Portfolio
Strategy
The
dimensions of active management, by Laurence Siegel and Barton Waring, The
Journal of Portfolio Management, Spring 2003.
This article is a powerful primer on the meaning, uses, advantages, risks,
and proper techniques of active equity management by two leading experts in
the field. The discussion focuses on alpha and emphasizes that hiring
active managers is a matter of alpha and nothing else. The employment of
active managers is in general so undisciplined and so lacking in focus that
Siegel and Waring’s treatment of this extremely important matter is must
reading.
A
critical look at the case for hedge funds, by Richard Ennis and Michael
Sebastian, Journal of Portfolio Management, Summer 2003.
This study finds that hedge funds do not reliably provide the kinds of
performance and strategy fulfillment that many investors expect. More
funds than you might expect have a high market correlation instead of being
market neutral. High variation in factor exposures makes the precise
correlation between hedge funds and the rest of the portfolio difficult to
predict. Herding tendencies are also visible.
Market
timing strategies that worked, by Pu Shen, The Journal of Portfolio
Management, Winter 2003. Yield spreads can
still do a job for us. In a world where the expected equity risk premium
is likely to be a single-digit, market timing strategies become increasingly
important. This article is short, sweet, and convincing.
After
the bubble, by Jeremy Siegel, Financial Planning, September 2002.
Siegel is the nation’s most
redoubtable bull and also the bull with the highest academic credentials. This article looks
back over the history of variation from irrational exuberance to irrational
despondency and offers strongly argued notes of cheer. Along the way,
Siegel provides interesting commentary about the impact of taxes on
investment decisions.
Rethinking
pension liabilities and asset allocation, by Frank Fabozzi and
Ronald Ryan, The Journal of Portfolio Management,
Summer 2002. While fluctuations in the present value of assets versus
liabilities (funding ratios) represent high financial risk for all
plan sponsors, most plan sponsors fail to recognize this risk because
it is seriously attenuated by actuarial and accounting smoothing of
financial statements. Instead, due to the way pension contributions
are calculated, and earnings reported, plan sponsors focus on the return
on asset assumption rather than assets versus liabilities. The authors
look at the performance of defined-benefit corporate pension plans
in 2000 and 2001, and consider the implications of this performance
for future corporate earnings. The conclusion is not a hopeful one.
The
Greatest Return Stories Ever Told, by Laurence Siegel, Kenneth
Kroner, and Scott Clifford, The
Journal of Investing,
Summer 2001. This impressively thorough and rigorous analysis uses
the Sharpe ratio of excess return/volatility to provide data and some
provocative stories of the top forty investment managers – such
as Warren Buffett, the Ford Foundation, and Capital Guardian - from
1980 to 2000. The paper leads to three important conclusions: (1) there
are many different ways to earn a high Sharpe ratio, as nearly all
styles and strategies are represented in the array, (2) based on CAPM
analysis, alphas of 100 basis points are certainly achievable, but
information ratios (a ratio similar to the Sharpe ratio) of more than
0.5 are not sustainable over meaningful periods, and (3) “…although
our findings do not formally contradict the efficient market hypothesis,
one would have to be a hard-core believer in efficient markets to deny
that the best managers in our study had skill.” In short, folks,
there is hope!
