John Matatko

The Investment Performance of UK “Ethical” Unit Trusts

Examines the impact on investment returns of stated non‐financial criteria by utilizing information on UK “ethical” unit trusts. Over a limited period of observation there was weak evidence of some overperformance on a risk‐adjusted basis by “ethical” unit trusts. Suggests arguments that might intuitively explain overperformance or underperformance. There is clear evidence that the “ethical” trusts have UK investment portfolios more skewed towards companies with low market capitalization than the market as a whole. Associated with this, they tend to be invested in low dividend yield companies. The degree of international diversification varies and a suitable international benchmark may be needed to separate out any “ethical” effect.

Detecting Information from Directors' Trades: Signal Definition and Variable Size Effects

There have been three empirical studies examining the share price reaction following trades by directors of UK companies (King and Poell, 1988; Pope, Morris and Peel, 1990; and Gregory, Matatko, Tonks and Pukiss, 1994). All three of these UK studies used different definitions of ‘buy’ and ‘sell’ signals resulting from the transactions of directors and employ different controls to detect the presence of any ‘size effects’. We investigate whether the signal definition explains the different conclusions drawn by these earlier studies, and examine whether or not any observed abnormal returns are explicable by the small companies effect. We also investigate trading strategies based on holding a long portfolio of shares purchased or a short portfolio of shares sold by directors held until the end of the study period or until a ‘reserving event’ (e.g. a sale following a purchase by director[s] is observed).

Cardinality constrained portfolio optimisation

The traditional quadratic programming approach to portfolio optimisation is difficult to implement when there are cardinality constraints. Recent approaches to resolving this have used heuristic algorithms to search for points on the cardinality constrained frontier. However, these can be computationally expensive when the practitioner does not know a priori exactly how many assets they may desire in a portfolio, or what level of return/risk they wish to be exposed to without recourse to analysing the actual trade-off frontier.

Tax Effects in Gilt-edged Security Valuation

The central problem of bond (and general cash flow) management is the valuation of the sequence of temporal cash flows generated by the bond. One approach (see, e.g., Brennan and Schwartz, 1979) postulates a stochastic process for bond price dynamics and obtains an equilibrium pricing relationship. An earlier but still popular approach assumes certainty of expectations on the part of bond holders and assigns the value of the bond as the sum of the discounted cash flows. To perform this calculation it is necessary, however, to apply an appropriate discount function. The estimation of this discount function has in turn produced many studies (see, e.g., McCulloch, 1975; Jordan, 1984). This problem is compounded by the existence of different tax rates for income and capital gains and of varying marginal rates of income tax among individuals and corporations. This paper adopts the second approach and addresses the problem of term structure estimation in the presence of tax effects. It also reviews the development of the current system of taxation of investors in the UK government securities market with particular reference to the anomalous low-coupon issues.

Investment Trust Price Discounts

The ‘problem’ of the divergence between the market value of shares in a closed-end fund (investment trust) and the valuation of their assets is one that has led to a good deal of research and comment over a period of many years (see the references cited in our second section). The issue has also, perhaps, a broader interest other than simply to those interested in mutual funds. For investment trusts, unlike other companies, there exists a very ‘clear’ valuation of the company’s assets. The difference between the value of these assets and the share price, the former usually being greater than the latter, is clearly quantified. There may well exist large premiums/discounts on the shares of other quoted companies which are much less ‘visible’ because of the lack of a precise, or even approximately precise, value of their assets. The sharp movement, usually an increase, in the share price of companies being taken over, testifies to a possible wide divergence in asset value and share price. Investment trusts present an opportunity to investigate the movements in this ‘discrepancy’. More plainly in an efficient market without frictions the existence of the premium/discount is impossible. Given the presence in the stock market of highly informed and well resourced agents, the existence of a large market information inefficiency is highly unlikely.

Risk and Rates of Return in British Unit Trusts: Bull and Bear Market Movements, 1973–8

For both the investor who seeks to construct a portfolio by sometimes using ‘managed’ portfolios such as unit trusts, and for the professional portfolio manager who needs to assess his performance, the measurement of risk and rate of return on a portfolio is crucial. As argued in the introduction to this volume, only ‘systematic’ risk is relevant for investors holding well-diversified portfolios; all other risk may be ‘diversified away’. The appropriate measure of risk in this instance is the beta coefficient, the exposure of a portfolio to ‘market’ or ‘systematic’ fluctuations. There has been much discussion in recent literature suggesting that parameters, such as portfolio beta, may be non-stationary (see Fabozzi and Francis 1977, 1979; Jensen 1968; Klemkosky and Maness 1978; Kon and Jen 1978; Treynor and Mazuy 1966; all using US mutual fund data). It is, of course, of great importance for the investor and the portfolio manager to know the nature of the fluctuations in beta for a particular fund: in a rising market we would expect a fund managed successfully with respect to market timing to increase its exposure to systematic risk and to decrease it when the market falls.