The following is derived from the Editor’s Snapshot podcast summary of the latest issue of the CFA Institute Journal of financial analysts. Institutional subscribers and connected CFA Institute members have full access to all articles.
What’s in the CFA Institute Journal of financial analyststhe last issue of the 2021 quarter?
This edition opens with the last installment of our series celebrating the magazinehe is 75 years old. In “Environmental, social and governance issues and the Journal of financial analysts,” Laura T. Starks looks back magazine[1945worktoshowhowinvestmentacademicsandpractitionershavebeengrapplingwithenvironmentalsocialandgovernanceissuessincelongbeforetheterminologyESGandsociallyresponsibleinvesting(SRI)enteredthelexiconInfactthemagazine it was the first!
Over the years, we have been at the forefront of this knowledge development with articles on the social responsibility of companies and their investors, the performance of investments following ESG or SRI principles, the effects of divestment, climate risk , impact investing and the need for more ESG disclosure. Starks explores the essential ESG arguments then and now and demonstrates how insights from many decades ago are still relevant to today’s investment decision-making.
For previous selections in this commemorative series reviewing 75 years of investment practice, look for “The Financial System Red in Tooth and Claw: 75 Years of Co-Evolving Markets and Technology” by Andrew W. Lo in our latest number; the endowment study, “Seventy-five years of investment for the future generation”; William N. Goetzmann’s book “The Conference of Financial Analystsli Gestión d’Inversiones;” and the premiere of Stephen J. Brown’s collection, “The Efficient Market Hypothesis, the Journal of financial analystsand the professional status of investment management.
Our first research paper in the latest issue looks at the implementation of the Shanghai-Hong Kong Stock Connect in 2014 as an experiment and looks at the effects on corporate investment efficiency that resulted. “Capital Market Liberalization and Investment Efficiency: Evidence from China,” by Liao Peng, Liguang Zhang, and Wanyi Chen, distill lessons about markets as a whole from observations in China. The authors show that market liberalization improves the efficiency of corporate investment, mainly through better information disclosure and corporate governance, and ultimately promotes sustainable capital market development.
For those unfamiliar with Chinese markets, an excellent cheat sheet at the beginning of the article provides a brief history of the liberalization of Chinese markets since 2002.
Since William Fung and David A. Hsieh’s seminal hedge fund replication work, “Hedge Fund Benchmarks: A Risk-Based Approach,” was published in magazine in 2005, the banking risk premium market emerged. Philippe Jorion provides the first analysis of these bank risk premium products versus the corresponding hedge fund returns in “Hedge Funds vs. Alternative Risk Premia.” It finds various risk premiums in stocks, rates and credit that give significantly positive returns. In fact, its explanatory power outperforms the well-used Fung-Hsieh seven-factor model. In particular, in the area of quantitative hedge funds, this research highlights evidence of improved (and of course cheaper!) hedge fund index replication.
The next piece, by BlackRock’s Andrew Ang, Linxi Chen, Michael Gates and Paul D. Henderson, is simply titled: “Index + Factors + Alpha.” It addresses the question of how best to allocate among the three sources of return: market index, factors or smart beta, and alpha-generating funds. The authors derive and demonstrate the proposed method of using a Bayesian framework in which the investor sets priors on Sharpe ratios or information ratios over index and factor strategies. His step-by-step demonstration of how to implement this intuitively appealing model into your investment process is especially helpful.
In “Boosting the equity momentum factor in credit,” Hendrik Kaufmann, Philip Messow, and Jonas Vogt show how machine learning techniques can improve the quality of equity momentum signals used in fixed income investing. It is a cross-asset strategy that applies information from stocks to predict the returns of their corresponding credit lists. The real contribution, however, is to show how alpha can be doubled with boosted regression trees.
To get up to speed on machine learning in general, “Machine Learning for Stock Picking” makes for a good pre-read.
Rajna Gibson Brandon, Philipp Kruegerad and Peter Steffen Schmidt then focus on the dispersion between ESG ratings in “ESG Rating Disagreement and Stock Returns”. Other research covers why ESG ratings differ, this piece assesses how much they differ and which aspects are more dispersed. The authors extend the analysis to the relationship between these rating spreads and the cost of capital and, by extension, the return on capital.
This research applies a particularly comprehensive set of rating providers (seven in total), so if you use ESG scores, it’s worth looking at the authors’ data and score comparisons alone.
And finally, in “Tax-Loss Harvesting: An Individual Investor’s Perspective,” Vanguard’s Kevin Khang, Thomas Paradise, and Joel Dickson show that tax-loss harvesting is not one-size-fits-all. In fact, it is not worth the cost for everyone. The researchers apply investor archetypes to represent the spectrum of clients who may be in the market for tax-managed investments and show that there is substantial dispersion in the results. Some of this dispersion is environmental, but most of the dispersion in the benefits of tax loss harvesting is the result of the investor’s own characteristics, especially his own tax rates and the amount of offsetting income that they have
The magazine has recently published a number of articles on tax management, including last year’s “An Empirical Assessment of Tax Loss Harvesting” and “Tax Managed Factor Strategies” and “The Tax Benefits of Separating Alpha from Beta” in 2019. Private wealth professionals can track the development of tax management through these selections.
And that wraps up our coverage for 2021. Stay tuned for the first issue of 2022.
You can browse through Journal of financial analysts dating back to 1945 at tandefonline.com. The editor offers an excellent search and navigation experience to help you catch up on any topics you’ve missed. Registered CFA Institute members have full access to all of our articles.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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