models can be considered satisfactory in general terms, their limitations can generate significant errors at some points in the series. The HAM model presented here as an alternative approach to econometrics models yields superior results, both in hedging efficacy and in the ease of application in professional portfolio management.

Valuing Value Plays with Bloomberg

Valuing Value Plays with Bloomberg Christopher Brady, Wayland T. Coppedge, Reinhold P. Lamb Abstract Value analysts attempt to identify particularly undervalued securities in an attempt to produce positive returns and even positive alpha. This paper traces the process of that pursuit from company selection through valuation. The resource showcased throughout is the tool used by professional portfolio managers and security analysts – Bloomberg. Each iteration along the process is demonstrated through Bloomberg functions and screenshots, providing a step by step map for identifying potential value plays. Full Text: PDF DOI: 10.15640/rcbr.v5n1a1

Crowded Spaces and Copycat Risk Management

In recent years, a new form of risk has been recognized. This risk is the risk of crowded spaces. That is, how the saturation of a particular trading strategy can lead to a mis-measurement of the future expected returns and risks of the trading strategy. The primary focus of this risk has to do with copycat trading, whereby traders or investors engage in a similar trading strategy. As too many dollars chase the same strategy, the opportunity fades away but leaves the remaining traders at greater risk exposure. This paper focuses on an entirely neglected source of crowding. The crowding explicitly from the risk management process. In particular, this paper focuses on equity portfolio managers that use similar risk models and examines the extent to which these similar risk models can mis-measure risk and lead to crowding of the investment space, even when the investment models are completely unrelated to one another. Our empirical analysis with real-world professional portfolio management data finds that the risk modeling process leads to crowding and mis-measured risk. Interestingly, we find a rise in crowding due to portfolio construction immediately before the quant crisis of 2007. We also show how a simple method of altering the eigenvalue structure can reduce the average crowding from portfolio management by 20%, and in some cases as high as 61%. We also find that crowding in the financial system would be lower if the distribution of risk model usage amongst portfolio managers was more diversified.

Market-timing the business cycle

As a group, professional portfolio managers have been largely unable to outperform the market buy-and-hold benchmark. Likewise, professional forecasters have been unable to predict recessions reliably. The paper contributes to the literature in two significant respects. First, the Recession Probability Model herein correctly forecasts out-of-sample the probability of a downturn and the binary state over a 45-year validation sample. This is important as it is around cyclical turning points that forecast errors are largest, and dependable forecasts are most useful. Reliable recession forecasts are essential for risk-management, planning capital outlays, and for portfolio management. Moreover, accurate forecasts of the turn allow policy-makers to mitigate the social cost of recessions. Second, the paper shows that it is extremely profitable to switch from equities to T-bills when the one-quarter-ahead probability of recession reaches a certain threshold. Several market-timing rules dominate the buy-and-hold in terms of the risk-adjusted measures of Treynor, Sharpe, and Jensen. One trading rule achieves triple the terminal wealth of the buy-and-hold.

Improving international diversification benefits for US investors

There are two main questions that have attracted considerable attention in the financial literature over the last few years: whether international diversification benefits are still substantial in the current context of increasing market correlations and which approach provides better results in terms of out-of-sample returns and risk. In this context, the aim of this study is to provide empirical evidence about the economic gains that a US investor could obtain with a dynamic strategy based on the use of time varying returns and volatility forecasts from a multivariate VAR–DCC approach for the exchange trade funds of US, UK and Japan which are the most actively traded on the New York Stock Exchange in recent years. These findings are relevant not only for academics, but also for practitioners, especially for professional portfolio managers.

Improving asthma care

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS689 Hazeldine V (2013) Pharmacological management of acute asthma exacerbations in adults. Nursing Standard. 27, 33, 43-49. I care for many people with coexisting conditions, including asthma, in a nursing and residential care home. The CPD article helped me to change practice in this setting. Although the prevalence of asthma is slowly declining, it affects an estimated 3.8 million people in the UK. There have been advances in diagnosing and managing asthma, but exacerbations remain a problem, and early recognition of such exacerbations can save lives. Where I work, several service users experience asthma and other respiratory pathologies. All service users are monitored regularly using the National Early Warning Score (NEWS) observation chart, which includes temperature, pulse, blood pressure, respiratory rate, peripheral oxygen level and consciousness measurements. These parameters are measured routinely in the nursing and residential care home and recorded on clinical charts. It was interesting to read that the signs and symptoms of an acute asthma exacerbation can include cough, wheeze, dyspnoea, chest tightness and variable airflow obstruction. Patients with asthma and other respiratory conditions could be monitored more effectively using a peak expiratory flow (PEF) meter. PEF meters are low cost, portable, and easy to use. Using this meter, along with the NEWS observations, allows for greater monitoring of asthma and other respiratory conditions. Individuals with asthma ideally require a recorded PEF from within the last two years for comparison purposes. This would help nurses to determine if a service user was experiencing an acute asthma exacerbation. A series of PEF readings were taken for service users, initially only for those with asthma, to record baseline levels. PEF can be used with a traffic light system, and this is how it is used at the care home: Red (danger) – PEF less than 50% of the individual’s personal best indicates a medical alert. Advice should be obtained as soon as possible. At the care home, the service user’s GP or nurse practitioner responds as appropriate. Yellow (caution) – PEF 50-79% of the individual’s personal best indicates that the asthma is worsening. Medical review of the service user should be obtained. At the care home, the GP or nurse practitioner responds as appropriate. Green (safe) – PEF 80-100% of the individual’s personal best indicates that the asthma is under control and that the person should continue to be monitored. The rapid assessment of a service user during an asthma exacerbation is important. At the care home, individuals with asthma usually only develop exacerbations when they have an acute illness, such as a chest infection or pneumonia. Monitoring PEF and using the NEWS observation chart will help to improve the care I give NS

Mental health in men

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS686 Haddad M (2013) Promoting mental health in men. Nursing Standard. 27, 30, 48-57. Mental and physical health are intrinsically linked to a person’s ability to maintain good physical health determined, in part, by his or her mental wellbeing. Similarly, poor physical health can lead to mental health problems. Long-term conditions such as diabetes, coronary heart disease and arthritis are associated with various mental health problems, including depression and anxiety.

Diabetic foot ulcers

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS683 Holt P (2013) Assessment and management of patients with diabetic foot ulcers. Nursing Standard. 27, 27, 49-55. I care for patients with a range of bone or soft tissue infections, which often require surgery and long courses of intravenous antibiotics. Many patients have diabetes, and are admitted with foot ulcers. A diabetic foot ulcer usually occurs as a result of trauma combined with neuropathy. Trauma can be caused by ill-fitting footwear or socks. Neuropathy is caused by poorly controlled diabetes and hyperglycaemia. Neuropathy is a long-term complication of diabetes, and it was interesting to read the learning zone article to gain an understanding of the various types of neuropathy. Motor neuropathy is damage to the nerves supplying the muscles of the body. When this occurs in the muscles of the foot, the shape can no longer be maintained and it becomes deformed. This can result in excessive pressure at various points on the foot, increasing the risk of developing a foot ulcer. Sensory neuropathy results in reduced sensation caused by sensory nerve damage, which means that the patient is less able to feel pressure, pain or temperature. Usually the feet are the first area affected, and this increases the risk of foot ulcer development. Autonomic neuropathy affects the sympathetic and parasympathetic nerves, affecting various systems in the body, such as the digestive and cardiovascular systems. Charcot neuropathy involves deformity of the bones in the foot caused by increased blood flow, which washes away essential bone minerals and leads to bone thinning. This is one of the types of neuropathy that I have encountered in practice. The article prompted me to read the National Institute for Health and Care Excellence guidelines on diabetes and, in particular, foot care. I had been unaware of the recommendation that patients with diabetes should have an annual foot examination. This is something that from now on I intend to check with my patients who have diabetes, as part of my health promotion role.

Asthma and allergic rhinitis

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS638 Burns D (2012) Management of patients with asthma and allergic rhinitis. Nursing Standard. 26, 32, 41-46. In my work as a nurse practitioner at a GP surgery, I see patients with symptoms of allergic rhinitis and many people in the asthma clinic have exacerbations during the summer hay fever season. The article explains that poorly controlled allergic rhinitis can have a detrimental effect on asthma control where the conditions co-exist. Poor asthma control can result in severe and persistent symptoms, such as shortness of breath, chest tightness, cough and wheeze. The quality of life for patients with asthma may be improved through identifying and reducing the effects of allergic rhinitis, which include sneezing, runny nose, nasal congestion and itching. Assessing for symptoms of allergic rhinitis is sometimes difficult. Anecdotally, I find that many patients tend to accept that hay fever is something that they may experience. They may purchase over-the-counter medications to treat the condition and tend not to seek any further assistance. If, or when, patients encounter problems with their asthma control, they may not mention signs and symptoms of allergic rhinitis. The article has therefore been useful as a reminder of the importance of asking patients whether they are experiencing any signs and symptoms of allergic rhinitis, and I can now use the classification table to assess the seriousness of the condition. Through having an objective means of classifying the condition, I can reassess the patients following treatment to ascertain if there is any improvement.

Mental health crises

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS665 Wright K, McGlen I (2012) Mental health emergencies: using a structured assessment framework. Nursing Standard. 27, 7, 48-56. After reading the learning zone article, I am more knowledgeable about the care and management of patients experiencing mental health crises in the emergency department. The article describes challenges that staff may encounter when assessing patients experiencing mental health crises. A mental health crisis can affect individuals with no history of mental health illness. A crisis can occur as a result of a life-changing or traumatic event, leading to mental or emotional deterioration stemming from the loss of coping mechanisms. The public psychiatric emergency assessment tool (PPEAT) was designed to assist nurses to collect information about patients experiencing mental health crises and to pass this information to specialist staff. Nurses working in emergency departments that use the PPEAT objectively record what they see and hear. This information can be used as the basis for further assessments by specialist staff. A nurse in the emergency department may be the first point of contact for a patient experiencing a mental health crisis and the PPEAT will help the nurse to form an accurate and fair assessment of the patient. Police officers, paramedics and carers can provide relevant information to use with the tool. This information can form a timeline from the point when concerns about the patient’s mental health were raised to when the patient was admitted to hospital, and can help nurses to identify how the problems were, and continue to be manifested.

Iron deficiency anaemia

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS626 Derbyshire E (2012) Strategies to improve iron status in women at risk of developing anaemia. Nursing Standard. 26, 20, 51-57. I was interested to read the learning zone article on iron deficiency anaemia because it enhanced my understanding of the subject and increased my ability to advise women during my work as a nurse in a centre for sexual health. I was aware that individuals with iron deficiency experience symptoms such as abnormal fatigue, poor concentration and difficulty regulating body temperature. I also knew that women of childbearing age are especially susceptible to iron deficiency because of blood loss during menstruation and the nutritional demands of pregnancy. It was interesting to learn that neurological development and fetal growth can be affected by iron availability, and that premature birth and low birth weights are more common when mothers have iron deficiency. Therefore, healthcare professionals should advise and assist women to optimise their iron status before pregnancy and childbirth. Treating women at risk of iron deficiency with iron supplements is problematic because of the common side effects of nausea and constipation. As these conditions are exacerbated in pregnancy, it was interesting to learn how to treat iron deficiency anaemia effectively through the use of simple dietary management strategies. The article drew attention to a wide range of foods with high iron content, including cockles, sesame seeds, sardines and liquorice, the iron concentration of which greatly exceeds that of foods commonly associated with iron, such as lean beef and spinach. I was surprised by the need to avoid drinking tea while consuming foods rich in iron. I was unaware that calcium-rich foods, such as milk, yogurt and cheese, and foods containing phytates (for example, wholegrains, legumes and nuts) can interfere with iron absorption.

Chronic fatigue syndrome

The RCN Learning Zone is a FREE online service to help RCN members with their continuing professional development and professional portfolio management. The RCN Learning Zone can be found at www.rcn.org.uk/members/learningzone.php This practice profile is based on NS631 Burns D et al (2012) Chronic fatigue syndrome or myalgic encephalomyelitis. Nursing Standard. 26, 25, 48-56. As a nurse practitioner working in a GP surgery, I often encounter patients who complain of feeling ‘tired all the time’. On listening to patients, it becomes evident why excessive fatigue has occurred in some cases. In others, no specific diagnosis can be made, and patients are reassured that all is normal and they should return if the fatigue continues. Chronic fatigue syndrome (CFS) or myalgic encephalomyelitis is difficult to diagnose early. The learning zone article on CFS was thought-provoking, resulting in a greater understanding of the effects of the illness on the patient and enhanced support for patients with CFS. An early diagnosis of CFS/ME can be useful, as prompt intervention can improve patient outcome. Anecdotal evidence suggests that patients rarely return to the GP surgery with unexplained fatigue, and when they do, patients often appear with other symptoms and are searching for a diagnosis that will explain their inability to work or study. By not actively following up on patients who have reported unexplained fatigue, it is possible that I have delayed potential diagnoses of CFS.