Laurentius (Laurens) Adrianus Petrus Swinkels

Return-based style analysis with time-varying exposures

Abstract This paper focuses on the estimation of mutual fund styles by return-based style analysis. Often the investment style is assumed to be constant through time. Alternatively, time variation is sometimes implicitly accounted for by using rolling regressions when estimating the style exposures. The former assumption is often contradicted empirically, and the latter is inefficient due to its ad hoc chosen window size. Here, the Kalman filter is used to model time-varying exposures of mutual funds explicitly. This leads to a testable model and more efficient use of the data, which reduces the influence of spurious correlation between mutual fund returns and style indices. Several stylized examples indicate that more reliable style estimates can be obtained by modelling the style exposure as a random walk, and estimating the coefficients with the Kalman filter. The differences with traditional techniques are substantial in these stylized examples. The results from the empirical analyses indicate that the structural model estimated by the Kalman filter improves style predictions and influences results on performance measurement.

Performance evaluation of Polish mutual fund managers

This study aims at evaluating the performance of mutual fund managers in one of the fastest growing financial markets in emerging Europe. We use well-known performance evaluation measures to investigate whether private investors in Poland have benefited from investing in mutual funds. Our analysis focuses on returns over the period 2000-2007 for three categories of mutual funds: (1) equity, (2), bond, and (3) balanced mutual funds. Our results indicate that mutual funds in each of these three categories have positive, but insignificant selectivity skill, indicating that a private investor would not have been worse of by investing in mutual funds. We do not find any evidence of equity or bond market timing skill by Polish mutual funds. This conclusion does not depend on our choice of evaluation model taking into account the direction and/or the magnitude of the market return.

An Anatomy of Calendar Effects

This paper studies the interaction of the five most well-established calendar effects: the Halloween effect, January effect, turn-of-the-month effect, weekend effect and holiday effect. We find that Halloween and turn-of-the month (TOM) are the strongest effects fully diminishing the other three effects to zero. The equity premium over the sample 1963-2008 is 7.2% if there is a Halloween or TOM effect, and -2.8% in all other cases. These findings are robust with respect to transactions costs, across different samples, market segments, and international stock markets. Our empirical research narrows down the number of calendar effects from five to two, leading to a more powerful and puzzling summary of seasonal effects.

The Global Multi-Asset Market Portfolio 1959-2012

The market portfolio contains important information for purposes of strategic asset allocation. One could consider it a natural benchmark for investors. The authors composed the invested global multi-asset market portfolio for 1990–2012 by estimating the market capitalization for equities, private equity, real estate, high-yield bonds, emerging-market debt, investment-grade credits, government bonds, and inflation-linked bonds. They also used an expanded period (1959–2012) for the main asset categories: equities, real estate, nongovernment bonds, and government bonds. The invested global multi-asset market portfolio is the aggregate portfolio of all investors, in which portfolio weights indicate the constitution of the average portfolio. The invested global multi-asset market portfolio contains important information for purposes of strategic asset allocation. First, it shows the relative value of all asset classes according to the global financial investment community, which one could consider a natural benchmark for financial investors. Second, this portfolio may also serve as a starting point for investors who use a particular framework or follow adaptive asset allocation policies. In our study, we focused on the invested global multi-asset market portfolio, which is relevant to financial investors. We composed the invested global market portfolio for 1990–2012 by estimating the market capitalizations of eight asset classes: equities, private equity, real estate, high-yield bonds, emerging-market debt, investment-grade credits, government bonds, and inflation-linked bonds. At the end of 2012, we estimated the total market capitalization of the invested global multi-asset market portfolio at

Strategic Asset Allocation: The Global Multi-Asset Market Portfolio 1959-2011

90.6 trillion. Equities (36.3%) represent the largest asset class, followed by government bonds (29.5%). Investment-grade credits (18.5%) are also a major asset class. The total market capitalization of the five other asset categories (15.6%) is relatively small. But the total weight of the relatively small asset classes increased from 6.2% to 15.6% over 1990–2012. For the four main asset categories—equities, real estate, nongovernment bonds (investment-grade credits and high-yield bonds), and government bonds (broadly defined and including inflation-linked bonds and emerging-market debt)—we compiled data series for 1959–2012; we did not take private equity into account. At the end of 2012, the market portfolio weights for these four main categories are 37.7%, 5.3%, 20.9%, and 36.1%, respectively, and the 54-year averages are 52.0%, 3.2%, 15.1%, and 29.6%. The weight of equities in 2012 is close to the record low of 37.1% in 2011. In 2011, for the first time in our sample period, equities no longer outweigh government bonds. We showed that pension funds’ allocation to equities is a little above the market portfolio’s allocation. The sovereign wealth funds in our sample tend to allocate more to equities and the endowments allocate more to alternative assets than is warranted by their weights in the market portfolio; their allocation to bonds falls short of the market portfolio’s weight of bonds. Our development of this new historical database on the global multi-asset market portfolio has important applications for the strategic asset allocations of practitioners. Moreover, our study might serve as a fruitful resource for future research in this field. We hope that this article will spark new applications, both theoretical and empirical.

Emerging Markets Inflation-Linked Bonds

The portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the optimal portfolio for the average investor. We determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, we estimate the invested global market portfolio for the period 1990-2011. For the main asset categories equities, real estate, non-government bonds and government bonds we extend the period to 1959-2011. To our understanding, we are the first to document the global multi-asset market portfolio at these levels of detail for such a long period of time.

Can Exchange Traded Funds be Used to Exploit Country and Industry Momentum

We investigate the added value of inflation-linked bonds in an investment portfolio. Recently, several studies questioned the added value of inflation-linked bonds based on empirical analyses on developed markets. We extend the cross-section of countries with a set of nine emerging markets and conclude that for many of these countries the inclusion of inflation-linked bonds improves the risk-return characteristics of investment portfolios. We also document that inflation-linked bond returns correlate more with realized inflation than nominal bonds, even on the short run. Hence, investors that invest in nominal bonds and equities should also allocate a significant amount to inflation-linked bonds. Furthermore, our mean-variance spanning tests indicate that US investors that already invest in emerging markets nominal bonds and emerging markets equities benefit from adding emerging markets inflation-linked bonds to their investment portfolio.

High-Conviction Equity Portfolio Optimization

There is overwhelming empirical evidence on the existence of country and industry momentum effects. This line of research suggests that investors who buy countries and industries with relatively high past returns and sell countries and industries with relatively low past returns will earn positive risk-adjusted returns. These studies focus on country and industry indexes that cannot be traded directly by investors. This warrants the question whether country and industry momentum effects can really be exploited by investors or are illusionary in nature because they exist only on non-tradable assets. We analyze the profitability of country and industry momentum strategies using actual price data on Exchange Traded Funds (ETFs). We find that, over the sample periods that these ETFs were traded, an investor would have been able to exploit country and industry momentum strategies with an excess return of about 5% per annum. These returns cannot be explained by unconditional exposures to the Fama-French factors. The daily average bid-ask spreads on ETFs are substantially below the implied break-even transaction costs levels. Hence, we conclude that investors that are not willing or able to trade individual stocks may use ETFs to benefit from momentum effects in country and industry portfolios.

The Zodiac Calendar and Equity Factor Returns

We investigate the construction of well-diversified high-conviction equity portfolios using the Portfolio Diversification Index (PDI). This paper is the first to investigate the out-of-sample properties of the PDI. Our research applies a novel portfolio selection algorithm to maximize the PDI of a portfolio of stocks in the S&P 500 Index over the period 2000 to 2009. We construct equally-weighted, well-diversified portfolios consisting of 5 to 30 stocks, and compare these with randomly selected portfolios of the same number of stocks. Our results indicate that investors using our algorithm to maximize the PDI can improve the diversification of high-conviction equity portfolios. For example, a portfolio of 20 stocks constructed using the algorithm with the PDI behaves out-of-sample as if it contains 10 independent stocks, i.e. a PDI score of 10. This is a significant improvement over the PDI score of 7 that occurs with a randomly selected portfolio. Our research is robust with respect to the number of stocks in the investment portfolio and the time period under consideration.

The Composition of the Global Real Economy and Public Equity Markets

We calculate the returns for four well-known equity factor returns, the market, size, value, and momentum, for each Zodiac calendar year from 1926 to 2015. We find that point estimates of average returns for each Zodiac sign can be substantially different. However, when we employ statistical tests, we do not find enough evidence to reject the null hypothesis of equal excess returns across Zodiac signs. For an investor with an equally-weighted portfolio in these four equity factors, the Year of the Rooster may seem particularly good and the Year of the Ox particularly poor, but also in this case the null hypothesis cannot be rejected. Hence, we conclude that investment strategies based on Zodiac signs are unlikely to generate superior returns.