Haim A. Mozes

Does the Composition of the Compensation Committee Influence CEO Compensation Practices

CEOs receive preferential treatment, at the expense of shareholders, when corporate insiders are included on the compensation committee. While CEO compensation is not greater, the relation between CEO compensation and corporate performance is more favorable to the CEO with insiders on the compensation committee when corporate performance is poor.

The Persistence of Hedge Fund Risk: Evidence and Implications for Investors

In this article the authors examine persistence of hedge fund performance and find that returns are not persistent while risk (volatility in returns) and correlations to underlying markets are highly persistent. Less risky funds tend to be less correlated with underlying markets and more efficient at bearing risk than their more risky counterparts. They analyze various determinants of hedge fund performance and develop a multifactor model to identify funds whose superior performance is based on underlying investment skill, rather than on risk-taking or undue exposure to markets. For the period 1996 to 2001, portfolios of such funds generate significantly higher risk-adjusted returns (Sharpe ratio of 4.14) than portfolios containing all funds (1.38), portfolios constructed solely on the basis of past returns (0.75), and portfolios constructed based on past Sharpe ratios (2.42).

Accuracy, usefulness and the evaluation of analysts’ forecasts

Abstract This paper provides evidence that forecast immediacy (FI), which is the speed with which analysts respond to a significant change in the publicly available information set, is an ex-ante determinant of analysts’ forecast properties. Specifically, the greater the FI the less accurate analysts’ forecasts and the greater the dispersion in analysts’ forecasts. Conversely, FI is positively related to forecast usefulness, which is the extent to which the forecast improves upon the accuracy of existing forecasts. One implication of these results is that it may be appropriate to evaluate separately analysts whose forecasts tend to have high FI and analysts whose forecasts tend to have low FI. A second implication is that, to the extent that forecasts with high FI tend to be more accurate than prior forecasts, one might place less weight on forecasts that precede high FI forecasts.

Evidence in Support of Shorter-TermMarket Timing

In this article, the authors provide evidence that market timing is possible over the shorter time periods that institutional asset allocation approaches typically consider. The evidence is based on the performance of components typically used in quantitative market timing approaches as well as the finding that hedge funds have successfully practiced market timing over the past 20 years and that market timing is the source of at least half of hedge fund alpha.

Calculating Earnings Growth Rates for Indexes That Include Unprofitable Companies

This article provides empirical evidence that the expected earnings growth rate used to value an index is the expected earnings growth rate of the index composed only of companies with positive earnings. In addition, this article provides evidence that the market multiple on an index’s aggregate earnings is an increasing function of the losses reported by the unprofitable companies in the index. The difference between conventionally calculated earnings growth rate forecasts and our computation of earnings growth forecasts is greatest in times of economic weakness, when the conventional approach results in earnings growth forecasts that are significantly higher than warranted. Likewise, the magnitude of reported losses is typically higher at market troughs, so market multiples should also be higher at market troughs. Therefore, before one infers that an index is too expensive or has a very strong earnings growth profile, one needs to adjust index earnings and earnings growth rates for the companies with losses.

The Disconnect Between Physical Gold Demand and Gold Prices

This article provides empirical evidence that the drivers of physical gold demand are different from the drivers of gold prices and concludes that increasing physical gold demand does not imply higher gold prices. Accordingly, one should not expect rising gold demand from emerging market countries to support gold markets and to lead to a recovery in gold prices back to the recent highs.

The Impact of Expected and Unexpected Inflation on Local Currency and U.S. Dollar Returns from Foreign Equities

This article examines the impact of inflation on stock returns. We find that inflation that is expected is significantly positively related to local currency equity market returns while inflation that is unexpected is significantly negatively related to local currency equity market returns. In addition, our estimates show that unexpected increases in inflation have a negative impact on equity returns during the year that inflation increases unexpectedly, but a positive impact on subsequent years’ equity returns. The rationale is that the current years’ unexpected inflation becomes subsequent years’ expected inflation. With respect to the impact of inflation on a country’s FX rate relative to the U.S.dollar, we find that inflation that is expected is significantly negatively related to the local currency’s performance versus the U.S. dollar, while inflation that is unexpected is significantly positively related to the local currency’s performance versus the U.S. dollar. In the aggregate, after combining local currency equity market returns and FX returns, we find that countries with higher expected inflation tend to experience higher equity returns in U.S.dollar terms and that countries with higher unexpected inflation tend to experience lower equity returns in U.S.dollar terms. The results imply that U.S. investors should seek to invest in foreign countries with either high but stable inflation or with declining inflation.

Valuation, Observability of Valuation Drivers, and Future Stock Returns

This article shows that the relationship between favorable equity market valuations and subsequent equity market returns depends on the extent to which the reasons for such valuations are likely to be observable to investors. The authors use the Implied Equity Risk Premium (ERP) to measure whether the U.S. equity market is favorably valued, and a macroeconomic model to explain the level of ERP and allow a determination of whether valuations are consistent with observable data. The model for explaining ERPs considers factors such as interest rates, GDP growth, analysts’ longterm growth forecasts, and investors’ preference for equities with high asset value relative to investors’ preference for equities with high future growth opportunities. When the reasons for the favorable valuations are likely to be known to investors, such as when the negative macroeconomic data consistent with current ERP levels are already public information, higher ERPs are predictive of higher future stock market returns in the long term. However, when the reasons for the favorable valuations are not as likely to be known to investors, higher ERPs are predictive of lower stock market returns in the short term. The rationale is that investor concerns that lead to higher ERPs are more likely to be fully priced when those concerns reflect data that are publicly available, setting the stage for higher future returns. The relevant implication for investors is that valuation is not a sufficient signal for increasing equity allocations. Rather, even if valuation appears attractive, investors should wait to increase equity allocations until the valuation level can be explained by observable data.

Brokerage Firm Analysts: How Good are the Forecasts?

This article reexamines the relationship between analysts’ forecast accuracy and brokerage firm affiliation. The lowest individual forecast is found to be more accurate than either the mean of all contemporaneous forecasts or the mean of all contemporaneous forecasts by large brokerage firms, and large brokerage firm analysts are more accurate only when their forecasts are lower than those of small brokerage firms. The lower the small brokerage firm forecasts relative to large brokerage firm forecasts, the more forecast accuracy can be improved by incorporating small brokerage firm forecasts. The conclusion is that an analysts expected forecast accuracy is more closely related to whether that analysts forecast is lower or higher than other analysts’ forecasts than to the analysts brokerage firm affiliation.

Private Equity Performance: Better Than Commonly Believed

This article reexamines the performance of private equity (PE) funds by including data from more recent PE vintages and by using a measure of PE performance that considers the opportunity cost that investors incur between the commitment and capital call dates and the duration of PE investment. The primary results indicate that 1) buyout funds have better standalone long-term risk–return characteristics than public equity markets and they perform counter-cyclically to public equity markets; 2) when venture funds are combined with buyout funds, the resulting mix provides a more attractive alternative to public equity markets than buyout funds alone provide; and 3) venture funds’ higher absolute returns as compared to buyout funds and public equity markets are restricted to a few vintages and a small number of big winners in those vintages. Other findings suggest that a manager’s past PE fund performance is a weak basis for forecasting future PE fund performance and that fund size is positively correlated with performance for venture funds but negatively correlated with performance for buyout funds.