Investment Strategy

Valuation Ratios and the Long-Run Stock Market Outlook

2007-05-23T07:48:00.000-07:00

The use of price–earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970. Various simple efficient-markets models of financial markets imply that these ratios should be useful in forecasting future dividend growth, future earnings growth, or future productivity growth. We conclude that, overall, the ratios do poorly in forecasting any of these. Rather, the ratios appear to be useful primarily in forecasting future stock price changes, contrary to the simple efficient-markets models. This paper is an update of our earlier paper (1998), to take account of the remarkable behavior of the stock market in the closing years of the twentieth century.

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Sequential Optimal Portfolio Performance: Market and Volatility Timing

2007-05-23T07:31:00.000-07:00

This paper studies the economic benefits of return predictability by analyzing the impact of market and volatility timing on the performance of optimal portfolio rules. Using a model with time-varying expected returns and volatility, we form optimal portfolios sequentially and generate out-of-sample portfolio returns. We are careful to account for estimation risk and parameter learning. Using S&P 500 index data from 1980-2000, we find that a strategy based solely on volatility timing uniformly outperforms market timing strategies, a model that assumes no predictability and the market return in terms of certainty equivalent gains and Sharpe ratios. Market timing strategies perform poorly due estimation risk, which is the substantial uncertainty present in estimating and forecasting expected returns.

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US Portfolio Strategy

2007-05-23T06:13:00.000-07:00

As I travel around and visit with a growing number of Morgan Stanley accounts, it has become clear to me that hedge fund managers — particularly emerging ones with limited assets — are increasingly trafficking in smaller-capitalization US stocks. But it helps to get a second opinion. To this end, my colleague Bill Smith built a database of hedge fund 13F filings. What we found is that hedge fund ownership of mega/large-cap stocks has fallen to 36% in 4Q05 from 48% in 1Q99. Probably more interesting to the typical man on the street, however, is that there is a lot of money to be made by tracking which specific stocks hedge funds own.

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Portfolio Strategy: Alpha Returns and Active Extensions

2007-05-23T05:34:00.000-07:00

The relaxation of the long-only constraint within equity portfolios and the subsequent move into an active extension “120/20 strategy” can lead to material improvements in both alpha returns and alpha/tracking error (TEV) ratios. These potential benefits can be estimated by combining an alpha ranking system, a position weighting function, and a tracking error model.

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Portfolio Strategy

2007-05-23T05:26:00.000-07:00

Stock market valuation without reference to risk is insufficient to make sound investment decisions. However, finding accurate measures of the level of risk associated with a security is not a trivial enterprise in emerging markets. First, high levels of market volatility make measures based on contemporaneous market indicators highly unstable. Second, the limited history of bond market prices in emerging markets makes it impossible to ascertain any long-term trends in risk.

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Beyond Portfolio Theory: The Next Frontier

2007-05-23T05:16:00.000-07:00

The time has come to integrate the insights offered by information theory and principal–agent theory with the tools of portfolio management into a holistic, comprehensive theory of investing.

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Asset Strategic Planning

2007-05-23T04:59:00.000-07:00

This Asset Strategic Planning guideline has been prepared to assist General Government and other agencies to develop Asset Strategies. These plans support government policy on Total Asset Management and focus the management of assets on service delivery.

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Capital Investment Strategic Planning

2007-05-23T04:48:00.000-07:00

Agencies undertake strategic asset planning within the Government’s Total Asset Management (TAM) Policy framework, which was introduced to achieve better planning and management of the State’s physical assets, both existing and newly acquired. Physical assets include items such as land, buildings, information technology, infrastructure, collections, equipment or fleet, owned or controlled by an agency as a result of past transactions or events, providing future economic benefits and having a definite business function or supporting the delivery of services.

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Risk Management Guideline

2007-05-23T04:32:00.000-07:00

Managing risk is an integral part of good management and is something many managers do already in one form or another. Sensitivity analysis or scenario planning for a project or economic appraisal are familiar examples, as are assessing the contingency allowance in a cost estimate or budget, buying insurance, revising contract provisions or undertaking community consultation during project planning.

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Value Management Guideline

2007-05-23T04:26:00.000-07:00

The greatest gains of Value Management have been shown when it is directed towards obtaining maximum value from a total system. The examination of function remains fundamental, however this occurs within the system wide context. It is the systematic analysis of functions, which sets Value Management apart from other approaches to improving value.

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