The following is derived from the Publisher Snapshot summary of the podcast of the last issue of the CFA Institute Financial Analysts Magazine. Institutional subscribers and registered members of the CFA Institute have full access to all articles.
What’s in the CFA Institute Financial Analysts MagazineThe number of the last quarter of 2021?
This issue opens with the final installment of our series celebrating the DiaryHe is 75 years old. In “Environmental, Social and Governance Issues and the Financial Analysts Magazine,” Laura T. Starks looks back over the Diarysince 1945 to show how investment academics and practitioners have been grappling with environmental, social and governance issues since long before ESG and Socially Responsible Investing (SRI) terminology entered the lexicon. In fact, the Diary it was first!
Over the years, we have been at the forefront of this development of knowledge with articles on the social responsibility of companies and their investors, the return on investments following the ESG or SRI principles, the effects of divestment, risk climate change, impact investing and the need for more ESG disclosure. Starks explores the essential ESG arguments then and now, demonstrating how insights from many decades ago are still relevant to investment decision-making today.
For past selections in this commemorative series reviewing 75 years of investment practice, search for Andrew W. Lo’s “The financial system red to the teeth: 75 years of joint evolution of markets and technology” in our latest issue; the endowment study, “Seventy-five years of investment for the future generation;” William N. Goetzman “He Financial Analysts Magazinel and Investment Management;” and the debut work from the Stephen J. Brown collection, “The Efficient Market Hypothesis, the Financial Analysts Magazineand the professional status of investment management.
Our first research article in the latest issue treats 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 draws lessons about markets as a whole based on observations in China. The authors demonstrate that market liberalization improves the efficiency of corporate investments, primarily through better 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.
From the seminal hedge fund replication work of William Fung and David A. Hsieh, “Hedge Fund Benchmarks: A Risk-Based Approach”, was published in the Diary in 2005 the bank risk premium market emerged. Philippe Jorion offers the first analysis of these bank risk premium products against the corresponding hedge fund returns in “Hedge Funds vs. Alternative Risk Premium.” He finds various risk premia within stocks, rates, and credit that generate significantly positive returns. In fact, the explanatory power of it improves upon the well-used Fung-Hsieh seven-factor model. Particularly in the hedge fund quant space, this research highlights evidence of improved (and of course cheaper!) performance of the hedge fund index.
The following piece, by BlackRock’s Andrew Ang, Linxi Chen, Michael Gates and Paul D. Henderson, is titled simply: “Index + Factors + Alpha.It addresses the question of how best to allocate between the three sources of return: market index, factors or smart beta, and alpha generating funds. The authors derive and demonstrate their proposed method of using a Bayesian framework in which the investor prioritizes Sharpe indices or information indices that outweigh factor and index strategies. His step-by-step demonstration of how to implement this intuitively appealing model into your investment process is especially helpful.
In “Boost the fairness boost 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. This is a cross-asset strategy that applies stock information to predict returns on their corresponding credit listings. However, the real contribution is to demonstrate how alpha can be duplicated with powered regression trees.
To catch up with machine learning in general, “Machine learning for stock selection“It’s a good read ahead.
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 measures how much they differ and which aspects are more spread out. The authors extend the analysis to the relationship between these rating dispersions and the cost of capital and, by extension, equity performance.
This research applies a particularly comprehensive set of rating providers (seven in total), so if you’re using ESG ratings, it’s worth taking a look at author data and rating comparisons.
And finally, in “Harvesting Tax Losses: An Individual Investor’s Perspective,Vanguard’s Kevin Khang, Thomas Paradise and Joel Dickson demonstrate that tax loss collection is not one size fits all. In fact, it’s not worth the cost for everyone. The researchers apply investor archetypes to represent the spectrum of clients who may be in the tax-managed investing market and show that there is substantial dispersion in the results. Some of that dispersion is environmental, but most of the dispersion in the benefits of tax loss collection results from the investor’s own characteristics, particularly their own tax rates and the amount of offsetting income they have.
He Diary has published a number of articles on fiscal management recently, including last year’s “An Empirical Assessment of Tax Loss Collection” and “Tax Controlled Factor Strategies,” and “The tax benefits of separating alpha from beta” in 2019. Private wealth professionals can follow the development of fiscal management through these selections.
And that wraps up our coverage for 2021. Stay tuned for the first issue of 2022.
You can browse the Financial Analysts Magazine going back to 1945 in tandfonline.com. The editor provides a great search and browse experience to help you catch up on any topic you’ve missed. Registered CFA Institute members have full access to all of our articles.
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All messages are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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