Marie Brière

Crisis-Robust Bond Portfolios

This article defines a “crisis robust” portfolio that satisfies the minimal crisis-to-quiet time volatility ratio. This type of portfolio is less demanding for the investor than a regime-wise asset allocation. Although general, the concept of a crisis-robust portfolio is especially pertinent when applied to the bond market, which offers a flight-to-quality trade-off during crises (all volatilities increase but most correlations decrease). Using three categories of bonds (sovereign, investment-grade corporate, and high-yield corporate) in the U.S. and Eurozone for the 1998–2007 period, we demonstrate the composition of crisis-robust portfolios and discuss the stabilizing role played by low-quality bonds during crises.

Do inflation-linked bonds still diversify?

The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has changed significantly. In this paper, we study the dynamics of conditional volatilities and correlations for three asset classes, IL bonds, nominal bonds, and equities, in the USA and Europe. Using a DCC-MVGARCH for the period 1997-2007, we highlight the change that took place in 2003. Although IL bonds once had definite diversification power, they are now highly correlated with nominal bonds and have reached similar volatility levels. As a result, the two asset classes are practically substitutable. This seems to be due to more stable inflation expectations and to a more liquid IL bond market. Although diversification was a valuable reason for introducing IL bonds in a global portfolio before 2003, this is no longer the case. Dynamic portfolio optimisation using our estimates of conditional correlations and volatilities clearly demonstrates that the optimal weight of IL bonds in a portfolio decreased sharply in 2003 in favour of nominal bonds and equities.

Does Commercial Microfinance Belong to the Financial Sector? Lessons from the Stock Market

This paper is the first to draw a global picture of worldwide microfinance equity by taking full advantage of daily quoted prices. We revisit previous findings showing that investors should consider microfinance as a self-standing sector. Our results are threefold. First, microfinance has become less risky and more closely correlated with the financial sector. This convergence might be followed by a decline in the proportion of women borrowers. Second, microfinance and finance shares have equivalent currency exposure. Last, introducing a self-standing microfinance sector presents few diversification benefits. This paper confirms that microfinance has changed dramatically during the last decade.

Inflation and Individual Equities

We study the inflation hedging ability of individual stocks. While the poor inflation hedging ability of the aggregate stock market has long been documented, there is considerable heterogeneity in how individual stock returns covary with inflation. Stocks with good inflation-hedging abilities since 1990 have had higher returns, on average, than stocks with low inflation betas and tend to be drawn from the Oil and Gas and Technology sectors. However, we show that the time variation of stock inflation betas is substantial. This makes it difficult to construct portfolios of stocks that are good inflation hedges out of sample. This is true for portfolios constructed on past inflation betas, sector portfolios, and portfolios constructed from high-paying dividend stocks.

Investment in Microfinance Equity: Risk, Return, and Diversification Benefits

This paper draws a global picture of worldwide microfinance equity. Taking full advantage of daily quoted prices of microfinance stocks from their issuance, we construct microfinance country equity indices and an international global microfinance index. We analyze changes in these indices, assessed in reference to comparable indices for the financial sector and also to national indices. Our findings show that microfinance has been closely correlated with the financial sector since 2003. In terms of risk exposure, estimates of the Capital Asset Pricing Model demonstrate that microfinance shares exhibit higher market beta than those of conventional financial institutions and have equivalent currency exposure.

Yield Curve Reaction to Macroeconomic News in Europe: Disentangling the US Influence

This paper analyses the response of the Euro yield curve to macroeconomic and monetary policy announcements. We present a new methodology for estimating the reaction of the Euro swap curve to economic news, in a data-rich environment. Given the sharp degree of interdependence between Euro rates and US rates, we propose to use the factors of the US yield curve to disentangle the daily variation in Euro rates stemming from US influence and the variation resulting from European news. We highlight the importance of taking the US yield curve influence into account and investigate the shape of the Euro term structure reaction to a range of news types. We find that the impact of economic announcements on the yield curve shows different patterns according to the news and we provide a hierarchy of the economic figures that have the strongest impact on the different maturities.

Do Social Responsibility Screens Really Matter When Assessing Mutual Fund Performance

On average, socially responsible (SR) funds have showed statistically similar performances to traditional funds. Does this mean SR screens make a negligible contribution to fund performance? In this paper, we propose a new decomposition of the variability of mutual fund returns. This allows us to measure the performance contributions of SR screening compared with the other traditional sources: market movement, asset allocation choices and active management. Our results, based on a large sample of equity mutual funds worldwide, show that SR screening does explain the variability in mutual fund performance, alongside asset allocation and active management. However, the sum of these three components accounts only for 30% of total performance. SR screens matter but, like active portfolio choices, they have a limited impact on total equity fund performance, heavily dominated by market movements.This paper questions the contribution that socially responsible (SR) screening makes to mutual fund performance. We propose a new decomposition of the variability of SR mutual fund returns making it possible to isolate the contribution of SR screening and compare it with the other traditional sources of performance: market movements, asset allocation (country, industry and style) choices and active management. Our results, based on a sample of SR equity mutual funds investing either globally or solely in the U.S., show that SR screening does contribute to the variability of mutual fund performance, alongside other portfolio choices such as asset allocation decisions and active management. This contribution is rather modest on average (4% for U.S. and 10% for global funds), roughly two times lower than that made by active portfolio choices. There is a significant dispersion among funds: 25% of them have a negligible SR contribution (below 1%) while for 5% of them the contribution of SR screening is above 14%.

Factor Investing: The Rocky Road from Long Only to Long Short

This paper examines how restrictions on short positions affect the financial attractiveness of factor investing. To fill the gap between unconstrained long-short allocations and restricted long-only portfolios, we consider two in-between strategies. The first imposes that only the market can be shorted; the second is the so-called “130/30” or “active extension” trading strategy, which caps total short exposure at 30%. The takeaways from our research are twofold. First, short sales contribute significantly to the mean-variance performance of efficient factor-based portfolios. Second, the factor portfolios built originally by Fama and French (1992) with the purpose of developing asset pricing are impressively clear-sighted when it comes to portfolio management. Indeed, combining these portfolios generates mean-variance performances similar to those of optimized long-short portfolios, except for low levels of volatility.

Factor-Based v. Industry-Based Asset Allocation: The Contest

Factor investing emerged as the byproduct of factor models of asset pricing. It consists in holding assets with positive exposure to selected risk factors and, if possible, shorting those with negative exposure. This paper assesses the merits of factor investing on the U.S. stock market by using sector investing as the benchmark. Our results reveal a trade-off between the risk premia associated with factors and the diversification potential of sectors. When short selling is authorized, factor investing outperforms sector investing in all respects. For long-only portfolios, factor investing tends to be more profitable than the benchmark during expansion times and bull periods, but less attractive during recessions and bear periods, i.e., in periods where diversification is needed the most.

Optimal Asset Allocation for Sovereign Wealth Funds: Theory and Practice

This paper addresses management of sovereign wealth from the perspective of the theory of contingent claims. Starting with the sovereigns balance sheet, we frame sovereign fund management as an asset-liability management (ALM) problem, covering all public entities and taking explicit account of all sources of risks affecting government resources and expenditures. Real-life SWFs asset allocations differ strongly from theoretical ones. Financial management of the sovereign balance sheet is hampered by a lack of aggregate data, which compromises the coordination of sovereign wealth management with fiscal policy, monetary policy and public debt management. In this framework, we suggest institutional arrangements that could overcome this obstacle and enable efficient coordination.