While passive investments constitute a substantial share of assets in the US, the transition from mostly active to passive approach is only beginning in India. What lessons can India learn from the growth of the sector in the US?

Anxiety around global markets provided a boost to S&P/JPX JGB VIX levels heading into the end of the month.

As we approach the final month of a rollercoaster year in the markets, adding a factor lens can provide perspective, especially when it comes to low volatility.

How does the performance of the S&P 500 Low Volatility Index compare with that of its parent, the S&P 500, in 2018?
 

This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

In this webinar, the following topics will be addressed:

• Overview of the industry: structure, brief history, players
• How to get started and sources of information (Investor/Market Maker)
• Identifying and investing in an opportunity
• Potential risks
• Experiences over the years
• Future outlook
• Tax implications and recent regulatory developments

 
 

This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

In this webinar, we will cover the following:

• How can the confluence of five factors assist with better investing outcomes?
• What traits are typical of the best and worst third-wave managers from an investment due- diligence perspective?
• How does one differentiate between third-wave managers, and second-wave managers--traditional computational finance managers?
• What are the skill sets and the learning required to become a third- wave manager?

 

This webinar qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

This webinar gives foundational understanding on smart betas and factor investing from a pioneer in this field

How are S&P Carbon Efficient Indices constructed and how are they used by institutional investors, including Japan's GPIF to meet their sustainable investing goals.

As the cost of research is unbundled from that of trading, as a result of MiFID II, the value of research comes to the fore. The authors present a framework for the estimation of relative research values across markets and constituents.

Larry Cao, Director of Industry Research at CFA Institute, talks about the promises and challenges of deep learning, and how artificial intelligence finds application in the investment industry, in an interview for MioTech.
 

Centralized exchanges constitute a weak point in the cryptoassets ecosystem, as the are vulnerable to hacking and theft. Although more secure, decentralized exchanges have been created, they languish in obscurity. Are they a solution that can bring better security and price stability?
 

This article qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

This collection of working papers was submitted to Thailand SEC Working Paper Forum 2018, a collaboration between academic institutions in Thailand, Thailand SEC, CFA Society of Thailand and CFA Institute Asia-Pacific Research Exchange. The research was presented at Thailand SEC Policy Dialogue 2018: Regulating by Market Forces on November 28, 2018 as best paper on asset management and paper of the year.

How is GPIF achieving its green objectives through indices? S&P DJI’s Sunjiv Mainie, Kana Kawasaki, and Ryan Christianson discuss how they partnered with GPIF on the new S&P Carbon Efficient Indices to power their commitment to ESG. (Video: 6 min.)

By analyzing abnormal stock returns prior to public quarterly earnings announcements, the authors find that information from private monthly reports to managers of collateralized loan obligations slowly leaks to the public market. 

This paper has been submitted to the conference Politics, Stock Markets and the Economy, held at the Centre of Applied Finance and Economics, University of South Australia Business School on 4-5 December 2018.
 

While a run-up in value of crypto-assets before the end of the year is unlikely, we present a brief analysis of short- and long-term market opportunities in crypto on which digital asset management protocols should be focusing.

The ASEAN nations’ investment landscape is changing and providing greater access for global investors. Premia Partners’ David Lai joins S&P DJI’s Sam Tsui and Utkarsh Agrawal to discuss the index solutions that help investors to capture the potential growth in these markets. (Video: 5 min)

Market pressures from rising interest rates, an abrupt slowdown in China and lacklustre corporate profits should abate by mid-2019 and the bull market should then resume. But the growing tensions between US and China remain a wild card.
 

Dividend yield is a significant consideration for income-focused investment strategies. As companies in different markets tend to pay dividends on different schedules, the calculation of dividend yields has to take into account these differences. 

Although the implied volatility of Japanese government bonds remained below the July and August highs, the JGB market was sensitive to rumors of possible changes to the Bank of Japan (BoJ) JGB purchases.

Plastic pollution, particularly in oceans, is a growing environmental concern. The report takes a deep dive into the economy of plastics in search of companies well-positioned to mitigate the risks of plastic pollution and to deliver sustainable solutions. 

 

What does the growth of passive investing mean for the Indian market? Watch as S&P BSE Indices’ Koel Ghosh and Akash Jain discuss the latest passive investing trends in India. (Video: 5 min.)

Intraco Refueling Station Limited made its debut on Dhaka Stock Exchange on 17th May 2018. The company is planning to use the IPO proceeds to establish an LPG bottling plant in Patenga, Chittagong, changing the project's intended location from Gojaria, Munshigonj. EBL Securities Limited offers an updated analysis on the business operation of Intraco Refueling Station Ltd.   

Given the recent rise of interest in Blockchain technology and cryptocurrencies, it‘s quite clear that there is a growing unspoken need for professional portfolio management services and well-established investment techniques.

The proliferation of investment opportunities and the increase in the sheer size of each investment in the cryptographic asset space requires the incorporation of concepts such as diversification, asset allocation and other basic and well-tested investment techniques. As the market grows, it’s obvious that there is a compelling need for both: professional portfolio management skills as well as a good understanding of the underlying information technology.

In this report, we measure the performance persistence of active funds that outperformed their peers and benchmarks over consecutive three- and five-year periods. Persistence of outperformance is an additional test that reveals fund managers’ skills in different market environments.

This report qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits

How should portfolio managers incorporate ESG scores and individual ESG factors in the investment process? Is the reliance on ESG scores sufficient or should institutional investors engage with companies to create shareholder value?
 

Did fund managers of Thailand's three largest asset management companies, Kasikorn AM, SCB AM, and BBL AM, add value to the return of the domestic equity funds?
 

What’s inside this broad benchmark and how are market participants putting it to work? S&P BSE Indices’ Mahavir Kaswa and Neyaz Shaikh provide an in-depth look at the S&P BSE 500. (Video: 3 min.)

How are index-based strategies being used to eliminate home bias? Shaunessy Investment Counsel’s James Garcelon joins S&P DJI’s Randall O’Leary to discuss the role of indexing in building diverse global portfolios. (Video: 6 min)

The SPIVA India Scorecard reports on the performance of actively managed Indian mutual funds compared with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.

How do active managers stack up to their benchmarks in India? Join Neyaz Shaikh and Akash Jain from S&P BSE Indices as they dive into the SPIVA data. (Video: 3 min.)

As the US Fed withdraws its quantitative easing, two economic drivers are in play that will replace the monetary stimulus: the business-oriented 2017 tax cut and growing productivity, according to a quarterly forecast by Pinebridge Investments.

Since one-off devaluation of the Uzbekistani som to 8,100 UZS/USD from 4,210 on 5 September 2017, the currency has been quite stable thanks to growing exports, increasing foreign investments, loans from international financial institutions (EBRD, ADB, etc.), decreasing use of US dollar within Uzbekistan, and a small intervention from Central Bank of Uzbekistan (CBU).

As initial coin offerings (ICOs) explode in popularity in the startup world, they are surrounded by controversy. The response of market practitioners and regulators has varied, from enthusiasm to outright bans. Li and Mann offer an economic analysis of the role of ICOs in development of platforms. They analyze economic efficiency to pinpoint when token sales create value. Their findings have implications for regulators and practitioners in the booming ICO market.

A study of how market makers set their quotes and how the frequency of quotes with respect to trades affects the mispricing and the cost of capital. The dealers' quote rate is higher for neglected stocks and when investors are more precisely informed. Such stocks turn out to have lower average returns. 

This article qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

Growing adoption of ESG investing after 2003 generates a new "friction" that affects the efficiency of stock markets. Socially responsible institutional investors tend to under-react to mispricing signals when they contradict the investors' preference for ESG performance. This leads to predictability of returns. 
 

We examine the impact of smart beta equity exchange-traded funds (ETFs) on how investors evaluate active mutual fund performance. We find that when smart beta ETFs are actively traded, mutual fund flows become “smarter”, with a higher sensitivity to alphas from multi-factor models. The dominance of the CAPM alpha weakens and even disappears. Our findings highlight the importance of financial innovation in shaping investor behavior and are not explained by alternatives such as investor learning because the results are driven by sophisticated investors. We document consistent evidence using international data and a cross-country analysis.

Responding to the need for a VIX-type index reflecting Australian equity market uncertainty, S&P Dow Jones Indices launched the S&P/ASX 200 VIX in 2010. The index has proven to be a good gauge of the volatility of the Australian equity market and has shown a strong negative correlation with the local market.

Value-at-Risk (VaR) and Performance Predictability:Evidence on Skewed distribution mutual fund in Thailand

This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 


This is a short paper written by CFA Society Bangladesh member on the topic "The asset management industry in Bangladesh". The paper addresses the challenges that prevent growth of the industry and provide solutions to those challenges. The paper was published by the Bangladesh Securities and Exchange Commission, as part of their Silver Jubilee celebration.

The SPIVA Australia Scorecard reports on the performance of actively managed Australian mutual funds against their respective benchmark indices over 1-, 3-, 5-, 10-, and 15-year investment horizons.

The purpose of the S&P Risk Parity Indices is to provide appropriate benchmarks for risk parity and to provide an alternative to investors who are looking for a passive investable solution.

The Indian debt market has grown to USD 1.5 trillion over the past decade, largely due to the issuances from the central and state government. The ratio of government securities to corporate issuances is about 75 to 25, reflecting the subdued state of corporate bond markets in India. With a lack of participation, the Indian debt market remains smaller than the equity market—an anomaly among other global markets. 

The mid-cap space has often been described as the “sweet spot” of equity investing—and with good reason. Mid caps tend to offer a balance between the high growth (and high risk) offered by small caps and the stability (but slower growth) of large caps. In addition, the Australian midcap segment has a more diverse sector representation than both large-cap and broad-market Australian benchmarks, which are dominated by banks. Over the long term, these unique characteristics have helped the Australian mid-cap segment outperform all other size categories on both an absolute and risk-adjusted basis.

Despite these characteristics, the mid-cap segment of the Australian stock market is often overlooked and underappreciated. Pure mid-cap investing is not common, and often, mid- and small-cap companies are lumped together for investment purposes, diluting the unique characteristics of midsized companies. 

Personality Driven Portfolio
How to Invest Right for Your Style
Published by Marshall Cavendish Business, 2018

Have you ever thought about how YOUR Personality might affect your Portfolio?

• Are you wondering why your investments don’t seem to do as well as others?  
• Do you often own the right stocks, but find yourself either taking profit too early or not taking profit early enough and now sitting on losses?
• You have been following the recommendations of top analysts and portfolio managers, why aren’t you making as much out of these investments? 
• Is the performance of your investments keeping you awake at night? 

You are not alone…
 
Very often, we construct our investment portfolio by following the best research and recommendations out there.  However, the investment returns are rarely optimal. One of the main reasons is that these investments may not be suitable for you!
 
Constructing an investment portfolio is not a one-size-fits-all exercise.  What works for other top investors may not necessarily work for you.  Following them blindly can lead to a disastrous mismatch with your own investing style.

Successful investing starts with KNOWING YOURSELF.
What investment personality are you?  Are you a Diligent Deer, an Egoistic Elephant, a Cagey Crab, or perhaps a Busy Bee?

Understanding your investment personality would be the first step to constructing a bespoke portfolio for yourself - one that will suit your personality to a T, and put you in the best position to reap sustained results over the long term!

 

JGB VIX Drops as BoJ Tries to Regain Control

Riding on growing economic activity and favorable policy interventions by BB,  Listed Banks’ profitability improved in Q2’18 than Q1’18 but profit growth was not so high while comparing with Q2’17.

INTRODUCTION TO AIRLINE SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

AIRLINE INDUSTRY

Perhaps it’s the thrill of voyaging to a far-flung, unfamiliar place. Maybe it’s the teasing prospect of a seat or—even better—an earnings upgrade. Whatever our reasons, we remain seduced and frustrated by the airline industry.

In a 2007 letter to shareholders, Warren Buffett observed that: The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money—think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

In the beginning, airlines were a must-have sovereign accessory, an essential strategic asset with monopoly powers that conferred national pride and international prestige. That said, packing a soft-power punch wasn’t cheap, and the industry was replete with loss-making state-owned companies.
To the relief of investors (and taxpayers), economic sanity eventually prevailed and privatisation, together with the introduction of low-cost carriers (LCCs), helped to forge a
more sensible trading environment.

Old habits die hard, though, and aspects of a state-owned past haunt the airline industry. Intergovernmental deals dictate which airlines can fly and where they can land, and despite cheaper alternatives, national airlines still locate their hubs on their home turf. Industry pricing is also quixotic: a flight with two stopovers may be 40% cheaper than a shorter, more fuel-efficient, direct journey.
 
To read more, download the full sector analysis for the airline industry with accompanying question bank below.

This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
 

The worsening Turkish currency crisis has led to fears of contagion within emerging markets (EM) debt, widening the EM/US spread differential to historic levels. That is due in part, however, to US investment grade (IG) and high-yield (HY) bonds benefiting from stronger-than-expected earnings, a relatively light new issuance calendar and positive fund flows from retail mutual fund and ETF investors. With our target allocations unchanged, we continue to favor EM debt, which we expect to benefit from attractive valuations, positive trade developments and a moderation in US dollar strengthening. We also continue to find attractively priced IG and HY credits.

It turns out that “America First” has been an apt way of thinking of markets in 2018. US dollar strength is being attributed to emerging markets’ (EM) financing issues, commodity weakness, and seemingly anything else that cannot easily be explained. This leads many to wonder when the dollar’s upward trajectory will have run its course.

With quantitative easing peaking soon, growth and rate differentials are mattering more. The US came into 2017 as the global growth laggard, yet quickly moved to the front of the pack in 2018 by accelerating while others plateaued. Much of this non-US pause probably rests as much with the powers that be in Beijing as it does with those in Washington.

Before pulling back late in 2017 and early 2018, China’s policy initiatives pushed for growth in the lead up to the 19th Party Congress. With Europe and EM depending more on trade with China than they do with the US, China’s success or failure in handling its debt, managing its currency, and dealing with tariff issues will have a far greater impact on those nations than it will on the US.

Europe’s current slow growth, in fact, can be attributed in large measure to China’s careful steps to encourage slow domestic growth, which has cooled demand for goods from Europe and constrained the performance of many European companies that are export dependent.

Worries about EM dependence on China are partly the reason EM has underperformed developed markets (DM) in all asset classes by about 10% in the past year. Turkey and Argentina’s woes are unique and self-inflicted, yet still fuel fear that the Federal Reserve is on an overly ambitious pursuit of the dot plot, eventually crushing all EM.

We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of derivatives in order to gain exposure to an index and/or market factors that may be not directly tradable. Among our results, we establish a general tracking condition that relates the portfolio drift to the desired exposure coefficients under any given model. We also derive a slippage process that reveals how the portfolio return deviates from the targeted return. In our multi-factor setting, the portfolio’s realized slippage depends not only on the realized variance of the index but also the realized covariance among the index and factors. We implement our trading strategies under a number of models, and compare the tracking strategies and performances when using different derivatives, such as futures and options.

Optimal Mean Reversion Trading

with Transaction Costs and Stop-Loss Exit

In this post, we will review the historical performance of the S&P BSE 500.

Get insight into where large-cap American companies are selling their goods and services.

Central Securities LLC introduces the equity valuation report of Gobi JSC. 

This year, equity markets in the US and emerging markets – notably Asia – have decoupled, with the S&P 500 making new record highs while the MSCI Emerging Markets Index dropped sharply. Expected earnings growth, meanwhile, is also rising in the US while falling in Asia.

The big question is whether the weakening earnings growth outlook in Asia, now the single largest and fastest growing economic bloc, is a temporary issue or a sign of things to come for the global economy. If the main culprit is trade causing business sentiment to turn cautious, that means there is potential for spending to rebound when the trade issues are resolved. But if the main culprit is slowing demand – like what we’re seeing in many of China’s industries, including smartphone, auto, and home appliance – then earnings expectations in 2019 and beyond are too high.

In this post, let’s take a deeper look at how the emerging ASEAN equity markets—consisting of Indonesia, Malaysia, Philippines, Thailand, and Vietnam—performed historically.

This paper discusses the construction and attributes of the S&P BSE 500 and compares it with other popular equity indices in the Indian market.

In pre-crisis days, market participants understood that central bankers had their hands on the short-term end of the yield curve and knew how to react when rates were dialed down to boost a sluggish economy or up to cool an overheated one.

In response to the financial crisis, mission creep set in. Leading central banks moved into the long end of the curve, where rates traditionally had been determined solely by market forces. Yesteryear’s yield curve, therefore, was a transparent comparison between the market’s view of the economy down the road versus the Federal Reserve’s. When the 10-year Treasury rate fell below the two-year rate, creating an inverted yield curve, recession typically followed 18 months later – a report card suggesting that the market had superior forecasting powers. Today’s yield curve may have morphed into a kind of financial funhouse, where the rates we see are distorted images of market-determined rates.

The Association of Southeast Asian Nations (ASEAN) region is well known for its growth potential among market participants who seek to diversify their exposure within emerging markets.

This paper examines the effects of macro-level disagreement on the cross-section of stock
returns. Using forecast dispersion measures from the Survey of Professional Forecasters
database as proxies formacro disagreement, I find that high macro beta stocks earn lower
future returns relative to lowmacro beta stocks following high macro disagreement states.
This negative relation between returns for macro factors andmacro disagreement is robust
and exists for a large set ofmacroeconomic factors, suggesting that highmacro beta stocks
are overvalued compared with low macro beta stocks due to their greater sensitivity to
aggregate disagreement.

Non-Monotonic NPV Function Leads to Spurious NPV and Multiple IRR Problems: A Critical analysis using a modified capital amortization method that Resolves These Problems

This analysis is conducted using some popular non-normal net cash flow (NNCF) investment data available in public domain and other hypothetical NNCF data. The methodology is mainly based on capital amortization schedule (CAS) and modified CAS (MCAS) methods along with a comparison of the results with the common DCF method. The findings are summarised here:

a. The problem of multiple IRR is caused by reinvestment income and the resultant non-monotonic NPV function. The CAS methods clearly indicate whether there is any reinvestment. Non-monotonic NPV function of NNCF investment leads to multiple IRRs or spurious IRRs, NPVs and MIRRs. With non-monotonic NPV functions the DCF estimated criteria are all spurious.

b. The MCAS method eliminates the reinvestment thereby leads to monotonic NPV function and resolves the problem of reinvestment, spurious NPVs, MIRRs, IRRs and or multiple IRR.

c. Neither the NPV nor the MIRR could resolve the problem of multiple IRR. With normal NCFs and some of the NNCFs also, there are no reinvestment at IRR or at hurdle rate as wrongly asserted in many published works.

d. It is normal for the estimated IRR to be either ‘nil or zero or negative’ when the sum of net benefits or NCF is zero or negative. Such IRRs are consistent with NCF or net benefit. IRR of ‘zero or negative or no’ is not a weakness or problem but it reveals the real or consistent return.

e. MCAS is an appropriate method to estimate the rate of return (IRR and NPV) for both normal NCF and NNCF and resolves the multiple IRR problem and eliminates spurious NPVs and MIRRS. The estimated IRR and NPV by MCAS method are consistent with NCF.

f. Ultimately, IRR and NPV, estimated by MCAS, are the best criteria available to investment, project and cost-benefit analysis.

In summary, NPV and IRR estimated by MCAS method are equally appropriate and therefore one cannot be the best substitute for the other. The multilateral and bilateral organizations and corporate managements may wish to revisit their recommendation to use the NPV only and not the IRR while dealing with multiple IRRs associated with NNCF investments.

The ability to leverage by investing a small amount to gain exposure to a much larger investment is the key benefit of index derivatives.

Bangladesh Strategy 2018 - A challenging year for equities

If the U.S. were to increase women’s LFPR to that of other advanced countries, S&P Global Ratings estimates an addition $455 billion output could be added to its baseline forecast for growth, or alternatively could add 0.2 percentage point per year on average for the next ten years.

Equity markets continue to normalize. But midway through 2018, this normalization process is more nuanced than it was at the start of the year, exacerbated by the rise in tensions on trade and geopolitics. For investors, this has created an even greater need to focus on company fundamentals over the medium to long term.

At the equity index level, we believe that valuations are fair, and even attractive in some cases, after the recent de-rating of many stocks. We also consider the current environment for stock selection as being attractive due to the high dispersion in valuation multiples relative to history. 

 

The S&P 500 is a renowned benchmark for large-cap U.S. equities and is widely referenced as the gauge of U.S. equity performance. But what is the relevance of the U.S. market and the S&P 500 internationally?

Learn about accessing the growth of the ASEAN economies with the Dow Jones Emerging ASEAN Titans 100 Index.

S&P Dow Jones Indices produces a range of low volatility indices, covering various single-country and international markets, which offer a perspective on the returns of lower volatility equities and provide a basis for index-linked products and benchmarks globally.

INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

 
THE PROPERTY DEVELOPMENT SECTOR - LUMPS, BUMPS AND SLUMPS

In a complex and fast-moving financial world, it’s comforting to know that some sectors remain relatively easy to understand. A case in point is property development. The property developer acquires land and an architect then designs the building and obtains planning approval before passing the baton to the construction team. 

At this stage, the developer could choose to undertake marketing and sales before construction is complete or wait until the last brick falls into place. Either way, you can then calculate the gross development value (GDV) of a project or profit from the project, of which the sum of GDV, excluding the developer’s liabilities, will yield the value of the development.

To read more, download the full sector analysis for the Property Development Sector with accompanying question bank below.

This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.

JGB VIX Finishes Month at Historic Lows

We investigated the performance of different commonly used valuation parameters by market participants during the period from September 2005 to March 2018 in the Indian market.

Individual or institutional investors are always interested in devising the profitable portfolios to maximize the wealth. In the highly volatile market like Pakistan, liquidity needs to be considered as a crucial factor to price the returns. This study aims to test the basic liquidity measures known as a turnover ratio and trading volume. Using daily data from all shares listed on Karachi Stock Exchange over the period January 2005 – December 2015, equally weighted and value weighted decile portfolios are constructed. We found that the investors should take a short position in P10 with low turnover ratio and take a long position in P1 with the high turnover ratio. On the basis of trading volume, investors should take a long position in P10 with high trading volume and take a short position in P1 with low trading volume. The study is resulted in contradiction with mean-variance framework because the said portfolios fail to generate abnormal returns constructed on the basis of turnover ratio and trading volume. The results of the study are beneficial for brokerage houses in explaining the variations on portfolio performance in times and the investors to devise the optimal investment strategies in their portfolio choice decisions either investment portfolio based on liquidity turnover ratio or trading volume yields higher or lower returns.

The S&P GIVI (Global Intrinsic Value Index) Japan outperformed its benchmark index, the S&P Japan BMI, by 86 bps in Q2 2018.

In this blog, we explore the integration of carbon risk in quality factor portfolios.

The commentary deals with the future of investing and how artificial intelligence will benefit asset managers.

The S&P Green Bond Index provides a rules-based, transparent benchmark to measure the performance of the global green bond market.

The S&P/ASX Bank Bill Index seeks to measure the performance of the Australian bank bill market, with maturities of up to 91 days. The series is designed for use by institutional investment managers, mutual fund managers, professional advisors, insurance companies, and custodians.

Does Financial Market Development Explain (or at Least Predict)
the Demand for Wealth Management and Private Banking Services
in Developing Markets?

The Financial Services Development Council (FSDC) released an updated version of the “Overview of Hong Kong Financial Services Industry” in May 2018 which aims to facilitate industry practitioners and the wider public to understand and promote the strengths of Hong Kong as an international financial centre. The report covers the below sessions:

Why Hong Kong?
Being one of the world's most competitive and freest economy, Hong Kong possesses advantages like the strategic location and gateway to Mainland China, key conduit for investment and trade linked exchange rate system, bilingual legal system and simple tax regime, deep pool of talent and centre of expertise.

Asset and Wealth Management 
As the leading fund management centre in Asia Hong Kong has a diversified distribution of fund management and advisory business, an active ETF market and a sizable pension fund market. The soon-to-be-introduced open-ended fund companies structure will further promote Hong Kong as the Asian asset management centre for both conventional funds and PE funds.

Banking
Hong Kong has a robust banking industry by international standards and is regarded as the global offshore RMB hub. The Hong Kong Government is exploring with the Mainland authorities ways to open up more channels for two-way cross-border RMB fund flows.

Capital Markets
With HKEX being the leading stock exchange in fundraising (2015-2017) and diversified listed companies and investors, Hong Kong is looking to increase connectivity with Mainland investors and the Mainland market.

Insurance
Hong Kong ranks 1st in Asia in insurance density and 2nd in Asia in insurance penetration in 2016. Government has recently taken a number of initiatives to promote the insurance sector which includes the establishment of insurance authority, HK$100mn 3-year pilot programme for talent development and the adoption of FinTech on the development of personalized products.

Fintech and Green Finance
FinTech cooperation agreements signed with partners such as Australia, Dubai, Gibraltar, Singapore, Switzerland and the UK. On the other hand, HKMA, Cyberport in Hong Kong and the the Office of Financial Development Service of Shenzhen (OFDS) are exploring the feasibility of establishing cross-border soft-landing facilities in Shenzhen, encouraging Hong Kong FinTech firms to expand their businesses, and Mainland firms to establish themselves in Hong Kong.

Professional Services & Financial Infrastructure
Half of the Global 100 law firms and 1,400 regional headquarters of consultancy firms are set up in Hong Kong. With a well-established payment & settlement system and bilingual legal system, Hong Kong has the increasing prevalence of being the Alternative Dispute Resolution (ADR) forum. Meanwhile the Belt and Road Initiative will drive significant demand in Hong Kong’s world-class professional services.
 

This paper has won the Best Paper Award in Investments in FMA Asia Pacific Conference 2018 in Hong Kong. This award is sponsored by CFA Institute. See web page: https://www.fma.org/conference-awards#asia

In this paper, we use the merger of BlackRock with Barclays Global Investors to study how changes in ownership concentration affect the investment behavior of financial institutions and the cross-section of stocks worldwide. We find that other institutions begin avoiding stocks that experience a merger-related increase in ownership concentration. As a result, affected stocks experience a permanent and negative price, liquidity and volatility impact. We confirm these effects in a large sample of asset management mergers over a ten year period. The interpretation that institutions strategically avoid stocks with an elevated risk of future fragility enjoys the strongest support in the data.

The SMSF Association hosted the first SMSF Expo in Australia, attracting over 1,500 people over the three-day Expo.

The fixed income market has historically been relatively illiquid in India, as well as globally. Bond ETFs may be able to solve these issues, which may be part of the reason bond ETFs have soared in popularity in developed markets recently.

As large sums of global money flows now follow global indices, it is important to understand how global index providers decide on country classifications and country weightages.

In this paper, we discuss the potential drawbacks of only adopting a single-factor equity strategy in an attempt to capture its risk premium, which could reward market participants over time.

As the mainland China equity market continues to open to overseas investment the ability for international investors to gain access to this large and growing market has become easier.  The questions for international investors are whether they need to include China A shares in their existing China portfolios, and what to do with their existing holdings of overseas China?  This paper highlights that to gain a complete exposure to China equities investors need to diversify across all the different China shares classes.

This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
 

INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 
 
THE BANKING SECTOR

In earlier editions of the Sector Analysis series, we explored the Real Estate Investment Trust (REIT) business model and the Telecommunications sector. In this article, we examine banks and highlight the various factors and lines of enquiry that will help you make informed investment decisions.

SPHERES OF OPERATION

The role banks play in our lives is vital. Their activities underpin the efficient working of an economy – indeed, they are often among the most significant constituents of a country’s stock market. When we talk about banks, we are not just referring to the familiar branches we occasionally visit to deposit funds or withdraw cash. Banks is an umbrella term that describes an industry subdivided into several segments, including, but not restricted to Consumer Banking & Wealth Management (also known as retail banking), Wholesale (also known as institutional banking) and Treasury.

To read more, download the full sector analysis for the Banking Sector with accompanying question bank below.

This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.

CFA Institute and PRI survey on ESG integration in Asia
 
In 2017, CFA Institute and the PRI agreed to undertake an ESG investing study that entails a survey, a series of workshops and the release of four reports: one case study report and three regional reports. The aim of the study is: 

1. to understand the current state of ESG investing in listed equity and fixed income across the AMER, EMEA and APAC regions; 
2. to analyse the drivers, barriers and solutions of ESG investing.

We would like you to help us by responding to the survey: https://start.yougov.com/refer/vXwDHpNl4ZBrY2

The results of the study and the feedback from the workshops will be published in the regional reports. There will also be regional and country guidance and case studies on how investors are integrating ESG issues into their investment analysis and decisions. These reports will be readily available for all CFA members and PRI signatories.
 
The survey contains two sets of questions that should take roughly 8 – 10 minutes to complete. It covers the impact of ESG investing at the financial market level and firm level. It is being completed by participants across seventeen countries.
 
If you like to fill out the survey, please do so by 15 June. We appreciate your response.

______________________________________________________________________________


ESG Integration Explained: An Alpha-Generating and Risk-Reducing Tool

The term “ESG integration” is often used when talking about ESG investing. Practitioners new to ESG investing are sometimes uncertain what ESG integration is and how it is performed—so much so that they may not realize they are already performing integration techniques informally.

One definition of ESG integration is “the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions.” Put another way, ESG integration is the analysis of all material factors in investment analysis and investment decisions, including environmental, social, and governance (ESG) factors.

What does that mean? It means that leading practitioners are:

• analyzing financial information and ESG information;
• identifying material financial factors and ESG factors;
• assessing the potential impact of material financial factors and ESG factors on economic, country, sector, and company performance; and
• making investment decisions that include considerations of all material factors, including ESG factors.

What does that not mean? It does not mean that

• certain sectors, countries, and companies are prohibited from investing;
• traditional financial factors are ignored (e.g., interest risk is still a significant part of credit analysis);
• every ESG issue for every company/issuer must be assessed and valued;
• every investment decision is affected by ESG issues;
• major changes to your investment process are necessary; and, finally and most importantly, 
• portfolio returns are sacrificed to perform ESG integration techniques.

2017 was a strong year for equity markets globally, but we saw even stronger performance from Shariah equity markets.

Most S&P and Dow Jones Shariah-compliant benchmarks outperformed their conventional counterparts in Q1 2018, as the information technology sector led the market by a wide margin, and financials matched the returns of the broad market.

习近平总书记在第五次全国金融工作会议上宣布设立国务院金融稳定发展委员会（以下简称“金稳会”），这标志着我国现行“一行三会”的监管架构开始按照“统筹协调监管、有力有效”的要求进行方向性调整。2017年11月8日金稳会首次会议召开，明确五项主要职责。下一步，应立足我国国情、借鉴国际经验尽快做实金稳会，使其有序运转，依法履职，有效防控系统性金融风险。具体看，一是在厘清定位的基础上明确金稳会的权限；二是确定人员组成，细化金稳会下设日常支持型组织的具体架构和运转机制；三是优化运作机制。包括确立定期会议和不定期会议相结合的工作机制，信息收集、保密和透明度安排，问责机制等；四是尽快启动与金稳会相关的立法修法工作；五是按照急用先行原则，以加强资管产品监管协调和提升金融数据标准作为下一步金稳会的工作重点。

Akash Jain, Associate Director - Research & Design in conversation with Ved Malla, Associate Director at S&P BSE Indices on recent research paper.

Safeguards against the Introduction of a Dual-Class Shares Structure
 
As revealed in a survey conducted in Asia Pacific by CFA Institute in March, a majority (60%) of the 450-plus respondents have not had any experience investing in firms with a DCS structure, which signalled the urgency for and need to educate investors and the general public on the implications of DCS structures.


The survey, “Dual-Class Shares and the Demand for Safeguards,” revealed that respondents in the region were divided when asked whether DCS structures should be introduced to the market, with 53% opposing the introduction and 47% in favour. Regardless of their position on DCS, almost all (97%) respondents considered it necessary to enact additional safeguards if DCS structures are permitted.

Among different possible safeguards, more than 90% of respondents considered it appropriate to implement enhanced mandatory corporate governance measures as well as time- and event-based sunset provisions, such as automatic conversion of shares with super voting rights to ordinary voting rights. Specifically, 94% of respondents considered it appropriate to introduce a time-based sunset provision; among which, 91% of such respondents considered it appropriate to convert shares with super voting rights to ordinary shares within 10 years. Separately, 93% of respondents considered introducing a maximum voting differential appropriate; 63% of these respondents found a 2:1 maximum voting differential optimal.
 

Mistake #9: Not properly fading return on invested capital
 
Check out the video to learn more about Mistake #9 and how to avoid it.

Mistake #8: Choosing an unreasonable cost of equity
Check out the video to learn more about Mistake #8 and how to avoid it.

Mistake #7: Valuing a stock using the calculated Beta

A common mistake is valuing a stock just using whatever historical beta you find in Bloomberg or your data provider. Also failing to realize that valuation is made to infinity, hence, your beta is a forecasted beta and that forecast is to infinity. Past betas tend to regress towards 1.00x. The Beta you use for valuation is to infinity. To avoid error we use three betas: High risk: 1.25x, Average risk: 1.00x, low risk: 0.75x. If you use a beta outside of this range you have a higher obligation to justify.

Check out the video to learn more about Mistake #7 and how to avoid it.

Mistake #6: Underestimating working capital investment

Net working capital (NWC) is difficult to forecast because it’s a result of five separate forecasts: accounts receivable; inventory; other current assets; accounts payable; and other current liabilities. Unlike in accounting, in valuation we exclude cash and short-term borrowing from net working capital. Changes in NWC are volatile because that change results from five separate forecasts. NWC is a small but volatile investment item. Large deviations from past trends usually are a mistake, so explain them carefully.

Check out the video to learn more about Mistake #6 and how to avoid it.

Mistake #5: Forecasting drastic changes in cash conversion cycle

I've analyzed 17,414 companies across the world to try to understand how assets break down. Avoid huge changes in working capital items, except in rare cases of product mix or management policy. Focus much of your attention on inventory. If you forecast big changes, explain your reasons.

Check out the video to learn more about Mistake #5 and how to avoid it.

Mistake #4: Confusing growth CAPEX with maintenance CAPEX

I've looked at the largest 500 companies in Asia and their CAPEX spending in their cash flow statement. CAPEX should be roughly the same as depreciation. The starting point for overall CAPEX forecasting is 100% of annual depreciation charge and that additional growth CAPEX depends on how fast you expect the firm to grow.

Check out the video to learn more about Mistake #4 and how to avoid it.

Mistake #3: Growing fixed assets slower than revenue

Analysts often underestimate fixed asset growth. A rule of thumb is that fixed asset growth should roughly match revenue. Use the asset turnover ratio to prevent this error. It can help you see when you're unrealistic.

Check out the video to learn more about Mistake #3 and how to avoid it.

Mistake #2

In this video, Dr. Andrew Stotz, CFA talks about how underestimating expenses, causing unrealistic profit as one of the most common valuation mistakes.

It covers:
- Analyzing and forecasting 17,000 companies around the world over a 15-year period.
- Defining the value of the gross profit margin in forecasting.
- Providing real examples based on his own coffee business, CoffeeWORKS, and IKEA, etc.
- Giving other sound advice, including the idea from the fantastic book: Understanding Michael Porter.
- The idea is that to forecast changes in gross profit margin, an analyst should study the supply chain.
- Looking at some common valuation mistakes in the academic-style research.
- ABC analysis and valuation.
- Evaluating the accuracy of net profit and net profit margin forecast analysts in Asia, based on the result of 540 of the largest companies in Asia.
- Presenting expenses with the highest variability in the net profit margin.

Over the 15-year period ending in February 2018, encompassing the latter part of Japan’s so-called “lost decades” of stagnant equity returns, the equal-weight index would have outperformed the cap-weighted Japanese equity benchmark by a stonking 7.41%, annualized.

Recent SEBI guidelines have highlighted the issue of flawed benchmark usage in the Indian mutual fund industry.

The covariation of option-implied disaster concern of a stock and the market index allows me to estimate the conditional and systematic disaster concern of the stock with respect to the market. The estimated variables can be interpreted as the stock's risk-neutral conditional disaster probabilities given possible future market states. Theoretically, these risk-neutral conditional probabilities are equal to the corresponding physical conditional probabilities if the market state is the only priced factor---a sufficient but not necessary condition. Empirically, the conditional and systematic disaster concern variables strongly predict future realizations of stock disasters and returns in different market states. This suggests that the comovement of option prices between stocks and the market index carries forward-looking information on their joint tail distributions.

Akash Jain, Associate Director - Research & Design in conversation with Ved Malla, Associate Director at S&P BSE Indices on a recent research paper - Factor Performance Across Different Macroeconomic Regimes in India by S&P BSE Indices.

The S&P GIVI (Global Intrinsic Value Index) Japan outperformed its benchmark index, the S&P Japan BMI, by 2 bps in Q1 2018. Since its launch in March 2012, the S&P GIVI Japan has outperformed its benchmark index by 0.65% per year, with a tracking error of 2.32%.

In this paper, we examine the geographic revenue distribution of the S&P 500 and see what, if any, impact foreign economies and geographically driven market events may have on overall index performance. 

The biannual SPIVA^® India Scorecard attempts to capture the performance of active funds (both equity and bond funds) domiciled in India against the S&P BSE benchmarks over different time horizons. 

The SPIVA^® Japan Scorecard reports on the performance of actively managed Japanese mutual funds against their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons. 

Advent Pharma Ltd (ADVENT) is engaged in manufacturing, importing and marketing of animal health care drugs, nutritional supplements and feed additives for livestock. The company manufactures products in the form of powder, bolus and liquid dosage. ADVENT produces both Non-Biological and Biological products. ADVENT manufactures 32 products likely electrolyte, vitamins & minerals, multivitamins, zinc supplement, calcium supplement, stomachic, anticoccidial, antibiotic, anthelmintic, analgesic, appetizer for both poultry and dairy. 

The world of indexing is constantly growing and evolving and the Indian index providers have geared up to match the global pace.

The cross-section of corporate bond returns strongly depends on past bond returns. Comprehensive transaction-based bond data yield evidence of significant return reversals and momentum. Return-based factors for corporate bonds carry sizable premia and provide strong explanatory power for returns of industry- and size/rating/maturity-sorted bond portfolios. We also provide an illiquidity-based explanation of short-term reversal and show that momentum and long-term reversals are prevalent mainly in the high credit risk sector. Further, long-term reversals occur mainly in downgraded bonds (with low returns), indicating that downgrading increases the risk of holding the bonds, thus increasing the required return.

JGB VIX Spikes After BoJ Comments.

 

With increasing interest in smart beta strategies in the Australian equity market, we examined the effectiveness of six well-known risk factors, size, value, low volatility, momentum, quality, and dividends, in the Australian equity market from Dec. 31, 2004, to Dec. 29, 2017.

This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program.
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.
 

Paper for presentation at the 30th Asian Finance Association Annual Meeting to be held at Hitotshubashi Hall, Tokyo, Japan from June 25 - 27, 2018

While firms often use pension return assumptions to manage earnings, they may also use high return assumptions to signal lower pension contributions to increase internal cash flows available for profitable investments. Benefits of such internal funding can overweigh forgone tax benefits. Our cross-sectional evidence suggests that pension return assumptions can exert real effects beyond earnings management, as they predict significant increases in operating cash flows, fixed capital investments, and R&D expenditures. The stock market places significant values on pension return assumptions beyond the valuation of management forecasts of earnings, especially among firms with low profitability or large pension underfunding.

This blog post examines the SPIVA^® Australia Scorecard, which reports on the performance of actively managed Australian mutual funds against their respective benchmark indices over various investment horizons.

 

This is a conference paper accepted at 2018 Asian Finance Association annual meeting to be considered for the CFA Institute Asia-Pacific Research Exchange Award, 

The SPIVA India Scorecard compares the performance of actively managed Indian mutual funds with their respective benchmark indices over 1-, 3-, 5-, and 10-year investment horizons.

A paper submitted for the consideration of the CFA Institute Asia-Pacific Research Exchange Award.

In this report, we measure the performance persistence of Australian active funds that outperformed their peers and benchmarks over consecutive three- and five-year periods, and we analyze their transition matrices over subsequent periods.

For investors exploring the telecommunications sector, it is important to be aware of the key economic, operational and regulatory factors influencing these firms. These not only vary from country to country but also from company to company, depending on the kind of service that is being provided – fixed line, mobile or a combination of the two. Common to all are the opportunities afforded by the growth in data and the proliferation of online services. For operators in developing markets, lower penetration rates offer long-term opportunities. Meanwhile for operators in the  developed world, staying relevant by keeping pace with technological advancements is vital. In general, the sector is marked by intense competition, hefty capital expenditure requirements (at least historically) and rigorous regulatory intrusion.

There are three listed telecommunication stocks in the FTSE ST All-Share index, with a net market capitalisation of S$28.6 billion, and they accounted for 7.5% of the index as at 31 Jan 2018*. Of the three, SingTel is the largest constituent  company, representing about 90% of the Singapore telecommunication sector by market capitalisation.

The sector analysis for REITs can be found on ARX here: https://www.arx.cfa/post/Understanding-Real-Estate-Investment-Trusts-REITS-Sector-Analysis-A-Framework-for-Investors-5166.html 

To read more, download the full sector analysis for the telecommunications sector with accompanying question bank below. 

This publication qualifies for 0.5 CE credits under the guidelines of the CFA Institute Continuing Education Program.
 

Based on the paper “The Value of Institutional Brokerage Relationships: Evidence from the Collapse of Lehman Brothers” by Jianfeng Shen, Jerry T. Parwada, Kok Keng Siaw, and Eric K.M. Tan, available at https://www.arx.cfa/post/The-Valueof-Institutional-Brokerage-Relationships-nbsp-Evidence-From-The-Collapse-of-Lehman-Brothers-4536.html

This paper was recently recognized for excellence by the CFA Institute Asia-Pacific Research Exchange (ARX) at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.

Institutional brokerage has always been a many-splendored thing. Analyst recommendations, IPO allocations, block order execution, networks for sourcing liquidity—these and other equity-trading–tied services were the lifeblood of Wall Street. Fund managers, via directed trades, lapped it all up and in return fed bank-owned brokers billions in commissions. Then came the Dodd–Frank Act, which led banks to scale back on capital-at-risk, and an even more dramatically disruptive trend: the rise of automated, or algorithmic, trading.

Today, the interaction between money managers (“buy side”) and institutional brokers (“sell side”) is focused primarily on managers getting access to bank-run electronic trading venues known as “dark pools.” Though the institutional equity trading business has shrunk to a shell of its former self, an unshakable symbiosis remains between the two “sides.”

One can never underestimate the intangible benefit of a longstanding, trusted relationship. And certain mutual fund managers may want to consider those benefits when deciding whether to dole out commissions or reel them in, according to Shen, Parwada, Siaw, and Tan, whose paper, “The Value of Institutional Brokerage Relationships: Evidence from the Collapse of Lehman Brothers,” is the subject of this ARX Practitioner’s Brief.

“There is still much that we do not know about how fund managers’ performance is related to institutional brokers because it is difficult to measure relationship capital,” the authors write as they tee up their research work, which cleverly holds a mirror up to one question—“What do brokers really offer fund managers?”—by asking another instead: “How would a fund manager suffer if one of their trusted brokers suddenly was removed from the equation?”

WHAT’S THE INVESTMENT ISSUE?
Although fund managers have become less reliant on sell-side research, billions in commissions
still flow from fund managers to brokers. Analysts can’t offer the kind of insider intelligence that they once could (because of the US SEC’s Regulation Fair Disclosure), but information is still to be had, say, from a bank-facilitated meeting with a management team.

The reality is there are thousands of stocks out there to be covered but only so many analysts a buy-side firm can afford to employ. Unavoidably, fund managers continue to steer trades to institutional brokers in exchange for a bundle of premium services, which may include research, execution, meetings, conferences, and a certain level of recognition on the part of fund managers that they can rely on their trading partners in a pinch. But does all of that translate into better investment performance? If not, what’s the point of having an institutional broker?

HOW DO THE AUTHORS TACKLE THIS ISSUE?
The collapse of Lehman Brothers on 15 September 2008 was the largest bankruptcy in US history. For the authors, it was the perfect setting to answer the question, “What happens to fund managers when one of their key brokers goes out of commission?” Using data from US SEC Form N-SAR (through which mutual funds disclose to whom trading commissions are paid), the authors identified more than 730 mutual fund clients of Lehman Brothers just before the crisis; they then compared that group’s performance over a 48-month period (September 2006 through August 2010) to 366 non-Lehman mutual fund clients.

It is worth noting that Lehman’s brokerage arm did not instantaneously vanish in the collapse. The authors assert a causal impact on the Lehman mutual fund clients not from Lehman’s disappearance but rather from the severe disruption of its brokerage unit. Disrupted is one way to put it: the unit was liquidated and absorbed abruptly and chaotically into Barclays Capital. Trust evaporated. Of 25,000 employees, one-third were let go more or less immediately and another one-third left within two years. Still, one would think that certain key people were retained and to some degree some form of value was rendered. Besides, most fund managers had plenty of other brokers in their stables, and further, what value did brokers even provide in the first place?

For fund managers, assessing the value added by their institutional brokers had long been a challenging exercise. Perceptions at the time of the Lehman collapse were largely that the value of such brokers had already diminished. And yet …

WHAT ARE THE FINDINGS?
The authors found that certain types of fund managers experienced a decrease in performance when Lehman became severely impaired. They pointed to monthly return lags averaging as much as 70 basis points per month relative to those fund managers who weren’t affected. Hardest hit were smaller firms that by design had exceedingly concentrated brokerage networks; also hurt were those firms that specialized in small-cap investments and thus were overly reliant on the deeper breadth of sell-side research. Put another way, these types of small/small-cap–focused firms were the ones extracting the most value from their broker relationships. Portfolio managers, especially smaller ones, strategically channeled a large portion of orders to a few brokers to get more bang for their commission bucks. And this reliance came at a risk. Damage to one key broker resulted in a reduction in alpha.

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
Human capital shouldn’t be underestimated. Trusted brokers leverage myriad relationships built up over time to incalculable effect—sometimes you really don’t know what you’ve got until it’s gone. Downsizing doesn’t always pay dividends. It’s still important, particularly for small-in-size/small-cap–focused fund managers, to maintain close ties with institutional brokers. Although certain funds may resort to establishing new relationships, doing so involves significant switching costs and the forfeit of any relationship capital developed in the prior relationships. Overall, relationships still matter—perhaps to an ever-lessening degree in equities, but they still matter. Lehman’s collapse made for a fine experiment. But now, 10 years later, the authors’ findings, while surprising, nevertheless ring increasingly irrelevant with each passing day as more buying and selling occurs autonomously via algorithmic trading.

The authors challenge their peers to take up similar research in fixed income, where trusted human capital remains truly valuable. The give-and-take between sell side and buy side in fixed income would seem exceptionally rife for further exploration. But that is another story.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

We use Rajan’s (2012) theory of entrepreneurial firms to develop testable hypotheses and to empirically analyze how venture capitalists (VCs) help to standardize the corporate governance and management of family firms prior to an IPO. We find that VC-backing causes family members to depart more from top management positions and causes family control rights, cash-flow rights, and the separation between them to drop more relative to non-VC-backed family firms. Further, these effects are stronger when VCs have greater bargaining power or board representation. The above changes in management and governance yield correspondingly higher IPO firm valuations and post-IPO operating performance.

The market systematically underweights price-relevant information in high-quality analysts’ forecasts and recommendations due to its fixation on the consensus, despite the persistently superior forecasting ability of these analysts. In particular, we find that only the high-quality analysts’ recommendation changes and forecast dispersion predict the firm’s stock returns and return volatility one month ahead. The PEAD phenomenon occurs only when high-quality analysts are relatively uncertain about the firm’s performance. The information provided by analysts at the firm level aggregates to the market level, so that high-quality analysts’ recommendation changes and normalized forecast dispersion predict future market returns and volatility, while the information provided by other analysts does not. Our findings conclude that the market’s focus on the consensus earnings forecast and its negligence in differentiating among analysts according to quality has significant negative economic implications.

Berger Paints Bangladesh Limited is the largest paint manufacturer and distributor in Bangladesh. Berger Paints manufactures world class paints for all kinds of substances and also provides different support services with more than 250 years of rich heritage. Louis Berger from Germany started dye and pigment making business in 1760. The company was introduced as Louis Berger & Sons Limited.  The company grew and expanded rapidly with a strong reputation for excellence in innovation and entrepreneurship. Production of dyes and pigments evolved into production of paints and coatings, which till today, remains the core business of Berger. Berger expanded globally by establishing branches all over the world and through mergers and acquisitions with other leading paint and coating manufacturing companies. Berger Robbialac, the flagship brand of Berger Paints, is the number one paint brand in Bangladesh. The product line of Berger Paints includes decorative, industrial, marine, power coating, adhesive, wood coating, textile paints and construction chemicals.

This paper examines the applications of U.S. sector indices in a portfolio context, from the perspective of both international and domestic investors. 

This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

Based on the paper “Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs” by Tālis J. Putniņš and Joseph Barbara, available at https://www.arx.cfa/post/Heterogeneity-in-how-algorithmic-traders-impactinstitutional-trading-costs-4550.html

This paper was recently recognized for excellence by the CFA Institute Asia-Pacific Research Exchange (ARX) at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.

Traversing the dense, tangled underbrush of an otherwise mostly explored section of securities terrain—the impact of automated, computerized trading—two researchers have demonstrated why it doesn’t pay to ignore the nuances of a complicated subject. Literally, it can cost billions to not heed the observations of authors Putniņš and Barbara, whose paper, “Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs,” is the subject of this ARX Practitioner’s Brief.

The July 2017 paper is a wake-up call for institutional investors who may not be as vigilant as they think they are when it comes to getting best execution on block orders, if only because their defenses might well be focused on the wrong bad actors, that is, high-frequency traders (HFTs). HFTs, argue Putniņš (University of Technology Sydney) and Barbara (Australian Securities and Investments Commission), are unfairly stigmatized and singled out among computer-program–based or algorithmic traders (ATs) for driving up big-block trade implementation costs when in reality, according to an exhaustive study of trading data, their impact is negligible.

In support of their argument, Putniņš and Barbara fully mapped and surveyed an algorithmic trading community comprising both HFTs, who transact a large number of orders at eye-blink speeds, and non-HFTs. In the process, they uncovered a variety of species and motives, some of which are even beneficial to institutions. On the surface, the ground the authors covered would seem cut and dried: grievances about HFTs have been voiced repeatedly, to the point where no one questions who in this narrative wears the black hat and who wears the white.

What the authors sought to understand was whether the complaints against HFTs had merit. Was there more to the story than what generally has seeped into the mainstream media via books such as Michael Lewis’ Flash Boys?

WHAT’S THE INVESTMENT ISSUE?
The rise of electronic equity trading venues at the dawn of the 21st century emptied the trading floors, drove down execution costs, and opened the way for technological advancements, such as order-implementation speeds measured in milliseconds, that few could have ever imagined. By the time of the 2010 flash crash, the fundamental manner by which stocks were traded had radically changed. Although a few die-hard specialists were still clinging to their Big Board posts back on that spring day in 2010, the flash crash made it abundantly clear that algorithms had taken over. At the center of regulatory scrutiny post-flash crash was high-frequency trading, the best-known and most controversial form of algorithmic trading.

With alpha scarce and trading venues fragmented, fund managers increasingly focused their energy on improving execution costs. For decades, the buy side railed against specialists front-running their institutional orders. Now, institutions face a new predator on their blocks: HFTs. These automated strategies account for more than half of the total volume during any given session, and some institutional investors claim they impede liquidity.

As a result of concerns about being preyed upon, institutional investors are forced to break large orders into smaller pieces that need to be traded across multiple venues, making them more susceptible to HFTs. In turn, new liquidity pools and networks have been created to provide a safe space. Yet, as Putniņš and Barbara point out, some studies show that, at best, high-frequency trading and algorithmic trading lower spreads and improve price discovery, and at worst, represented a benign force. So are HFTs good, bad, benign, or what?

HOW DO THE AUTHORS TACKLE THIS ISSUE?
Putniņš and Barbara created a data cross-section reenacting trading of the largest 200 Australian equities (ASX 200 Index constituents) over a 13-month period (1 September 2014 through 30 September 2015), amounting to 273 trading days.

Using unique trader-identified regulatory audit-trail data, they identified a subset of 187 of the most active nondirectional traders (AT/HFT) and measured their activity (roughly 25% of Australian volume on any given day) in terms of the impact on the execution costs for institutions, which control about 80% of Australian large-cap stocks. “Origin of order” identifiers, collected by the Australian Securities and Investments Commission, allowed the authors to reassemble smaller (child) orders back into larger (parent) ones.

Upon close inspection, the AT/HFT gang of 187 proved decidedly heterogeneous. Putniņš and Barbara categorized these traders across a spectrum, ranging from those who drove costs up the highest (toxic) to those who lowered them the most (beneficial).

WHAT ARE THE FINDINGS?
The 12 most toxic traders increased the average order-implementation shortfall cost by 10 basis points or nearly double the cost without the harmful behavior. At the same time, the 14 most beneficial traders systematically decreased costs, effectively, in aggregate, countering the negative impact. However, this offset in aggregate would not have come as any consolation to those individual buyers and sellers specifically impacted by the toxic traders. “An investor that disproportionately interacts with harmful AT/HFT faced higher costs,” concluded the authors.

Interestingly, HFTs were no more likely to be toxic than non-HFTs. And even those ATs/HFTs who drove up costs may have done so unintentionally, merely by trading on the most common entry and exit signals, behavior that could be described not so much as exploitative as lemming-like.

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
First, for buy-side asset managers, it bears underscoring that execution matters. Potentially large cost savings can be realized from trading in a manner that avoids overexposure to toxic counterparties. Such savings could mean the difference between a fund that performs well and one that underperforms.

Second, in terms of execution strategy, more caution should be exercised in smaller stocks, where toxic traders tend to be more active.

Third, effort spent avoiding HFTs may be in vain because many HFTs are beneficial and can reduce institutional execution costs. At the same time, toxic non-HFTs should be avoided if one wants to minimize execution costs.

Finally, from a regulatory perspective, the empirical measurement tools featured in this research could be used to better monitor markets and identify predatory trading behavior.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

Since its first publication 16 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate.

This paper investigates the characteristics and performance of family investment trusts across the world. Their unique combination of family wealth and expertise and investments in stock markets make them a special asset class for retail investors. We find that families are strongly involved in terms of stake and management both in their trusts and the trust’s investments. We further document a significant outperformance of family investment trusts globally and especially in Europe and a more contained performance on Asian markets. Trust characteristics and the economic environment appear to have some influence on performance with European multi-holdings displaying a 9% risk-adjusted performance during crises.

The SPIVA Australia Scorecard reports on the performance of actively managed Australian mutual funds against their respective benchmark indices over 1-, 3-, 5-, 10-, and now 15-year investment horizons.

INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 
 
REAL ESTATE INVESTMENT TRUST (REIT) SECTOR 

REITs are vehicles that own and typically operate a portfolio of income-yielding real estate assets. Modelled along the lines of unit trusts, REITs allow for funds to be pooled from a group of investors. Such a structure provides retail investors with several advantages: a low-hurdle of entry and exposure to a diversified pool of real estate assets with a high level of liquidity, which would not otherwise be possible with direct investing. 

Most REITs are publicly listed, and declare above 90% of their earnings as dividends to fulfil certain benefits accorded to REITs by the local securities regulator. As such, REITs provide a stable source of recurrent income, which serves as a yield play rather than an investment avenue for reaping capital gains. We believe an effective and accurate fundamental analysis can help the retail investor determine if the recurrent income is stable and/or trending upwards over the long term. 

A REIT generally focuses on a specific category of property for investments.  Some common classifications of REITs include: Office & Commercial REITs, Retail REITs, and Industrial REITs.

To read more, download the full sector analysis for REITs with accompanying question bank below.

This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
 

Rich Thinking: Smart women and risk-taking

The topic of this year’s study is smart women and risk-taking. Do smart women take risks? What types of risks do they take? Why do they take a risk? Do they prepare before taking a ‘big risk’ or do they just jump right in? What have they learned from taking risks? This is research that is 100% based on qualitative interviews. My previous research has shown that women are interested in learning about financial matters through the sharing of real-life stories. Conducting face-to-face meetings and listening intently is, in my view, the most powerful way to access much-needed data about women, finance, investing and risk.

This paper highlights the salient features of S&P BSE Bharat 22 Index, its objective, and its
characteristics.

JGB VIX Gets a Boost From the BoJ

We find compelling evidence that integrating ESG (Environment, Social and Governance) into ongoing investment practices in Australia does not harm returns, limit diversification nor adds additional risk to portfolios and investments formed from high ESG rated firms. Portfolios formed from high-rated ESG firms can provide significant outperformance, superior diversification and lower overall portfolio risk when compared to portfolios comprised of low ESG rated firms. The inclusion of ESG into investment strategies in Australia is consistent with maximising shareholder value, minimising risk and is consistent with the fiduciary responsibilities required of professional asset managers and owners. 

This paper presents the most comprehensive study to date on commodity futures in China. We find that passive long-only investments deliver poor economic returns. Among 12 long-short strategies examined, momentum and term structure strategies generate statistically significant economic profits in nearby and distant contracts, illiquid markets and randomly selected commodity sectors. Our results cannot be attributed to aggregate market risks, none-tradable macroeconomic risks, commodity specific risks, market sentiment, transactions costs and data-snooping. We show that liquidity, anchoring bias and regulation induced limits-to-arbitrage provide at least a partial explanation. Furthermore, our findings suggest that long-short strategies that exploit past returns and hedging pressure make excellent candidates for hedging against movements in traditional assets in China. This paper also highlights the urgency to establish a CFTC-type repository for positions data that distinguish hedgers and speculators. Such data are essential to assess the effectiveness of risk transfers in these markets.

As of Dec 31, 2017, the total AUM of the ETF industry stood at INR 78,000 crores (USD 12 billion), with an annualized growth rate of 76.6% during the past four years.

New research published by Moxie Future shows that women are leading the way when it comes to investing responsibly with almost two thirds of those surveyed expressing an interest in pursuing investments that have a beneficial impact on society.
The report entitled, “Understanding Female Investors: Women Using Capital to Change the World” (#UFI18) was commissioned by Moxie Future to better understand the investment preferences, habits and motivations of women and their interest in responsible investing, which entails channelling funds into companies and industries that are creating positive social and environmental change.  
 “Our survey shows that female investors want more than just good financial returns,” says Moxie Future’s Founder Ms. Jessica Robinson. “In addition, increasing numbers of professional women want to make investment decisions that positively influence the world and are aligned with their values.”
 In total, 2,536 women aged 18 to 65 were surveyed across the five major markets of Australia, China, Germany, United Kingdom and the United States through online interviews conducted between March and April 2017.
Findings from the research highlight how female investors in China show the greatest interest and concern when it comes to responsible investment. In total, 84% of women surveyed in China expressed that they are motivated to be a responsible investor.
Among those surveyed, globally 69% of women indicated that they would be interested in investing responsibly if suitable products were available. Interest in responsible investment products is notably highest among women in China (91%) and the United States (74%). 
Across all markets poverty, income equality, healthcare and climate change are causes that matter the most to women when it comes to investing their wealth.
In addition, while the research found that women are motivated, there are a number of barriers to be addressed. Many women view their lack of time, knowledge, understanding and distrust of information regarding investment products as the key obstacles in the responsible investment process. Within China however, the leading concern is lack of tested products in the market.
“The research shines a light on the mindset of today’s female investors from their priorities when making investment decisions to the concerns that may be deterring them from investing responsibly,” says Ms. Robinson.
“While our study has found that women are generally positive about responsible investing, it has uncovered the practical difficulties that they face when committing their money, not least a perception among women that the financial services industry is failing to offer advice that aligns with their goals and interests.
“What this tells us is, not only is there a disconnect between women and the financial services sector, but there are untapped opportunities for the industry to work more closely with female investors to deliver products and services specifically designed around them. This includes catering to the investment preferences of women and addressing their needs in a more meaningful way.”
With regards to China, Ms. Robinson attributes the higher levels of interest in responsible investing to the fact that Chinese women are facing more visible challenges, particularly environmental threats which may explain why they are more motivated.  
“This is not forgetting that in terms of financial confidence, our research has uncovered that Chinese women tend to be the most bullish in their own investment abilities,” she continues.
Results from the research also point to how of the five markets surveyed, women in Germany appear to be the most lacking in confidence. Concludes Ms. Robinson, “When it comes to responsible investment opportunities, confidence matters because the higher the level, the more likely female investors are to be concerned and engaged.”
To view a full copy of the report, please see “Understanding Female Investors: Women Using Capital to Change the World.” HONG KONG, 30 January, 2018 – New research published today by Moxie Future shows that women are leading the way when it comes to investing responsibly with almost two thirds of those surveyed expressing an interest in pursuing investments that have a beneficial impact on society.
 
 

Vynn Capital's view on venture capital investment strategy.

To protect market integrity, regulators across the globe have applied trading constraining mechanisms like market-wide circuit-breakers, price limits, stock-based trading halts and the like. In June 2001, Securities Exchange Board of India (SEBI) introduced the market-wide circuit-breaker mechanism for Indian markets in a similar manner to other markets. Till date the Indian market has applied these marketwide circuit-breakers six times. This study attempts to examine the impact of market-wide circuit-breakers on trading activity and volatility. We consider data of Nifty closing price, turnover and number of shares traded for six different windows with event day, event plus 1-3 days, and 10 days average. The study estimates intraday return, overnight return high low volatility and day time volatility followed by T-test to measure the significance difference between average turnover, number of shares traded, high low and daily volatility with event day. The study finds that the effect of market-wide circuit-breaker continues up to three post-event days.

The S&P Geographic Revenue Exposure Indices seek to capture the performance of companies with revenues centered on specific target regions or countries.

In recent years, sustainable investing has moved to the forefront of the global agenda.

Extant literature suggests that firms that follow good corporate governance (CG) practices maintain lower cash holdings. However, emerging literature suggests that employee-friendly firms maintain higher cash holdings. Thus, the firm’s commitment towards employees, considered as a key stakeholder, seems to contradict with the good CG practices. Our study finds that the cash ratio is negatively related to good CG practices but not to employee-friendly practices. However, employee-friendly firms maintain lower cash holdings in the countries that have strong labour laws and regulations. This suggests that benefits provided at the country-level complement the benefits provided by the firm.

In this paper, an attempt has been made to examine the components and sources of investment performance in order to attribute it to specific activities of Indian fund managers. It also attempts to identify a part of observed return which is due to the ability to pick up the best securities at given level of risk. 

The rise of passive management was the consequence of active performance shortfalls.

As Asian market participants have become more aware of the importance of portfolio diversification, they have been paying more attention to the U.S. corporate bond market. 

For this paper, we compared sector composition in factor portfolios and examine performance characteristics of factors in different macroeconomic regimes, including market cycles, business cycles, and investor sentiment regimes in India.

Fusion Stock Analytics is the composition of  7 dimensions to analyze a stock including: Technical, Fundamental, Calendar Effect, Corporate disclosure effect, Mechanical (Trading) performance analysis and analysis of statistical (risk parameter). All together the offer is said "A Techno-Fundamental Psychoanalytic approach of Stock valuation"

JGB VIX Faced Year-End Downward Pressure

The S&P Pan Asia Bond Index, which seeks to track local currency bonds in 10 countries and is calculated in USD, reversed its loss in 2016 and delivered a total return of 7.86% in 2017. Meanwhile, its yield-to-maturity widened 123 bps to 4.64% YTD. The S&P Pan Asia Corporate Bond Indexoutperformed the S&P Pan Asia Government Bond Index and gained 8.30% over the same period. The size of Asia’s local currency bond markets, as measured by the S&P Pan Asia Bond Index, continued to expand and grew 17% to reach USD 12.1 trillion in 2017.

With the growing appetite for emerging market debt and in the hunt for better yields, Indonesian sovereign bonds have been popular this year.

International small caps represent a meaningful portion of the global equity opportunity set, have historically generated strong absolute and risk-adjusted returns, have been less volatile than U.S. small caps, and have relatively low correlations to U.S. equities and other asset classes.

Singer Bangladesh Limited manufactures and markets color televisions, refrigerators, home appliance, furniture, sewing machine. The company is also engaged in marketing of electric cables, computer and instant power supply, kitchen appliances, other consumer electronics and household appliances of other brands.
 

The belief that economic growth is possible without lowering carbon emissions is becoming harder to sell by the minute.

This paper studies the economic motivations for stock splits in the Korean stock market. Specifically, we investigate whether a stock split can be used not only as a tool to reveal information, but also as a manipulation tool, by dividing sample firms into two groups between the firms that split stocks with and without subsequent corporate events.

The speed of price adjustment hypothesis suggests that some stocks tend to adjust faster to market wide information than others. This paper uses the speed of price adjustment hypothesis to identify firm level characteristics that determine the information assimilation pace of individual stocks in the Indian markets. The research sample consists of 64 stocks with yearly data for 10 years, a total of 640 firm-year observations.

Previous studies have demonstrated style momentum within equity markets. This paper reports significant momentum profits among style portfolios of multiple asset classes, showing that style momentum is not merely an equity market phenomenon, but a cross-asset phenomenon. A decomposition of profits reveals that profits are mostly attributable to positive autocorrelations of style returns.

This paper employs the autoregressive conditional jump intensity model, incorporating a forecast error, to investigate the relationships between the changes in the implied volatility and the relevant determinants in the Taiwan market. We further apply the orthogonality test to explore forecast error and content of information. The empirical results show that the changes in the implied volatility are affected by the contemporaneous returns, lagged returns, lagged changes in the implied volatility, contemporaneous daily changes in the realized volatility and lagged forecast error.

This study tests the effect of turnover shocks on the asymmetric autoregressive behavior of index returns. The methodological approach adopted in this study is based on the relationship between market return and trading volume. This study first uses a vector autoregression (VAR) to model two market trading volume series by controlling for the variation associated with the sign and magnitude of both week t and week t - 1 or week t + 1 market returns.

By comparing liquidity and price discovery effects, the market microstructure literature insists that in-the-money options (ITMs) are informationally inferior to out-of-the-money options. However, such an argument is at odds with the anecdotal point that ITMs may be more effective for hedging future volatility risk. ITMs are driven by institutional investors, who are considered to be informed traders, and can provide significant hedging benefits such that a hedging with ITMs requires fewer options and less frequent rebalancing.

This study investigates the information content of implied volatilities extracted from over-the-counter individual equity put options to explain credit default swap (CDS) spreads in the Korean market. Using out-of-the-money put options, we demonstrate that the implied volatility dominates historical volatility in explaining CDS spread variations and that both the predicted future volatility and the volatility risk premium inferred from the implied volatility are significant determinants of CDS spreads in an out-of-sample approach.

This study investigates whether accruals quality (AQ) influences the expected returns of stock investors. We employ estimates of the implied cost of equity capital (ICOE) as the expected returns of stock investors because they are well specified ex ante without the need for noisy realized returns. Extending a current debate on AQ pricing, we control for several properties of analysts’ forecasts and find that AQ is positively and significantly related to ICOE.

Debt is an effective mechanism to mitigate agency costs in relieving manager–shareholder conflicts. Similarly, debt maturity choice allows the firm to discipline entrenched managers. In this paper we show cross-country evidence that national culture, along with corporate governance factors, influences the lender’s (or the borrower’s) debt maturity choice. Uncertainty avoidance index, masculinity, and long-term orientation indices are negatively related to overall debt maturity in a country.

In this study, we empirically test whether firms that belong to a business group ( chaebol ) behave differently from stand-alone firms in their decisions regarding internal corporate governance, given product market competition. The existing literature has ignored the possibility that firm characteristics may differentially affect this relationship. We find that the member firms of chaebol maintain better internal corporate governance in a non-competitive environment, whereas stand-alone firms do so in a competitive environment.

This study examines the determinants of Chief Executive Officer (CEO) turnover in Chinese state-owned firms. Based on a sample of 1 555 turnover cases among listed firms in China during the period 1999–2003, we obtain three main results. First, CEO turnover is negatively related to the sales performance but not the profitability of the core business.

In China’s state-dominated financial system, many firms, especially non-state-owned or private organizations, face serious restrictions in gaining access to bank and equity market financing. This kind of highly discriminatory financial repression policy has induced some unique post-takeover financing activities, which are consistent with the desire to acquire firms in order to capitalize on their privileges in getting access to external finance.

This paper examines the effects of a series of regulatory changes that facilitated business groups in Korea to switch from a complex circular shareholding or “loop” structure to a more simplified and transparent pure holding company structure. Since these changes are likely to affect intra-group dynamics of member firms in terms of their interdependence, we focus on changes in risk characteristics and how they are reflected in initial announcement returns.

This paper investigates the long-term value implication of business group affiliation. In order to secure comparability between business-group-affiliated firms and independent firms we employ the matching estimator technique, which selects firms with business characteristics most similar to chaebol firms to create a control group of firms. We find that the long-term performance of chaebol -affiliated firms is superior to that of control firms although the two groups are very similar at the beginning of the sample period.

Executive stock options (ESOs), serving as a compensation mechanism, are widely used in business administration. ESOs link managerial wealth to firm performance and shareholder wealth. The intrinsic value of ESOs is determined by the difference between the stock price and the strike price. Executives, as a result of self-interested incentives, would therefore manipulate firms’ reported earnings for influencing stock prices.

The purpose of this study is to investigate the relationship of value-based performance measures – economic value added (EVA), market value added (MVA) and cash value added (CVA) – with corporate governance using data on 41 corporations listed on the Istanbul Stock Exchange-100 Index. Multiple panel regression is used covering the 1998–2007 period.

The split-share structure is a unique characteristic of corporate ownership in China, and is often linked to poor firm performance and inefficient corporate governance. In this paper, we investigate market reactions around several important event days during the process of the split-share structure reform (share reform) in Chinese listed firms. The market reacts differently to different events during the process.

This paper examines whether the problem of high information asymmetry lowers the positive impact of board independence on firm value. Independent directors are outside directors who have never had business and professional ties with the firm. We adopt various proxies for information transaction costs from the market microstructure literature and traditional measures, such as firm size, firm age, number of analyst reports, governance scores, credit ratings, and institutional ownership, to see how they interact.

This study investigates how executive stock-based compensation affects the payout policies of a company. Stock bonuses, which are dividend-protected, induce executives to pay out cash dividends. Conversely, stock options, which are not dividend-protected, discourage the payment of dividends. We posit that the structure of executive stock-based compensation plays a crucial role in determining the payout policies of a firm, particularly for those firms with higher percentages of institutional investors and shareholders with ultimate controlling power.

This study investigates the role of corporate governance in the relationship between investment opportunities and dividend payouts. The study sample is divided into strong and weak governance regimes to investigate outcome and substitute effects, where the former stresses the negative relationship between investment opportunity and dividend payouts in a strong governance regime while the latter emphasizes the positive relationship between the two in a weak governance regime.

Implied volatility from the Black and Scholes ( Journal of Political Economy 81, 1973, p. 637) model has been empirically analyzed for the forecasting performance of future volatility and is well known to be biased. Based on the belief that implied volatility from option prices can best estimate future volatility, this study identifies the best way to derive implied volatility to overcome the forecast bias associated with the Black–Scholes model.

Using 1640 observations of completed acquisitions from 1996 to 2003, we investigate the relation between corporate governance and returns to bidders and targets. We find that the cumulative abnormal returns for acquirers are significantly negative upon announcement of acquisitions for the full sample and for the related and diversifying subsamples. However, we find that diversifying acquisitions, when conducted by firms with a higher percentage of outsiders on the board, improve returns.

Using unique information obtained from Korea regarding syndicates’ underwriting of initial public offerings (IPOs), this paper examines how syndicates are formed into syndicate structures, including fee distributions among syndicate members, and also investigates how they affect the IPO process, such as the underpricing of IPOs. Reciprocal participation among syndicates affects the formation of syndicates, and the formation strongly depends on the regulation of underwriting.

We present a model of the bid and ask quotes in the equity option market when option payoffs are asymmetrically distributed due to the limited liability of the option. We then provide empirical evidence for the actively traded Chicago Board Options Exchange stock options, which is consistent with the implications of our model.

Unsolicited ratings are credit ratings of firms that have not requested rating evaluation and, therefore, do not pay fees. Accordingly, unsolicited ratings are issued solely at the discretion of rating agencies based on public information. Given the controversy surrounding unsolicited ratings raised in some published studies as well as by Japanese firms, we examine whether the market extracts any new information from unsolicited ratings.

In this paper, we examine the asset allocation and consumption policy of the investor with habit formation, given a set of publicly available information. We use time-separable preferences as a benchmark for comparing decisions made by an agent with habit formation. We find that external habit combined with the available information plays a prominent role in both asset allocation and consumption choices for the agent with habit.

In this study, we attempt to determine whether or not Korean firms have failed to fully utilize the tax benefits of debt, particularly in the aftermath of the 1997 Asian financial crisis. Results suggest that underleveraged firms lost significant tax savings that would have been available had they increased debt levels to their kink.

This paper investigates the impact of business group structure on investment activities by group-affiliated companies. Using data on Korean business groups called chaebols we compare changes in investments across chaebol and control firms throughout the global economic crisis. To control for confounding effects, we applied an empirical strategy that identified a group of the most comparable control firms in terms of observables and eliminated the selection bias caused by unobservables.

A theoretical model is built to explore the organizational form of a diversified conglomerate, which depends on the competitive structure of the product market. The conglomerate may choose the form of either a business group, which consists of plural legally independent firms, or a multi-division firm. The analysis shows that, because of larger outside financing capacity, a business group generally needs less internal capital and invests more than a multi-division firm.

This study investigates the contribution of star funds to fund families in the Korean fund market. We find that star-fund families that feature either star funds or higher relative holdings of star funds attract more new investment than non-star-fund families. Our test shows the existence of a spillover effect from star funds to non-star funds that helps non-star funds and newly launched funds in the family to raise fresh capital.

It is very important to evaluate fund managers who are presumed to have access to superior information (either from inside knowledge or superior analysis) as compared to other investors. As Dybvig and Ross point out, however, the majority of performance measures thus far developed can yield distorted performance appraisals, as the portfolio mix of assets being evaluated is held constant.

This paper proposes revisions in the expectation of future money growth as a macroeconomic state variable in the perspective of Merton’s ( Econometrica , 41, 1973, 867) intertemporal capital asset pricing model, and examines whether the factor related with innovations in the expectation of future money growth is priced on stock returns in the Korean stock market after controlling for the market factor, Fama and French’s SMB and HML , and the momentum factor.

This article uses the approaches of ( Journal of Finance 53, 1998, 1775) and ( The Review of Financial Studies 19, 2006, 1531) to study the influence of overconfidence on the trading behavior of investors based on the accounts of 1185 individual investors in the Taiwan market. In addition, private information, interaction effect, and credit are treated in the analysis to establish a model of psychological bias and trading behaviors.

Using published studies in 24 leading finance journals across 21 years (1990–2010), we investigate the financial research productivity among Korean academic institutions and scholars. Overall, 61 Korean universities contribute a total of 158.50 weighted articles and make 382 appearances during the full sample period. The five most productive Korean universities are Korea Advanced Institute of Science and Technology, Korea University, Seoul National University, Yonsei University (Seoul), and SungKyunKwan University.

Asset prices depend on two elements: the dynamics of the state variables and the pricing kernel. Traditional term structure models differ in factor dynamics. However, most of them imply a log-linear pricing kernel. We investigate empirically the role of factor dynamics and pricing kernel in pricing interest rate derivatives using a nonparametric approach.

The present study proposes a three-factor model using spot rates as proxies for the state variables of the term structure of interest rates. Empirical analysis is carried out on the in-sample explanatory power and the out-of-sample prediction ability of spot-rate models, and comparison is made between the modified Macaulay duration and spot-rate duration hedging for bond portfolios.

Share repurchases have become a popular means of paying out cash to shareholders, and one of their often cited motives is their signaling of undervaluation of repurchasing firms. Dividends are often viewed as signaling future earnings. However, in theory, signaling of current undervaluation should be closely related to signaling of future cash flows.

This paper focuses on abnormal chief executive officer (CEO) structural power over top executives and examines its impacts on CEO pay for performance sensitivity and firm performance. We find that greater abnormal power is associated with weaker firm performance, but the relation is significant only when monitoring by external shareholders is weak.

This paper applies an efficient method for Korean investment funds that controls luck in fund performance measurement and classification. Unlike the case of US mutual funds, a large proportion of Korean investment funds are estimated to be skilled funds. Furthermore, the Korean investment fund industry does not show a conspicuous pattern of decline in the proportion of skilled funds over time as shown by its US counterpart.

This study uses a unique dataset to examine whether the trade types of different classes of traders in the Taiwan Stock Exchange Capitalization Weighted Stock Index futures market convey different information regarding underlying spot index returns and volatility. The evidence shows that open trading by foreign institutional investors conveys more information regarding the underlying index, and open selling of individual investors is more likely to introduce noise signals to the spot market.

This study examines the effects of scheduled macroeconomic news announcements on the implied risk-neutral distribution (RND) from option prices. Using the KOSPI200 index options market as the sample market, this study investigates whether the implied RND responds to scheduled macroeconomic news announcements from South Korea and the US. We select six important macroeconomic news announcements each for South Korea and the US and classify them as good news and bad news according to the KOSPI200 index return on the day of the announcement.

In this paper, we theoretically examine whether, and why, more informed traders (for example, foreigners) in an emerging market earn more than their informational advantage would justify. Anecdotal evidence suggests that once foreign traders establish themselves in the market, they outperform other informed traders, such as local institutions, even in the absence of any informational advantage.

At the opening of each trading day, the Korean stock market closely follows the overnight US stock market performance, and yet the subsequent intraday return is negatively related to the US market. Using the minute-by-minute return data, we find that the return reversal is gradually magnified throughout the day, which suggests that the Korean market systematically misprices the overnight US shocks.

This study aims to investigate the role that institutional investors played exploiting the split share structure reform launched in 2005 in China. Since that time, non-tradable majority shareholders have had to compensate minority tradable shareholders to obtain the rights to transfer their shares in the capital markets. The compensation ratio proposed by non-tradable majority shareholders needs to be approved in at least two-thirds of the votes cast by tradable shareholders, among which the most powerful are the institutional investors.

This study examines the effect of changes in the Korea Stock Exchange Price Index to determine the main cause of abnormal return behavior. It tests five prevailing hypotheses individually and simultaneously using both added and deleted stocks during the event window. We find evidence of permanent price effects and of temporary price pressure around the effective date.

This study examines the long-run performance of 936 Chinese initial public offerings (IPOs) over the period 1996 to 2005 (the post-issue return evidence ends in June 2008). Using a number of empirical methods, including event-time and calendar-time approaches based on a size and industry matching firm benchmark, we find a significant long-run overperformance using the equal-weighted buy-and-hold abnormal returns, although not for the value-weighted returns, suggesting that the performance of small-size IPO firms is superior to that of large-size IPO firms.

Taiwan eliminated double taxation of dividends in 1999, and allowed firms to repurchase stocks from July 2000. Taiwanese firms tend to pay dividends as opposed to repurchasing stock, even with zero tax on capital gains, and firms pay larger dividends after the elimination of double taxation of dividends. The relation between dividends and director ownership has been reinforced by the elimination of double taxation of dividends.

We examine the trading behavior and performance of foreigners, local institutions, and individual investors in the Korean stock market. The key research issue is whether the commonly-documented information disadvantage of foreign investors translates into their underperformance relative to local institutional and individual investors. Our results show the opposite, that the stocks foreigners buy significantly outperform the stocks they sell in terms of both stock returns and operating profitability, leading to the significant outperformance of foreigners’ trading strategies over those of local investors.

Using 1043 IPOs from January 1997 to June 2002, we examine whether syndicate participation is reciprocal and also whether such reciprocity is beneficial to issuers. Our empirical results show that reciprocal syndicates appear to make a lower level of price revision (lower information production), which lowers the amount of capital to be raised through going public, and that the lead underwriter in the reciprocal syndicate provides less analyst coverage.

We examine focused funds from 2002 to 2008 to see whether they offer superior performance to Korean equity funds without survivorship bias. Prior studies show that fund managers might allocate their funds to specific industries or focused securities to achieve superior performance. However, after controlling for various fund characteristics and using several alternative measures, our results show that fund performance has a positive relation to diversification.

In this paper, we generalize Bernard and Thomas’s [ Journal of Accounting and Economics 13 (1990), 305]“delayed response” hypothesis as an explanation of post-earnings-announcement drifts. By applying a modified version of Beveridge and Nelson’s technique of decomposing a time-series process of earnings into permanent and temporary components, we estimate the relative weight to proxy for investor perception on the temporary component of earnings.

Trade credit is vendor financing offered by a supplier to increase the sale of its product. Trade credit prevails among riskier borrowers, in competing with bank loans in the corporate loan market. The present paper models the economic incentive for product suppliers to extend trade credits to relatively riskier borrowing firms that might not be able to obtain financing from commercial banks.

Extant published literature reveals that sound corporate governance practices enhance firm value. However, how it affects firm value remains largely unexplained. This paper addresses this question by providing a direct link between corporate governance practices and strategic corporate decisions, such as investment, financing, dividend policies, and cash holdings. Applying a unique dataset of firm-level corporate governance practices obtained from the Korea Corporate Governance Service in Fama and French’s ( The Journal of Finance , 53, 1998, 819) framework, corporate governance practices are expected to influence firm value by enhancing value implications of firm-level decisions.

This paper examines the theoretical restrictions on alternative term structure models in assessing sovereign borrowing strategies. Our approach draws upon Hahm & Kim’s (2003) cost–risk analytic model of sovereign debt management within a mean–variance framework. To explore the effects of different interest rate modeling strategies on government debt portfolio selection, two models are considered; namely, the time series-based dynamic Nelson–Siegel (DNS) model proposed by Diebold & Li (2006) and the DNS model with arbitrage-free restrictions proposed by Christensen et al.

The paper addresses the influence on asset prices of agents’ disagreement regarding asset volatility. Using a stochastic volatility model and assuming that the market is complete, a state-price density incorporating heterogeneous beliefs in volatility is derived and used to compute asset prices. How agent disagreement regarding volatility influences asset prices and volatility is discussed and empirical results are provided.

This paper creates monthly investor sentiment indices for Korea and provides evidence that these indices have the power to predict the subsequent 6-month buy-and-hold returns. In addition, the paper shows that investor sentiment positively affects market response to stock split announcements by using stock splits on the Korea Exchange from 1999 to 2006.

This paper examines the relation between dividend yields and stock returns in the Korean market, and provides some valuable implications in light of certain institutional features of the Korean market that differ from those in the USA and other countries. For five portfolios ranked by the long-term dividend yield we find that stocks with higher dividend yield earn higher risk-adjusted returns.

Using data drawn from the Korea Exchange, the present paper examines the bidding firm’s stock price reaction to the announcement of a merger bid. The results indicate that bidders gain more from mergers involving private targets than from those involving public targets. In particular, bidders acquiring a private firm experience significant wealth gains when a new blockholder emerges from the target firm.

Hedge ratio stability is especially important because hedgers are likely to use the estimate of historical hedge ratios to hedge future positions of their portfolios. One main purpose of the present study is to examine hedge ratio stability during the Asian financial crisis and post-crisis, periods characterized by high price volatility, using the Nikkei 225, Hang Seng, and KOSPI 200 index futures contracts.

This paper investigates the causes of liquidity commonality. We consider information asymmetry, volatility, utilitarian trading interest, style-based trading, inventory cost, and investor sentiment as potential candidates. Our empirical analysis shows that greater information asymmetry causes higher liquidity commonality. The significant effect of the order imbalance beta supports our volatility hypothesis as a cause of liquidity commonality.

Conditions for credit sales transactions vary to a great degree depending upon characteristics of the commodity, the buyer, and the seller. In this paper, we analyzed the buyer’s right to return purchased commodities and void his or her financial obligations as an exchange option written by the seller and held by the credit buyer.

This paper examines the relationship between the level of political connection of the board and chief executive officer (CEO) equity-based compensation. Using a sample of Taiwanese firms, the paper provides evidence that politically connected boards grant a lower proportion of equity-based compensation to CEOs. Political intervention can reduce the proportion of equity-based compensation and, thereby, can have negative consequences for the alignment between the interests of CEOs and shareholders in firms.

This paper presents an analytical explanation of price volatility and mispricing in a rational financial market. In the proposed model, specialists might have private interest in manipulating their reports, which can affect the security price. Additionally, traders differ in terms of both rationality and available information. The present study shows that mispricing and price volatility occurs in a rational financial market when specialist reports are incorporated under different trader types.

Using the Nikkei 225 index redefinition that took place in April 2000, we examine whether informed traders strategically trade more when they face increased liquidity trading, as predicted by Admati & Pfleiderer (1988). The significant increase (decrease) in liquidity trading for the new additions (deletions) caused by index trading activities after index redefinition offers a valuable opportunity to empirically test the predictions of Admati and Pfleiderer.

The minimum price variation on the Taiwan Stock Exchange reduced for most price categories on March 1, 2005. The present paper simultaneously examines the institutional and endogenous impacts of tick size changes on transaction costs, market liquidity, and trading activity. The empirical evidence suggests that following a reduction in tick size, uniform declines are discernible in transaction costs and market liquidity.

We examine the relative efficiency of price discovery between the new market (KOSDAQ) and the main board (KOSPI) in the Korean stock markets that have the same trading mechanism (i.e. electronic limit-order book), focusing on the comparisons of each market’s efficiency of price discovery in three aspects: speed, degree, and accuracy.

This paper empirically examines whether insider trading sanctions in the USA in the 1980s reduced insider trading in advance of mergers and acquisitions (M&A). Using a sample consisting of 291 firms, both merged and non-merged in 1983 and 1989, I measured insider trading volume and the “news media effect.” I conclude that the sanctions reduced insider trading on average, and also resulted in larger noise trading on M&A-related news and rumors.

In this paper, we examine the incentives for a failing debtor and creditors to file for bankruptcy either under Chapter 7 or Chapter 11, and discuss whether avoidance powers can provide proper incentives to file. We show that if the future profitability of a failing firm is known, avoidance powers can eliminate an inefficient delay in bankruptcy filing.

In the present study, we examine two important issues related to the information content of a trade in option markets: (i) whether trade size is related to information content; and (ii) whether buy and sell transactions carry different information content. Our analysis is based on comprehensive market microstructure data on the KOSPI 200 options, the single most actively traded derivative securities in the world.

This paper examines the impact of stock market liquidity on the hedging performance of stock index futures, and extends the conditional OLS model described by Miffre [Journal of Futures Markets 24 (2004) 945] by including stock market liquidity in the regression model. The empirical results indicate that information regarding stock market liquidity is useful in predicting the optimal hedge ratio under different market conditions.

We investigate the impact of the March 1995 move to screen-based trading on the Mumbai Stock Exchange, using separate samples of more liquid (A) and less liquid (B) shares. Following the move, the average cumulative abnormal return for A shares was 4.5%, whereas that for B shares was over 12%; market liquidity and efficiency increased but the effect on volatility was more ambiguous.

We investigate the relation between insider trading law enforcement and stock market quality using a sample of American Depositary Receipts (ADR) over the period from 1998 to 2006. We show that ADR from countries that have enforced insider trading laws have better market liquidity and lower information asymmetry than ADR from countries that have not enforced insider trading laws.

Studying foreign flows and the liquidity of six Asian markets and the Johannesburg Stock Exchange, we provide evidence of two contrary effects of foreigners on liquidity. On the one hand, foreign trade has a negative but transitory impact on the overall liquidity of the market on a daily basis, consistent with foreign investors demanding liquidity more aggressively than locals and incorporating market-wide information.

A parsimonious two-factor model containing the market risk factor and a risk factor related to earnings information uncertainty has been developed to explain the seasonal regularity of January in international stock markets. This two-factor model shows apparently stronger power in explaining time-series behavior of stock returns and the cross-section of average stock returns in all major developed countries than do the competing models.

This paper examines the effect of government ownership on investment banks’ underwriting performance in China. A large number of Chinese investment banks are owned and controlled by their respective regional governments. While regional governments may capitalize on their superior local knowledge and administrative power to help affiliated investment banks identify and land high quality local issuers, they may also leverage affiliated underwriters to facilitate the capital market access of those underperformed but socially and/or politically desirable local firms.

This research studies the dynamic relationship between equity returns and equity fund flows by incorporating nonlinear properties of the two variables. Nonlinear estimation based on a smooth transition autoregressive model reveals results different from those previously reported based on a linear relationship. Our empirical results find that there is significant mutual Granger causality between equity returns and equity fund flows.

I examine the importance of price support regulation in explaining IPO underpricing in the Korean stock market from 2001 through 2007. In contrast to the US practice where price support is provided effectively at the cost of the issuing firms, the price support in Korea resulted in direct costs to the underwriters.

Building on the models of Benveniste & Spindt (1989) and Maksimovic & Pichler (2006), the present paper examines the optimal pricing and allocation mechanism for private placements of equity. Our model shows that for firms that receive favorable information prior to private placements, both the information acquisition cost and the value of information affect the offer discount.

Given the growing importance of the Taiwan stock market, the present study sets out to provide a comprehensive investigation of the intraday time series of the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX). We begin by exploring the intraday volatility patterns and then go on to examine their impact on intraday volatility forecasting.

Recent structural models have utilized new factors to enhance their exploratory power over credit spreads. Some studies have shown that jump risks allow us to obtain credit spreads that are more realistic. However, according to the empirical studies on capital structure, another factor that affects credit spreads is the stationary leverage ratio of a firm.

Currency knock-in knock-out (KIKO) options had been widely used for hedging exchange rate risks in Korean financial markets. However, as the Korean won moved in an unexpected direction during the global financial crisis period of 2007 and 2008, the hedging instruments incurred huge losses to the option holders. In this paper, we analyze the event from the viewpoint of risk assessment and management.

Contrary to fixed-priced initial public offering (IPO) subscribers in many other countries, IPO subscribers in Taiwan own the option to withdraw from their IPO allocations after learning the allocation rate ( ALLOC ). Investors’ option to withdraw reduces the information asymmetry between informed investors and uninformed investors but increases the firm-commitment underwriting risk.

Wherever the debate on demonetization goes, it’s easy to see that capital markets in India have been on a roll over the past year and have given exponential returns across size, segments, and sectors.

As assets continue to flow from actively managed to index-tracking strategies, the largest index asset managers are becoming increasingly influential, often ranking among the largest investors of public companies. Despite this fact, little research has been done to understand how index managers carry out their investment stewardship responsibilities. In this paper, we share our findings and highlight what managers have in common and areas where they differ. We also provide a list of best practices that investors can use to assess how asset managers stack up.

Technology has fundamentally transformed how trading occurs on financial markets, but not everyone agrees that it is for the better.  Few changes in how securities are traded have ever generated as much debate and disagreement as algorithmic and high-frequency trading (AT and HFT).  On one hand, many academic and regulatory studies find that AT/HFT in aggregate is beneficial (e.g., lowering spreads and improving price discovery) or at worst benign. Yet, at odds with this view, many institutional investors claim that finding liquidity for large orders has become more difficult and their trading costs in contemporary markets are worse than before the technological advancements. 
 
We reconcile these conflicting views using unique regulatory data for the Australian equities market. We show that behind the aggregate effects of algorithmic and high-frequency trading (AT/HFT) lies rich heterogeneity in the effects of individual traders/algorithms.  We find that the most harmful traders double the costs of executing institutional parent orders.  Beneficial traders offset much of this increase.  HFTs are no more likely to increase institutional trading costs than non-HFTs. We identify other characteristics that distinguish harmful and beneficial traders.  The paper explains why AT/HFT appear detrimental to some investors despite being beneficial or benign in aggregate.

The paper can be obtained here: https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2813870

 

We question whether a new dimension of conflicts of interest exists for sell-side analysts due to a business group affiliation between asset management firms (AMFs) and brokerage firms. In family-controlled industrial conglomerates in Korea (chaebol), member firms keep close business ties and engage in mutual cross-debt guarantees with their fellow member firms. Interlocking ownership along with various business ties allows controlling families to exert substantial influences over all member firms of the same chaebol group. This study aims to investigate reporting incentives of affiliated analysts who are employed by a brokerage firm in a business group where the group holds both an AMF and a brokerage firm.
In the US, mutual fund families have multiple distribution channels for their funds such as direct sales, fund supermarkets, or institutional sales. However, similar to European countries Korean fund management firms are heavily reliant on large banks, insurance companies or brokerage firms for their fund sales. Brokerage firms, therefore, are one of the most important marketing channel for mutual fund managers. In turn, mutual fund managers use brokerage service to trade, which makes them vital clients to brokerage firms. Ideally, fund managers should use brokerage firms which provide the most accurate research reports and the most competitive brokerage fees, while brokerage firms recommend the funds managed by the best performing AMFs. The problem is that the business groups in Korea are allowed to retain substantial ownership in both brokerage firms and AMFs, making those separate independent entities, by law, to be under influence of the same controlling families. This institutional structure restricts the chaebol member firms from following the ideal process in finding their business partners for brokerage services and fund distributions. However, both a brokerage firm and an AMF in the same business group can benefit by closely working with each other. First, brokerage firms can secure a steady stream of commissions from their affiliated AMFs. By commissioning a majority of the transactions to a fellow member firm, the AMF can also prevent their investment strategies from being leaked to other competitors in the market. Secondly, AMFs can secure a well-established distribution channel to promote their mutual funds. Employees in chaebol brokerage firms are also put under pressure to sell affiliated funds.
In the presence of the group affiliation between a brokerage firm and an AMF, we conjecture two competing reporting incentives of affiliated analysts. On the one hand, to boost performance of affiliated fund management firm, analysts may give more optimistic opinions for affiliated stocks than other stocks. On the other hand, employees in the same chaebol can communicate more frequently via the internal media/portal services and through close business ties and employee movements between member firms. Therefore, affiliated analysts may utilize information advantages through the research pools provided by financial firms within the same chaebol and produce more accurate forecasts.
By using analyst reports and the mutual fund holding data from July 1, 2000 to February 28, 2008, we calculate relative recommendations and forecast accuracy of affiliated and non-affiliated analysts. Our results show that more accurate and less biased earnings forecasts issued by the affiliated analysts on affiliated stocks, consistent with information sharing. However, affiliated analysts make more optimistic recommendations for affiliated stocks when the funding amounts on those stocks are high, when higher asset management fees are charged on the funds including those stocks and when those stocks are newly included to the affiliated fund.
Our paper makes the following contributions to the extant literature. First, we investigate potential agency conflicts that analysts face caused by the business group affiliation between brokerage firms and AMFs. Our findings find that analysts become selectively optimistic to benefit affiliated mutual fund managers while maintain their reputation by providing more accurate forecasts for affiliated stocks in general. In addition, our findings contribute to the stream of literature on the investment strategies of mutual fund families. Mutual fund managers in US may face agency conflicts between their clients and mutual fund family that they belong to. The fund families are suspected to organize investment strategies across the member mutual funds to maximize the total group profit. Our study presents a special case where mutual fund managers strategically cooperate with affiliated analysts to maximize the total profits of their affiliated firms. Such tactical collaboration can also be used as window dressing purposes by mutual fund managers as we find the analyst recommendations are biased in favor of highly valuable stocks to affiliated fund managers.
 

Utilizing the special institutional setting in the Chinese securities market, we innovatively propose suppressed short-sale demand as a new measure of short-sale constraint. We employ the revealed short-sale volume of shortable stocks and use a hedonic model to estimate the suppressed short-sale demand for non-shortable stocks. A higher short-sale demand being suppressed indicates a more binding short-sale constraint. Consistent with Miller (1977)’s overvaluation theory, we find that suppressed short-sale demand negatively predicts future returns, and such relation concentrates among firms with poor information environment. Consistent with Diamond and Verrecchia (1987)’s reduced-pricing-efficiency theory, we find that a higher suppressed short-sale demand is associated with a greater price delay and a stronger post-earnings-announcement-drift.

Quality investing has gained attraction in China, as high-quality stocks recorded remarkable performance in the first nine months of 2017.  As a result, the risk of paying too much for high-quality stocks has become a concern.  To address the issue, on Sept. 29, 2017 we launched the S&P China A-Share Quality Value Index, which is designed to measure the performance of the top 100 high-quality stocks with reasonable valuation, (see Exhibit 1).

Using the sudden collapse of Lehman Brothers as a natural experiment, we examine whether mutual funds derive value from their institutional brokerage relationships. We find the impact of a damaged institutional brokerage relationship is greatest among mutual fund clients with concentrated brokerage networks and funds that specialize in small-cap stocks. Based on a difference-in-difference analysis, we find a drop in monthly fund alphas ranging from 34.2 and 70.9 basis points per month in risk-adjusted returns arising from a weakening brokerage relationship. Collectively, our results support the view that mutual funds significantly leverage their relationship capital with brokers.

In the Asia Pacific region, factor-based ETPs only accounted for 4.3% of regional ETP assets. The adoption of factor-based products by market participants in the Hong Kong market has been far behind other Asian markets such as Australia and Japan.

Application for the "CFA Institute Asia-Pacific Capital Markets Research Award”

• Active management can yield alpha from inefficiencies in global equity markets particularly in the Asia Pacific region and in emerging markets 
• These opportunities to generate excess risk-adjusted returns are in spite of trading costs 
• There is a positive relation between transaction costs including the presence of short selling restrictions and alpha

The adoption of factor-based products by market participants in the Hong Kong market has been far behind other Asian markets such as Australia and Japan.

The Q&A session of public earnings conference calls represents a unique opportunity for stakeholders to interact with senior management. We examine buy-side analysts’ participation on these calls and the associated capital-market implications. Using 81,000 transcripts for 3,300 companies from 2007 to 2016, we find that buy-side analysts ask questions on approximately 18% of calls. Management prioritizes buy-side analysts, but discriminates against analysts from hedge funds when short interest is high. Relative to sell-side analysts, buy-side analysts’ interactions with management are shorter and less favorable. Buy-side appearances are also associated with increases in information asymmetry and reductions in sell-side activity.

Recently, a major shift has been observed among asset owners who once took a “tokenistic” approach toward environmental, social and governance (ESG) and are now looking to integrate it into core investment strategies. The pensions industry considers ESG themes, including the transition to a green economy, as an integrated part of their investment philosophy and processes. Asset owners, including defined benefit schemes, are citing ESG risks as central to their fiduciary responsibility. FTSE Russell recently surveyed 200 asset owners globally and asked what their strongest motive was for incorporating ESG considerations into their investment decisions.

The world of index-based investing is in flux as ESG integration into passive is on course to become the norm for new mandates. In the last year there has been a quiet revolution taking place as asset owners have been moving to integrate ESG into index designs for new mandates on core passive portfolios.

選挙結果を受けてJGB VIX 指数は下落

JGB VIX Drops After Election Results

In India, investors often use to the BSE Sensex index to keep a track of market valuations. Most investors interpret the movement of Sensex in different ways using valuation measures. Price to earnings (P/E) and Price to book value (P/B) ratios are predominantly used to analyse the Sensex movement. When these ratios are used they in fact convey different stories about S&P BSE Sensex. These ratios help the investor to understand whether the market is undervalued or overvalued. The price to earnings ratio is calculated by taking the ratio of Market price of the stock to its Earnings per share (EPS). A high price to earnings ratio indicate that the investors are expecting high earnings growth in the future when compared to low P/E. The price to book value ratio is used to compare a stocks market value to book value. A low P/B ratio could indicate that the market/stock is undervalued. The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. One can identify and understand all the booms and busts of the equity market from the Sensex market. It has indeed emerged itself as one of the most prominent brands in the country.         
 

The construction of hedge fund portfolios by institutional investors around the world has been a combination of both science and art over the years. While some use a strict quantitative methodology like Risk Budgeting and/or Sharpe Parity along with a correlation matrix among different hedge fund strategies to create a portfolio, others use more ambiguous, discretionary and qualitative factors like the in-house view on an asset class or geography (or both) to do so.

Either way a vast majority of institutional investors have been overpaying for beta that has been masked as alpha by the hedge fund manager or worse, paying for non-performance.

In this paper, we attempt to come up with a metric that helps investors keep track of how much alpha they are giving away to the hedge fund manager, both for an individual hedge fund as well as for their entire portfolio.

 

在2017年10月18日由CFA中国上海主办的量化金融分会中，来自国金证券资产管理分公司联席投资总监Stanley Ouyang,CFA 与现场观众分享了“A股选股模型从2.0到3.0的实践”的主题演讲。

Stanley Ouyang,CFA结合2017年当下的投资风格和策略，认为A股的选股模型正从 2.0 走到3.0 ，他预计到2018年，将会增加更丰富的数据模型与技术，“新数据将会有200+因子库，会增加聪明一致预期因子、新数据源构造的因子；而新模型中会增加预期收益方法增加随机森林，CART等非线性模型；新技术中可能会诞生新的机器学习方法选择因子、构造权重的技术”。

由CFA中国上海参与协办的资本市场交流盛会 “2017第四届中国北外滩对冲基金峰会”于10月27日在上海北外滩隆重举行。CFA中国上海首席代表郭涛,CFA在分论坛四“港股与量化市场的投资与发展机会”中，就“全球对冲基金发展的新趋势”发表了自己的见解。

郭涛,CFA表示，全球对冲基金总资产规模近3.1万亿美元，从数量来讲的话，实际上是出现萎缩的，但是包括量化ETF和量化对冲基金，他们加起来管1.5万亿美金。未来金融科技在资产管理领域里的应用会以量化为主，量化smart beta策略的ETF将会有大的发展。

在该主题演讲中，郭涛,CFA分别就以下几点做了分享：
全球对冲基金行业概览
对冲基金还能收2-20么？
一个千亿美金对冲基金的终极思考
Smart Beta崛起
量化VS基本面？
明星基金经理模式还有未来么？
Long short VS Long cash ？

        在2017年10月18日由CFA中国上海主办的量化金融分会中，来自东方证券首席金融工程分析师朱剑涛先生在主题为“A股金融工程卖方学术研究漫谈”的圆桌论坛中分享了其对“价值投资理念在A股的可行性-质优股量化投资”的研究。
        什么是价值投资呢？说法不一样，巴菲特89年致股东的信里有一个说法，你以合理价格买一个好公司，远比高价格买一般公司要强，这句话是两个层面，一个是公司的质量，二是估值。
        朱剑涛先生分别从对价值投资与质优股投资、质量因子的定义、合成大类因子表现、质量因子稳定性、市场对质量因子的BP估值定价几个方面的研究，得出以下结论：
1.上市公司的质量可以从盈利、成长、财务稳健、公司质量四个维度衡量，大部分时间内优质股在估值和股价上相对劣质股都有溢价；
2.优质股+合理估值的价值投资方式在A股收益颇丰，可结合投机因子做增强，适合长线大型机构投资者；
3.质量因子可用于主动量化和Smart Beta 产品设计。

在2017年10月18日由CFA中国上海主办的量化金融分会中，来自华泰证券首席金融工程分析师林晓明先生在主题为“A股金融工程卖方学术研究漫谈”的圆桌论坛中分享了其对“周期三因子模型及资产配置”的研究。
 
林晓明先生主要分享的是其团队在过去一年中关于整个市场周期的研究。这个研究讲的是，如果想做一个自上而下的研究，能不能找到一个框架，把所有相关的宏观变量和资产价格拉到一个统一的框架里面进行建模。

林晓明先后从对全球/中国市场的周期三因子回测、股市与宏观经济关系、全球股票市场周期、统一周期假设、空间谱估计-2、中国和全球市场共同周期的实证检验、周期三因子资 产定价方程这几个方面阐述了他的观点。

        在2017年0月18日由CFA中国上海主办的量化金融分会中，来自兴业证券研究所总经理助理、首席定量分析师、定量研究团队负责人任瞳先生在主题为“A股金融工程卖方学术研究漫谈”的圆桌论坛中分享了其对“人工智能时代的大数据投资”的研究。
        任瞳先生首先从人工智能与量化投资的关系、人工智能维度下量化投资的部分成果、人工智能在量化投资领域应用前景几个方面阐述了两者之间的紧密联系。
        随后，任瞳先生重点介绍了其团队针对雪球网在大数据方面进行的研究。根据雪球网的用户大概有三种行为：讨论（用户的发帖行为）、 交易（用户的关注行为）、 调仓（投资组合调整行为） ，总共构建了三个选股因子，分别是关注度因子、价值变动因子和负面情绪因子。其团队根据这三个因子分别构建了一些投资策略（见PPT），证实因子还是非常有效的，包括负面情绪因子如果跟反转因子如果结合起来的话，效应会更强。
        最后，任瞳先生提到了机器学习，其团队是比较早开始相关研究的。首先第一步是做了很多常见算法跟多因子模型的结合，即在常见的机器学习的算法和多因子体系结合的情况。机器学习为量化投资提供了新的工具，初步研究结果显示相比传统方法其更灵活效果更好，应用前景十分广阔，但同时须对过度数据挖掘等问题保持警惕。 

WHAT IS THE INVESTMENT ISSUE?
The paper is one of a handful that seeks to address why some markets are less efficient than others. Although it is conventional wisdom, this premise is not universally accepted.

Some academic research papers support the concept that developed markets are no more efficient than emerging markets. Authors Bartram and Grinblatt dispute this. Others have argued that investors rely too heavily on Fama’s Efficient Market Hypothesis (EMH)—that is, that stocks always trade at their fair value—rendering any effort to profit from mispriced stocks an exercise in futility.

On the one hand, the authors ask, if no one can ever profit from active management, then what magical force exists to drive prices to fair value? They argue that a passive investor will buy the index fund, whatever the prices of its component parts. Active managers, who have performed relatively poorly of late, may well have another cycle to show off their talents—and so will want to take note of where and when mispricings and market inefficiencies cross paths.

HOW DO THE AUTHORS TACKLE THIS ISSUE?
Bartram, of the University of Warwick, and Grinblatt, of UCLA, began their work by going through a database of company financials that went back more than two decades to capture all the information about the companies that would have been known at the time.

They constructed a robust set of synthetic portfolios—nearly 26,000 stocks from three dozen countries—to theoretically trade on mispriced companies, with a few unique layers of variables to provide reality checks. Trading signals, suggesting a clearly identifiable deviation of a stock’s price relative to its estimated fair value, were built using international point-in-time accounting data covering 21 company-specific metrics. Trading activity was replicated with transaction cost data from Elkins McSherry, the gold standard for tracking such expenses.

Transaction cost data included explicit commissions and fees as well as harder-to-quantify market impact costs. These costs were converted to alpha reductions using portfolio-turnover approximations, that is, two-way turnover.

WHAT ARE THE FINDINGS?
The results of running the mispricing replicating portfolios (and incorporating simulated buy/ sell executions) were definitive: Emerging and certain developed Asian markets were shown to be relatively less efficient in countries with quantifiable market frictions—particularly trading costs—that deter arbitrageurs. “If profits to trading strategies based on mispricing estimates are a measure of market inefficiency, then profits should vary across countries as a function of transaction costs, short sales restrictions, and other country characteristics that might influence limits to arbitrage, thereby impeding the process that makes a country’s stock prices reflect fair value.”

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
In regions where markets are most efficient, Bartram and Grinblatt caution that investors need to be aware of the costs of active management, noting that it is unlikely the fees associated with active management will outweigh its value. A caveat here, though, is that the data studied were annual accounting data. Conceivably, some improvement in the alpha may be generated by the strategy, even in the most efficient global markets, when using quarterly data. And there’s a catch as well: The least efficient markets, where the alpha opportunities may be the largest, can easily be eroded by those frictions—in other words, super-sophisticated investors are steering clear for good reason.
 

        为投资者提供他们实际想要的--绝对收益，投资界需要改变结构。这个变革的重点在于资产配置而不是选股。风险偏好和主动策略的定义需要修改，并且重点强调针对风险敞口管理配置。

The energy fundamentals, helped by Hurricane Harvey, are now in place for solid rebalancing and for potentially continued strong performance. Metals have reflected bullish sentiment but have recently been hindered by Chinese growth and credit concerns. Agriculture has been well oversupplied on better than expected weather and from improving farming technologies.

Gold crash of April 12-15, 2013 as seen from a liquidity perspective using Donier and Bouchard's measure of illiquidity

Academic Research Paper

Industrial metals hit multi-year highs last month with the S&P GSCI Industrial Metals Index up off its bottom nearly 60%.  This was mainly due to strong Chinese demand growth and a falling US dollar.  While the dollar has continued its fall in September, there is some concern over slowing growth in China. 

Although selecting ETFs can be challenging due the wide variety of products, they can be used as tactical and strategic tools for asset allocation. Market participants have recently been moving funds from underperforming products into more cost-effective ETFs. The sweet spot appears to be the intersection between active and passive smart beta products.

Southeast Asia's venture investing scene is booming, but not without its long history and influence by other regions in Asia. We are seeing a rush of investors from North Asia coming down to Southeast Asia, pushing the ecosystem to a more mature state and enhancing exit opportunities.

In August, the Dow Jones Commodity Index Total Return gained 0.7%, reducing its year-to-date loss to -1.4%, and the S&P GSCI Total Return lost 0.8%, increasing its year-to-date loss to -6.9%.  Industrial metals and precious metals were the only positive sectors, up 8.6% and 4.0%, respectively, while agriculture was the worst performing sector, losing 7.4%, posting its worst month since July 2015.  

Japanese regional banks have been suffering from the severe business environment and financial conditions since the 2008 Lehman Crisis. This situation has worsened since the Bank of Japan introduced negative interest rates in 2016.

On the other hand, Japanese corporations still have not paid sufficient dividends to its shareholders. The dividend payout relative to net profit (Payout Ratio) and capital (DOE) are half or less of leading global markets.

Shareholder proposals for an increased dividend payout of Japanese corporations are more supportive by large investors including banks in Japan. Another tail wind is the Japanese “Stewardship Code” which seeks for stronger corporate governance and deeper dialogues between corporations and shareholders

How can real asset combinations contribute to inflation protection, diversification, and volatility reduction when used as portfolio building blocks? S&P DJI’s Jodie Gunzberg takes a closer look at the characteristics influencing the growing global appetite for real assets.

Video interview with Jodie Gunzberg, CFA at the link below:
http://www.spdji.com/multimedia-center/the-role-of-real-assets-in-portfolio-construction

ICBC Credit Suisse Vincent Chen, CFA discusses the key growth drivers for China and how the liberalization of China’s capital market impacts global asset allocation.
Video interview with S&P DJI at the link below:

http://www.spdji.com/multimedia-center/harnessing-china-s-economic-growth

 

Is Kuala Lumpur Kepong Berhad The Best Palm Oil Company To Own?

In this research, I aggregate the financial statements of more than 17,000 companies across the world to then calculate the amount of cash that is held on the balance sheet of various countries across the world. From this, I then look at current cash levels at all markets across Asia, from Developed to Frontier.
The benefit of this research is that it can help us to better forecast the balance sheets of companies in Asia. This is especially critical for free cash flow valuation.

Are you a shareholder or analyst with an interest in mergers and acquisitions? 
The accounting standard-setters need your expertise. 

We are aware that M&As are common and can take the form of group restructurings or third party acquisitions. There is usually no question that there is underlying substance to acquisitions with third parties - the transaction price typically represents the fair market value of the acquired business. But M&As within a group might arguably be different.

The findings of this M&A survey will be published and will help us consider whether all M&As should be accounted and reported in the same way. 

To participate, click on this link: http://survey.hkicpa.org.hk/index.php?sid=57118&lang=en, or download and email us the attached survey: outreachhk@hkicpa.org.hk

Paper Submission for AAM-CAMRI-CFA Institute Prize in Asset Management

In this article, the impact of Chinese demand growth changes on overall commodities, sectors and individual commodities is examined, using year-over-year data from 1970.

​This paper studies the importance of plan members’ heterogeneity to the management of defined benefit (DB) pension fund. We propose a new multi-member model of DB pension fund that allows for heterogeneity in plan members’ retirement ages, salary growths, and other characteristics.

Financial system stability matters for economic growth.  Instability generates adverse effects on the economy because of their spilled over effects as observed in the recent financial crisis.  Many US and European banks required governments capital injections to stay afloat.  In January 2016, Basel Committee on Banking and Supervision of Bank for International Settlements issued a new revised market risk framework – “Minimum capital requirements for market risk”.  One of the features of the revised framework is a shift to an expected shortfall measure of risk under stress.  In this paper, we performed both value-at-risk and expected shortfall estimations for US and China securities markets.  While we use S&P 500 index, SPX, for US market, we use the time series of iShares China Large-Cap ETF, FXI, as a proxy for the broad market indicator of China securities market.  It is because there is a corresponding volatility index, VXFXI, for this Large-Cap ETF.  In this study, efforts have been made to turn volatility index into a risk management tools in the context of value-at-risk and expected shortfall.  It is found that it would be inappropriate to simply scale up the 1-day volatility by multiplying the square root of time (or the number of days) ahead to determine the risk over a longer horizon of i days.  Instead, empirical constants that are used to multiply the levels of volatility indexes, VIX and VXFXI, for estimating value-at-risk and expected shortfall of various significance levels for 1 to 22 days ahead for SPX and FXI have been statistically determined using 16 years and 4.75 years of daily data respectively.  Results show that the shift to expected shortfall approach with significance level of 2.5% yields an unexpected impact on regulatory capital requirements from the value-at-risk approach with significance level of 1%.

Manager selection is a critical step in implementing any investment program. Investors hire portfolio managers to act as their agents, and portfolio managers are then expected to perform to the best of their abilities and in the investors’ best interests. Investors must practice due diligence when selecting portfolio managers. They need to not only identify skillful managers, but also determine the appropriate weights to assign to those managers. This book is designed to help investors improve their ability to select managers. Achieving this goal includes reviewing techniques for hiring active, indexed, and alternative managers; highlighting strategies for setting portfolio manager weights and monitoring current managers; and considering the value of quantitative and qualitative methods for successful manager selection.

Translated into Mandarin June 2017.

The S&P GSCI Energy Total Return gained 8.1% in July, the most for a July in 13 years, led by petroleum that was up 9.2%.  Finally the fundamentals may be showing the oil market is starting to rebalance with the rest of the commodities. 

In the latest issue (Issue 13 – August 2017), it covers the stories of:

Financial Crime Risk : Anti-Money Laundering Practices in Banking To understand anti-money laundering, we have to understand what money laundering is. Money Laundering is the process of converting illegal funds into seemingly legitimate assets with the purpose of concealing the ownership or original source of these funds. This makes it difficult for the authorities to trace the origins of the funds. To counter this, the banking sector has established a set of internal regulations and system known as anti-money laundering. These are legal controls taken by financial institutions to investigate suspicious transactions to help prevent money laundering activities within the banking sector.

The Rise of Text Mining in Financial Markets The world is awash in data. Financial markets are awash in data. We are generating around 2.5 quintillion (2.5×1018) bytes of information every day, and there is an average of 4,000 brokerage reports a day comprising around 36,000 pages in 53 languages. As market participants try to maximize their competitive edge from the growing mountain of information, the nancial world increasingly feels there is a need to harness the power of big data and it has been shaping the way they acquire, analyze and utilize data. The recent development is the rapid expansion of text mining. Hence, this article will focus on the development of Text Mining technology as well as Text Mining technique.

温氏17-21年，预计五年生猪活鸡累计净利润785.79亿，平均每年157.158亿。温氏集团当前股本52.20亿股（市值1034.67亿）。1只考虑这两项业务情况下，7-21年，每股净利润（EPS）分别为：1.18元，2.47元，3.6元，3.83元，3.98元。

当前10年期国债收益率3.6%附近，2倍于10年期收益率，要求投资收益率等于7.2%。也即E/P=7.2%， P/E=13.89。按照13.89倍P/E，17-21年末的期望价格为，16元，34元，50元，53.2 元，55.2 元。考虑到当前的价格为19.82，当前买入持有该标的，到17-21年，每年末期对应的理论收益为：-17%，73%，152%，168%，179%。考虑到一定的交易策略，未来2-3年的时间，投资温氏股份，可以实现200%的收益率。再考虑到温氏集团作为大公司，市场系统性风险Beta低，而高市值对应的流动性很强。因此，投资温氏集团在接下来2-3年可以获得，低风险下的200%收益。

As emerging markets have grown in size and importance, emerging market equities have become a core part of many portfolio allocations. In addition, the increased diversity and liquidity of emerging equity markets have made strategies commonly used to manage developed market portfolios (such as tactical allocations across regions and size segments) much more accessible to emerging market investors.
Despite these trends, the use of more complex asset allocation strategies within emerging market equities remains quite limited, as the vast majority of market participants continue to gain exposure to this asset class either via index-linked products that track traditional benchmarks or through active managers with mandates closely tied to those benchmarks. While accessing emerging markets through a single holding linked to a conventional benchmark can be an effective, low-cost way to obtain unbiased exposure to this asset class, evidence indicates that using a more discerning approach to managing emerging market portfolios may potentially add value in the same ways it can in the U.S. and other developed markets.

The Pakistan stock market has witnessed considerable turmoil in the past few weeks falling from a high of 52,876 in May to around 44,300 lately.  There have been various positive and negative factors at play – from inclusion in the MSCI Emerging Market Index followed by selling from investors coupled with political uncertainty exacerbating concerns on foreign exchange and economy.
                       
Accordingly, CFA Society Pakistan has held a series of candid panel discussions with CEOs and CIOs of leading asset management companies and brokerage houses to understand what happened and what to expect going forward.
 
You can view the panel discussions as given below and feel free to pass on to your colleagues, friends and family.
-          Part 1: Sajjad Anwar, CFA,CIO NBP Fullerton Asset Management, Mohammad Sohail, CEO, Topline Securities, Muhammad Asad, CIO, Al Meezan Investment Management

-          Part 2: Syed Suleman Akhtar, CFA, CIO, UBL Fund Managers, Mustafa O Pasha, CFA, CIO, Lakson Investments, Muhammad Asim, CFA, CIO, MCB Arif Habib Savings & Investments.

-          Part 3: Raza Jafri, CFA, Director Research, Intermarket Securities, Muhammad Fawad Khan, Director Research, BMA Capital, Shamoon Tariq, CFA, Partner and Vice CIO, Tundra Fonder AB.

EXECUTIVE SUMMARY
Good corporate governance is increasingly considered one of the prime drivers of business success. Through transparency, equitable treatment of all shareholders, and a robust system of sound practices and procedures, good corporate governance can enhance performance and growth, both in the individual firm and at the national level.

A solid corporate governance framework is particularly important for family firms, which face unique challenges as they balance the advantages and disadvantages of family involvement in the business.

Based on an analysis of 56 family-controlled listed companies in 14 jurisdictions,* the CFA Institute report, Corporate Governance for Asian Publicly Listed Family-Controlled Firms, identifies opportunities to enhance corporate governance structures for family firms in the region. The report reveals how effective corporate governance can help these companies—and the regions in which they operate—continue to achieve economic success.

FAMILY FIRMS AS THE DRIVERS OF ASIA’S FUTURE GROWTH
Over the last few decades, Asian family firms have played a pivotal role in fueling the region’s economic growth, and their influence will continue to rise. By 2025, the number of firms in Asia with revenue exceeding USD1 billion is expected to be nearly equivalent to that in developed economies globally. Family firms will represent 75% to 80% of those entities.
However, the growth of Asian economies in recent decades has been largely propelled by low labor and production costs. As the performance of Asian economies begins to mirror that of developed economies, their future capacity for growth will not be sustainable if they are competing on cost alone. To remain competitive, Asian family firms must innovate, expand outside of traditional markets, and professionalize, which will necessitate the tapping of global talent and capital. This will put pressure on these firms to have a corporate governance structure in place that can meet international standards and investor expectations.

CHALLENGES FOR ASIA’S FAMILY FIRMS
Challenges of Internationalization
Between 2000 and 2010, the total market capitalization of Asian family firms grew significantly. A major driving force behind this was an entrepreneurial desire among Asian family firms to use capital market funding to expand in new markets, with the number of listed family firms increasing 62%. As more family firms use capital markets to fund their internationalization plans, they will face the challenge of developing sound corporate governance frameworks that meet the needs of the heightened regulatory environment and the scrutiny that comes with being listed.

Challenges of Professionalization
Although Asian family firms prefer to pursue family-management succession plans, many recognize the need to capitalize on external talent to meet future business pressures. Efforts to professionalize a family firm, however, may be double-edged.

On the one hand, professionalization might boost a firm’s effectiveness. On the other hand, professionalization might give rise to additional agency costs, such as the need to offer incentives to align the interests of professional management with those of family members. If a family firm is to realize the benefits of bringing in external talent, then that incoming management will need the freedom to do the job for which they were hired. Defining an optimal equilibrium between family culture and external professionalism is therefore imperative to facilitate future value creation without incurring greater expenses.

Challenges of Dispersed Ownership
The average percentage of family ownership of large-size family firms in Asia is substantially lower than that seen in their European and North American counterparts. This implies increased ownership diversity, which can result in two major issues. First, with a widely dispersed minority ownership structure, the entity is potentially exposed to greater majority/minority owner conflicts. Second, Asian family owners who wish to expand their businesses while still retaining control may rely more on creditors than on further equity dilution. This could potentially lead to greater shareholder/creditor conflicts. Family firms should develop corporate governance policies to address these concerns.

WHERE CORPORATE GOVERNANCE CAN PLAY ITS PART
Research is inconclusive on whether the family-firm construct enhances or diminishes corporate governance practices. In theory, the long-term horizon and closer alignment of principal-agency interest in family firms should improve corporate governance. However, those same features could prove problematic by increasing risk, whether as a result of a lack of transparency, entrenchment, or wealth expropriation from minority owners.

A solid corporate governance framework is essential for family firms to effectively balance the advantages and disadvantages of family involvement in the business. Combining governance, management, and ownership in the hands of family can bring benefits, but this centralized decision-making structure inevitably brings risks. Sound corporate governance practices can help family firms include different perspectives on their boards, which can mitigate risks. Moreover, such practices can help family firms balance the interest of different stakeholders, a task essential to the long-term sustainability of these entities. As well, sound corporate governance practices can help family firms reduce their cost of capital and reduce capital waste, making them more attractive investment targets and more competitive entities.

THE WAY FORWARD
The complex challenges facing publicly listed family firms in Asia are influencing the underlying corporate governance frameworks of those firms. Through a holistic understanding of corporate governance features supporting firm performance and value across the region, these firms will be better able to address the difficulties they face and to thrive in the future. The development of policy recommendations that assist in enhancing the corporate governance practices of Asian publicly listed family firms will also increase protection for minority owners from wealth expropriation by the majority, controlling family owners.

Learn more about how corporate governance can impact family firm value and success at www.cfapubs.org/toc/ccb/2017/2017/1.
 

As a result of the “Abenomics” reform, listed Japanese corporations are steadily
accumulating wealth in the form of cash and other liquid assets since 2013.

The share price of these cash rich corporations remains undervalued. Nearly half
of the listed companies in Japan have a PBR of less than 1.0. These undervalued
corporations have a large potential for a hike in share price.

In June 2017, the PBR of JASDAQ Japan listed Solekia (9867) soared from 0.3 to
1.2 in less than six months. The new “Stewardship Code” introduced in 2014 forces
stronger corporate governance in Japan. Since 2014, there have been significantly
stronger shareholder dialogues thus expanding investment opportunities.

Statutory statements prepared for reporting purposes are a combination of accounting rules formulated to characterize the accrual process, management estimates based on past experience applied to projected events, and managerial judgment that is subject to cost-benefit rationale. The net earnings per share number, which in the ultimate analysis increases shareholders’ equity, is mostly neglected in management discussions and analysis. A majority of the managerial analysis is concentrated on alternative numbers arrived at by massaging the earnings information. The ensuing treatise is an endeavor to reconnect the economic implications of the accounting for depreciation, goodwill amortization/impairment charges (universally assumed to be non-cash charges), as well as other one-time charges, that are being neglected by most investors when analyzing manipulated pro-forma earnings reports from corporate managements. Since earnings comprise an integral part of expected returns, a sound knowledge of accounting theory and concepts is essential for conducting insightful financial analysis. The purpose of this research is to generate a healthy debate amongst accounting, finance, and other professionals who are consumers of company information to evaluate the efficacy of reported financial statements, management discussion and analysis that accompanies them, and current valuation methodologies practiced. Contrary to popular notions, if cognitive biases are removed, one may find that accounting earnings do mirror economic reality.

Title: A Resolution to the Problem of Multiple IRR: A Modified Capital Amortization Schedule (MCAS) Method for Non-Normal Cash flow (NNCF) to Obtain a Unique IRR 

 

 
The problem of multiple IRR remained unresolved for almost a century. This problem is associated only with some of the non-normal net cash flow (NNCF) that wrongly includes reinvestment income as income or benefit stream. The reinvestment income, which is not a benefit from the investment or project under analysis, causes the multiple IRR problem. This is often misinterpreted as problem of IRR but its neither a problem with IRR nor NPV. It is a problem associated with some NNCF data and the failure to update the discounted cash flow (DCF) or capital amortization schedule (CAS) methods to handle such problem.
Using NNCF data, analyses are conducted with special emphasis on topics such as:


a.      A modified CAS (MCAS) method that eliminates multiple IRR associated with NNCF data;
b.      Multiple IRR problem and the Descartes rule of sign and Norstrom’s criteria;
c.      A NNCF data with a unique IRR under DCF / CAS methods vs IRR by MCAS method;
d.      Resolving the problem of multiple IRR by MCAS Method Versus MIRR; and
e.      A critical review of the GIRR and AIRR Methods to Estimate NNCF.
The salient findings of the present analysis are:
a.      The MCAS method, presented in this paper, identifies and eliminates the reinvestment income associated with NNCF investments (with positive opening balance in one or more years in the CAS) from the benefit stream;
b.      This new method overcomes the multiple IRR problem and leads to a unique and real IRR; The effectiveness of MCAS to handle the NNCF data is illustrated with numerical analysis;
c.      The assumption of reinvestment at IRR or at hurdle rate in NPV are false assertions in the cases of normal NCF and some of the NNCFs. However, such reinvestment is evident only with NNCFs with positive opening balance in one or more years under the CAS.
d.      The reinvestment income under the benefit stream causes multiple IRRs and multiple NPVs too. As NPV is a static point estimate (at hurdle rate) the multiple NPVs are not exposed. Without eliminating the reinvestment income, none of the criterions viz. NPV, IRR or MIRR, is useful as a decision criterion. Neither NPV or MIRR is a preferred criterion, under such circumstances, as recommended in some published works.
e.      The MCAS method is appropriate for both normal NCF and NNCF as illustrated in this paper. CAS or DCF method is appropriate only for normal NCF investments.
f.       Even when there is no multiple IRRs with some NNCFs under DCF/CAS method, the MCAS method estimated IRR or NPV, without reinvestment income, are different from that of the DCF/CAS estimated IRR and NPV. For a consistent estimate of IRR and NPV, the MCAS method is most appropriate both for NCF and NNCF investments.
g.      The generalized IRR (GIRR) and the Average IRR (AIRR) are also not appropriate estimates for NNCF and they are not NCF consistent as discussed in this paper. The problem of multiple IRR associated with the popular cases of NCF investments used in GIRR and AIRR, are also resolved now.
In conclusion, the MCAS method resolves the problem of multiple IRR and leads to a unique IRR that is real and NCF-consistent. Neither the NPV nor the MIRR could resolve the problem of multiple IRR.

Published in May 2017, this research reveals most active managers fail most of the time, at least if we define failure as underperformance of an appropriate passive benchmark. Success, when it does occur, tends not to persist.

China and Georgia are friendly countries. In 1991, China recognized the independence of Georgia -- among the first countries to recognize the independence of Georgia and established diplomatic relations. In 1992, China established diplomatic relations with Georgia. After twenty years of close interactions of leaders and people, fruitful cooperation in various fields is achieved.

In 1993, relevant government departments of China and Georgia signed several agreements, such as economic and trade agreement, agreement on encouragement and mutual protection of investments, scientific and technical cooperation agreement, agreement on cultural cooperation, health and medical science cooperation agreement, cooperation agreements in agriculture and food industry, tourism cooperation agreements, customs mutual assistance agreement, inter-bank cooperation agreement, and the development of railway transport cooperation agreement and maritime cooperation agreements. In 1994, the two countries signed the "mutual exemption of visas for official travel and group travel visa-free mutual agreement", "China agreement to provide 30 million yuan commodity loans to Georgia." In 1999, the two countries agreeed in Tbilisi Georgia to establish a Commission on Economic and Trade Cooperation, and held the first meeting. China is always a friend of Georgia. In September 2013, during a visit to Kazakhstan, President Xi Jinping proposed the "Silk Road economic belt" strategic vision, enthusiasticly responded by many countries including Georgia. On March 9, 2015, the Chinese Ministry of Commerce and the Ministry of Sustainable Development of Georgia agreed to establish a joint working group on trade to study feasibility of China-Georgia Free Trade Agreement. The two sides also signed a memorandum on strengthening "Silk Road economic belt" to jointly promote economic and trade cooperation, and to enhance trade, investment, economic and technical cooperation and infrastructure interconnection level. To start a free trade agreement feasibility study for the two sides, serves as an important initiative to strengthen "Silk Road economic belt", which will reinvigorate bilateral economic and trade relations for the two countries.

Georgia and China intend to intensify the trade and economic relations through creating free trade agreement. The goal of the report is to evaluate the potential, ex-ante effects of free trade agreement on existing trade flows and identify the specific areas of interest for further cooperation. The Research component of the report include the methodology and discuss some effects of differences in methodologies used by Georgian and Chinese experts, data description, detailed results of simulations and sensitivity analysis of parameters and discuss the specific sectors for potential augmentation of cooperation.

This report seeks to analyze the potential benefits and challedges of a potential China-Georgia free trade agreement. It involves the study of foreign economic situation between the two countries, in particular, through analyzing foreign economic policies and bilateral economic and trade relations, investigating issues related to trade in goods, trade in services and investments. Based on that, solid scientific suggestions will be given to guide the potential free trade agreement negotiations.

The objectives of the study are:
- To provide background information to commence negotiations on CGFTA.
- Identify specific products sectors for expansion and diversification of trade between the parties.
- Identify the benefits and challenges that may derive from the proposed FTA.
- To make conclusions and recommendations on options for future action including scope, framework and architecture and FTA for furthering bilateral trade investment and economic cooperation to expand and enhance the benefits in these areas.

State-owned enterprises (SOEs) have been criticized for poor governance and questionable efficiency. In a recent paper titled ‘Leviathan Inc. and Corporate Environmental Engagement,’ Dr. Pedro Matos from the Darden School of Business, University of Virginia, and his colleagues from the University of Hong Kong and Singapore Management University conducted an international study of the impact of state ownership on a firm’s engagement in environmental, social, and governance (ESG) issues. 

There has been significant debate on the effects of ESG issues on shareholder value. In this paper, it was found that SOEs are, in fact, more engaged in environmental issues and, more importantly, this engagement does not come at the expense of shareholder value. Furthermore, SOEs are also more engaged in social issues, but they do not reveal better corporate governance performance.


This is a recording of the presentation hosted by CFA Institute, HKSFA, ACCA, FSDC, HKIRA, and HKU SPACE Executive Academy on June 6, 2017 at HKU SPACE Po Leung Kuk Stanley Ho Community College in Hong Kong.
 

China’s residential housing market has been largely influenced by the central government’s policy initiatives. This study examines how implementation and removal of home purchase restrictions affect housing price changes in major cities. Based on the dataset of 70 large and medium sized cities between 2014 and 2015, the price evolution trends are evaluated by the distribution dynamic analysis based on the method of Mobility Probability Plot (MPP). This newly developed method allows for better exploring housing price dynamics under home purchase restriction policy. There are four major findings: First, home purchase restriction has salient effect on curbing speculative investment demand in terms of lowering large sized housing price growth; Second, home purchase restriction has long run effect in bringing down housing prices if current price increase does not exceed 5 percent on a month-to-month basis; Third, small or large sized housing may face more downward pressure of housing prices than medium sized housing under home purchase restriction; Fourth, removal of home purchase restriction may saliently increase the housing price levels that had been contained.

WHAT’S THE INVESTMENT ISSUE?
Still widely considered as bedrock financial theory yet often criticized, CAPM is a simple, formal methodology to price securities. Its fundamental idea of systematic risk is reflected in all modern asset-pricing theory. Because math-based models are built on sets of assumptions (e.g., “markets are frictionless and efficient”) that may not always reflect reality, all models are, to some degree, suspect. Such models are still relevant, however, in trying to gauge the differences in risk premiums of individual stocks. CAPM dictates that beta is the solely relevant measurement of a given stock’s risk—its co-movement with the market—relative to the movements of the market as a whole.
The foundation for asset-pricing theories such as CAPM is the Efficient Market (EM) hypothesis, which, over the years, has taken on water like the hull of a leaky boat. Skeptics, have poked holes in the EM hypothesis and cast CAPM in a contradictory light. Numerous studies have shown that beta, which came from CAPM, loses relevance when closely scrutinized. Shi and Xu are careful to set the stage by conceding from the outset that beta in and of itself exhibits weak power in explaining return differences of individual stocks. However, they also seek the source of this weakness: Could there be a glitch with standard “cross-sectional regression tests” that shows, when comparing one stock to another stock, statistical beta estimates to be overly noisy and/or limited measures of expected return? Might these backtests have a fundamental design flaw? And if so, is there a better proxy for expected return?
 
HOW DO THE AUTHORS TACKLE THIS ISSUE?
With a long-horizon investing approach in mind, Shi and Xu assert that most beta-bashing research shares a common denominator: the use of short-term testing methods to demonstrate the inconsistency of beta patterns. A common example, they find, is inputting the next month’s realized return as a proxy for the (retroactively assigned) expected return. Shi and Xu believe that CAPM may be better suited to capturing the risk-return relation in the long-run. To refashion CAPM to achieve this goal, they create a new way to model longer-horizon expected returns in their tests by having the future Implied Cost of Capital (ICC) play the part of expected return. “ICC is in the same spirit as internal rate of return,” they write. “It is perceived average return over time even when actual future expected returns might be time varying.” To test their theory, the authors examine all U.S. public companies on major exchanges (stripping out financial companies due to their overabundance of leverage, which skews the model) and pulling together, as a proxy for future cash flows, a mountain of analyst earnings forecast data (annualized). They supplement those data with long-term growth-rate assumptions for certain industries, forming a 710,840-variable dataset. The key output is the estimated ICC, which is calculated by asking what expected returns have investors used to discount future cash flows (approximated in part by the analysts’ earnings forecasts) to observe the current equity prices. Although the use of actual future returns might seem like a reasonable means of representing expected returns, an approach in which ICC is used as a proxy for expected return is, the authors insist, a better estimate when running models that aim to drill down into the explanatory power of beta.
 
WHAT ARE THE FINDINGS?
Despite abundant current evidence that seems to reject the explanatory power of the market beta in expected returns, Shi and Xu assert that when tests are run with ICC as a proxy for expected return, the weaknesses seen by others are not necessarily present. They find that the future implied cost of capital is “both positively and significantly related to the conventional beta estimate,” implying that beta could still explain future cross-sectional expected return differences over a longer horizon. In other words, the conventional estimate of the market beta risk might be a good measure of the long-term market risk. As an example of how long-term expected return measures can be useful, Shi and Xu show a connection between individual stocks with high levels of uncertainty (i.e., an additional dimension of risk surrounding them as measured by analyst forecast dispersion) and long term expected returns as approximated by future ICC. Stocks with large dispersion—when analysts’ forecasts do not agree—tend to have high long-term expected return, suggesting that investors are compensated for taking on the uncertainty risk. Thus, not only is beta—or rather, long-term beta—of use when trying to forecast expected return, but it may bring with it unexpected positive results.
 
WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
CAPM may not be perfect, but it is intuitive, easy to apply, and powerful in practice. In fact, Shi and Xu’s research justifies the continued use by industry members of models such as Fama and French’s three-factor model, which includes the market factor as its most important factor. In addition, their results carry important implications across finance. For private equity firms and investment bankers assessing the value of a young company, what matters most? The answer (or at least what should be the answer) is the company’s growth potential and long-term expected return. The market risk beta value attached to the company is the risk associated with the company for many years to come. For portfolio managers struggling to rationalize, perhaps even to themselves, that a long-term conviction is worth holding, running numbers through a long-term prism can bring peace of mind and justify additional allocations. Shrewd investors will, of course, not just pay attention to a manager’s absolute performance, but also to their own level of beta risk. In addition, they will invest in strategies carrying levels of beta risk with which they can feel most comfortable.



~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.
 

Given most of the FinTech innovations, in particular the DLT, are developed for providing services directly to consumers, FinTech has initially been regarded as disruptive to the established financial institutions. However, a more recent development is that increasingly FinTech innovations are developed by, and in collaboration with, the well established incumbents in the financial sector. There are two very insightful reports on FinTech and DLT published by the FSDC in May 2017; which covers extensively the following areas including cybersecurity, payment and securities settlement, digital ID and KYC utility, WealthTech and InsurTech (including data analytics, automation and artificial intelligence), RegTech as well as Distributed Ledger Technology.  

Attached are the two links to these two reports by FSDC.  

http://www.fsdc.org.hk/sites/default/files/FSDC%20Paper_FinTech_E.pdf

http://www.fsdc.org.hk/sites/default/files/FSDC%20Paper_DLT_E.pdf
 

A new CFA Institute study predicts large scale trends will have a significant impact on the investment industry. The landscape is expected to change dramatically and new skill sets will be necessary for investment professionals to be successful in this new environment. This is likely to produce fresh challenges for organisations providing education to the investment industry. They will need to adapt and construct educational services relevant for the industry of tomorrow. Some are evidently already moving towards a more engaged role. 

Presentation deck of CFA China Shanghai seminar - Stock Market Efficiency, Participants and Investment Delegation

In December 2016 CFA Institute supported the 29th Australasian Finance and Banking Conference by sponsoring two research awards in Banking / Finance / Investment Management in Asia-Pacific markets and the winner of the first prize goes to Yeguang Chi, associate professor of Shanghai Jiaotong University SAIF.

In addition to uploading Professor Chi’s winning paper “Private Information in the Chinese Stock Market: Evidence from Mutual Funds and Corporate Insiders” onto ARX, to bridge the gap between academics and practitioners we have created a Practitioner’s Brief, a short practitioner-focused digest of the research paper and an accompanying video edition of that digest.  The brief and video were well received and CFA China Shanghai decided to bring it to life by hosting the first o2o seminar on June 6.

During the event Professor Chi first illustrated the conditions of China’s stock market in terms of trading volume of retail investors and performance of mutual funds. Then he presented his research findings on how and why mutual funds and institutional investors in China outperform the market, highlighted the disadvantages retail investors possess in a considerably inefficient market and encouraged retail investors in China to consider delegate the investment decision to fund managers, trade less or to go for passive investments. Meanwhile he also urged for more disclosures on private meetings and stronger enforcement against insider trades to enhance market efficiency.

Professor Chi's presentation deck can be downloaded in the attached.

Investigating the vastness of Investment Risks Surviving the markets through strategy

WHAT’S THE INVESTMENT ISSUE?
In the summer of 2015, Chinese regulators aggressively tightened fairly lax trading rules in the country’s stock index futures market in the midst of a chaotic crash. The move, an effort to tamp down rampant speculation and manipulation, was widely criticized as an overreach. With margin barriers thrown up higher and position sizes significantly capped for nonhedgers, speculators all but vanished (a desired outcome); however, so too did volume, which decreased nearly 100%—not exactly a best-case scenario. “China has killed the world’s biggest stock index futures market,” Bloomberg wrote in September 2015. Illiquidity in the market for futures tied to the China Security Index 300 “was causing problems,” the Financial Times said. In hindsight, it’s worth asking: Were these regulations, while apparently necessary, nevertheless ill-advised? No, assert the authors, who do not gloss over the fact that liquidity was severely impacted. What they do emphasize is a rather counterintuitive finding: A market in which liquidity has ground to a halt does have an upside.

HOW DO THE AUTHORS TACKLE THIS ISSUE?
Eugene Fama’s efficient market hypothesis (EMH) holds that stock prices immediately and inherently reflect all available information such that there’s no predictive power to be gleaned, i.e., it’s all randomness at play. EMH has been endlessly tested and re-tested since it first emerged in the 1970s at a time when low-cost passive management was coming on the scene as a disruptor to active management. Several testing methods were used to batter/gut-check EMH. Prominent among them was the variance ratio (VR) test, put to use, alongside other tests, by authors Lin and Wang. They set out to measure the efficiency levels of the Chinese stock index futures between July 2015 and September 2015. During this period, a slew of rule changes were implemented, making it harder to trade index futures, a prevalent means of speculating, hedging, arbitraging, and as it turned out, carrying out manipulative schemes, e.g., pump-and-dumps or coordinated bear attacks. The futures market plays a major role in price discovery in the broader spot Chinese stock market. Prior to the change, rules for stock index futures trading were indeed loose and transaction costs were low. Leverage was plentiful and dangerously easy to access. When all of these conditions were curbed via tighter rules, something interesting happened. Yes, volume collapsed. But what happened to the market’s efficiency?

WHAT ARE THE FINDINGS?
The results of VR tests (and Granger causality tests) were puzzling. Although the authors thought they would find that regulatory tightening had a detrimental impact on market efficiency and price discovery, just as it had on volume and liquidity, it did not prove to be the case. To the contrary, the VR testing found that absolute VR levels of Chinese index futures’ five-minute returns went from roughly 2.70 before the rule change to around 1.0 after—a decrease of more than 50%. In other words, markets became more efficient in the post-tightening study period. With volume and liquidity in such a freefall, why would that happen? It is possible, explained the authors, that in low liquidity environments trading mainly occurs among the most knowledgeable institutional investors. Speculators and manipulators fall away. So we’re talking about very light trading—but among very well-informed participants free from the distractive din of the less informed. This hypothesis requires testing. If additional data was available, it would be an interesting topic for further research, according to the authors.

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS? “Regulators can be helpful in a bad market state,” the authors said, noting that at the time the rules were imposed the stock futures market had been overrun by unchecked manipulators who were abetted by low barriers to leverage and the ability to upsize. The regulatory goal of squeezing nonhedgers out of the market was met. Authorities drastically reduced excessive manipulation—without unintentionally creating a less efficient market. Co-author Hai Lin explained in an email: “While extreme regulations do not happen often, that doesn’t mean that their potential can be ignored.” Regulations can tighten in stressful environments—or in other words, right when investors might be most inclined to employ hedging strategies. In developing risk management strategies, investors need to view regulatory conditions as a factor that can vary over time. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

EBLSL prepares Equity Insight Report on regular basis that provides brief company insights based on fundamental analysis along with a preview of respective industry in which the company operates. Besides, factors affecting stock prices i.e. investment positives and negatives are also presented in the report.

WHAT’S THE INVESTMENT ISSUE?
Investors have a limited amount of attention to give to their investment decisions. Many believe that paying attention to rankings of stocks provides them with a less attention demanding decision making shortcut. In reality, however, does paying attention to stocks ranked in a more salient place help improve financial decisions and market efficiency? Existing research on ranking and attention typically encounters the difficulty of separating out the pure effect of attention from that of fundamental news, which is especially true when rankings correlate with fundamentals. Thus, findings based on fundamental based rankings are subject to the confounding effects of both attention and fundamentals. The author tackles this challenge by exploring the price limit rule in China’s stock markets. Under that rule, stocks that hit the 10% upper price limit on a day are ranked by their daily returns, whose differentials are produced by mechanical rounding of maximum price changes as opposed to differential fundamental news. Investment practitioners in markets with the price limit rule in place may wish to exploit the impact of stock rankings for those stocks hitting the upper price limit. Thus, relevant questions to practitioners would pertain to (1) whether hitting the 10% upper price limit is truly an attention-grabbing event; (2) whether differential attention is allocated across the stocks hitting the price limit based on their rankings; and (3) whether stocks hitting the price limit that are ranked differently exhibit different subsequent returns, trading volume, volatility, and liquidity.

HOW DOES THE AUTHOR TACKLE THIS ISSUE?
The author conducted a series of tests to address the empirical questions posed above, studying a sample of China’s A-shares (shares that are quoted and traded in Chinese RMB) on China’s Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE). The time period is from 16 December 1996, when SSE and SZSE initially established the current price limit rule, to 31 March 2015, when the research project was initiated. The author selects 2,505 out of 4,910 trading days; during these days the markets had at least 5 upper price-limit events. We hereafter call stocks that hit the upper price limit on a day the “event” stocks. For most stocks, the daily absolute price movement is regulated to be 10% of the previous trading day’s closing price. When the 10% price change is not an integer number of cents, the daily price limit is rounded to the nearest cent. This creates different maximum returns allowed across stocks with different previous closing prices. For example, stocks with the previous closing price of RMB 9.99, RMB 10.00, and RMB 10.01 would all have a daily maximum price change of RMB 1.00; this results in a maximum return limit of 10.01%, 10.00%, and 9.99%, respectively. The differential maximum return limit is, therefore, caused by mechanical rounding and not by differential fundamental news. As a result, the author identifies the pure effect of ranking by exploring the differential attention paid to the more saliently ranked stock, which returns 10.01% in a day in the previous example, versus those with less salient rankings, which return 10% or 9.99%, and the implications of rankings for the financial market. To carry out the tests, the author hand collected the website viewer data from hexun.com, one of the largest financial websites in China. The number of viewers from different IP addresses measures the attention paid by investors to a particular stock on a day. The author tested the impact of investor ranking by comparing two groups of event stocks, based on whether their event-day return was above median (usually 10%) or not, across dimensions of contemporaneous and subsequent returns, volume, volatility, and liquidity. Event stocks with the above median return were assigned to the high-rank group (with an average of above 12 stocks per day); the remainder were assigned to the low-rank group (with an average of near 10 stocks per day).

WHAT ARE THE FINDINGS?
The author finds that investors do pay significantly more attention to stocks hitting the price limit for several days on and after they hit the upper limit, measuring attention by the number of viewers on the hexun.com webpage. The abnormally high attention persists for two weeks after the event day. Furthermore, the high-rank group receives even more attention than the low-rank group on the event day and the subsequent three days. Relative to the low-rank group, the high-rank group of event stocks experiences a greater price increase for two days as well as a greater price reversal that follows within one to two weeks. As for trading volume, liquidity, and return volatility, the results suggest that during the post-event period, the high-attention group of event stocks exhibits higher trading volume, better liquidity, and higher volatility. Smaller investors are more affected by the rank effect. Moreover, the effect of trading volume and volatility is larger and persists longer, but the effect of liquidity is smaller and lasts only for a few days. These effects are noticeably stronger when a larger number of stocks are hitting the upper price limit on a particular day—thus, investors are more attention constrained and top rankings are more salient. The author conducts similar analyses on stocks with a 5% price limit and stocks that hit the 10% lower price limit. The evidence is overall weak, suggesting that it is the rankings of stocks that hit the upper price limit that matter most for attention allocation. When the maximum return is not extreme enough to make the top ranking, or the ranking is for losers and mainly attracts sellers, neither strong investor attention nor the effect of attention is found.

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
The findings send a clear message that even pure rankings that are uncorrelated with fundamentals dictate investor attention and lead to large and predictable effects on asset prices. Understanding how ranking affects asset prices will help to improve portfolio performance for institutional and individual investors who trade in securities markets where financial assets are presented in various ranking formats. Investors may consider exploring the temporary price momentum and subsequent price reversal of highly ranked stocks, and more importantly, exploring the return differential between high- and low-rank groups of stocks using a long-short portfolio. The conventional wisdom is that having investors who pay attention is a good thing; it means that important fundamental news is received and consumed, leading to more efficient asset prices. Advances in behavioural finance in recent years, however, suggest that attention may have a detrimental effect when it interplays with behavioural biases, such as the pure order effect. The findings of this article demonstrate such evidence as well as opportunities for smart investors who are paying attention in the right places. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Summarized by Danling Jiang and Jingyu Cui. Danling Jiang is an Associate Professor of Finance at Stony Brook University—SUNY and the Chang Jiang Scholar Visiting Professor at Southwest Jiaotong University. Jingyu Cui is a Master of Science in Finance student at Stony Brook University—SUNY.

WHAT’S THE INVESTMENT ISSUE?
Short-sale restriction is an important form of limits to arbitrage. In markets with partial shortsale restrictions, some stocks can be sold short (shortable stocks) whereas others cannot (no-short stocks). The latter are more subject to mispricing because of greater limits to arbitrage. Mispricing can be a source of risk, because investors may lose money if mispricing persists in the near term while they are betting against mispricing. Accordingly, finance theories predict that stocks more subject to mispricing—in this case, the no-short stocks—should on average earn a return premium as compensation for mispricing risk. Despite extensive research on short-sale constraints, few studies have directly tested the no-short return premium. Investment practitioners in markets with partial short-sale restrictions may want to exploit the no-short return premium induced by such regulations. To do so, they would ask two questions: Do the real-world data support the claim that no-short stocks on average earn higher returns? If so, how can they determine investment strategies based on the no-short return premium? The authors thus set out to reveal the superior expected excess and abnormal returns on no-short stocks over those on shortable stocks, as well as to demonstrate the strong return predictive power of the loadings on various long–short portfolios constructed using shortable and noshort stocks.

HOW DO THE AUTHORS TACKLE THIS ISSUE?
The authors test their prediction about the no-short return premium using the Hong Kong stock market’s unique regulatory setting. In the Stock Exchange of Hong Kong (SEHK), stocks are periodically added to or deleted from the list of shortable stocks. This list is selected from the pool of stocks satisfying criteria based on market capitalization, liquidity, and so on. Stocks on the list are “shortable,” and stocks excluded from the list are “no-short”. The authors form a portfolio consisting only of no-short stocks (denoted as N) and a portfolio of only shortable stocks (denoted as S). They then create a long–short portfolio (denoted as NMS, for “no-short minus shortable”) as the return spread between N and S. They consider four different NMS portfolios, using the SEHK size and liquidity criteria to decide which stocks should be added to, can remain on, or should be removed from the official short-sale list. Further, the authors use Fama–MacBeth two-pass regressions to investigate how well the loadings of the test assets (portfolios and stocks) on each of the four NMS portfolios can predict the cross-section of future asset returns.

WHAT ARE THE FINDINGS?
The authors find that from 1997 through 2014, the NMS portfolio earns a monthly return of 2% to 3%, or an abnormal monthly return of about 1.3%, after accounting for its correlations with a set of standard common factors (market, size, value, liquidity, etc.). Thus, on average, no-short stocks indeed earn a return premium over shortable stocks. Moreover, the authors discover that no-short and shortable stocks tend to co-move negatively: When no-short stocks do better, shortable stocks tend to do worse. Mostly importantly, the factor loadings on the four NMS portfolios are strong positive predictors of future portfolio and stock returns in the cross-section. For example, the regression estimates imply that moving from the lowest 20% to the highest 20% NMS loading stocks increases the expected return next month by 1.5% to 2.0%. Moving from the lowest five shortable to the highest five no-short size and book-to-market portfolios increases the future average return by more than 4% per month. The loadings on the other three NMS portfolios, formed by considering the size and liquidity criteria for the official shorting list, exhibit similar or somewhat stronger forecast power.

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
The findings will help to improve portfolio performance for institutional and individual investors who trade in securities markets with partial short-sale restrictions. Investors may consider gaining exposure to the NMS factor beyond their exposures to other standard factors. A refined strategy would require extracting stocks with the most extreme loadings on the NMS factor, as well as forming a portfolio that is long the highest NMS loading stocks and short the lowest NMS loading stocks. Furthermore, the refined trading strategy can be combined with strategies based on other style characteristics. Popular wisdom is that investors should pay more attention to the information revealed by short selling and take advantage of this information through observed short positions. The findings in this article direct investor attention to another side of the market, however: the stocks that cannot be sold short. These no-short stocks actually earn higher average returns because many investors may shy away from trading these more likely mispriced stocks. As a result, investors who are willing to invest in these stocks are paid to do so. For firms, however, regulation is bad news: Short-sale restrictions imply higher cost of equity. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Summarized by Danling Jiang and Xiao-Ming Li. Danling Jiang is an associate professor of finance at SUNY at Stony Brook and the Chang Jiang Scholar Visiting Professor at Southwest Jiaotong University. Xiao-Ming Li is a professor of financial economics at the School of Economics and Finance (Albany), Massey University. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

WHAT'S THE INVESTMENT ISSUE?
How much of a stock’s movement can be attributed to movements in the index in which it resides? And, if a stock moves in line with an index (or, in academic parlance, has a "high R-squared") what, exactly, accounts for that co-movement? Industry members and academics have numerous theories: shared information being digested in lockstep by portfolio managers; index funds rebalancing themselves; or random noise—some inexplicable yet observable factor that for whatever reason creates an environment of stock-return synchronicity. For quant managers spotting trends, there’s no point in asking why; they just want the trend to repeat. Not so for researchers such as Wang, Wei, and Yu, who want to bring new perspective to this puzzle, one that has proved tricky for active fundamental managers seeking to differentiate themselves against the benchmark. In tackling the question of synchronicity, the authors explore the issue across a dynamic setting—earnings season in China, when more-robust information on companies becomes available—and also consider newer companies versus older ones.

HOW DO THE AUTHORS TACKLE THIS ISSUE?
They examine synchronicity levels during earnings season, which for 98% of Chinese companies is January through April. The authors also go a step further, overlaying a variety of variables such as changes in fundamentals, fluctuating liquidity conditions, and corporate events. These events include any activity that could increase assets by 50% or more (e.g., a merger) and thus affect a company's systematic volatility.

WHAT ARE THE FINDINGS?
The authors discover that in rich information environments (i.e., earnings season), the degree of synchronicity (stocks moving in tandem) actually is reduced; and in less informative environments (non-earnings periods, May through December), synchronicity is more prevalent. This finding is noteworthy, if only in light of the overriding preconceptions about emerging markets such as China, long thought to generally be more prone to synchronous behavior relative to developed markets (for a host of reasons, including property rights considerations). Here, the authors are able to observe a repeated pattern: During Chinese earnings season, the degree of systematic volatility in that market is reduced. The trend is more pronounced for older companies with longer track records of meeting (or failing to meet) their numbers. One explanation stems from a concept that the authors call "intra-industry, cross-asset learning." Drilling down into this concept rather simplistically for illustration's sake, suppose three large companies from different industries (e.g., an automaker, a coal miner, and a retailer) make earnings announcements on the same day. Investors may make inferences about other companies in these respective industries. Now, further suppose that the following happens: The automaker’s earnings come in as expected; the coal miner’s come in better than expected; and the retailer’s do much worse than expected. In this example, one might expect share prices to behave distinctly among the three industries: mostly flat for auto firms, up for coal mining firms, and down for retailers. The market as a whole, however, may change little that day, with the offsetting share price changes in the different industries dampening the market or systematic volatility. In other words, share prices move in a less synchronized fashion because of intra-industry, cross-asset learning during the earnings announcement season, which reduces market or systematic volatility in the meantime.

WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
This study challenges the prevailing wisdom that Chinese stocks tend to move in step with each other, particularly with a time consideration (i.e., earnings season, when a higher intensity of firm-specific information arrives in the market). For stock pickers trying to differentiate themselves from a benchmark, earnings season would thus provide an especially opportune moment to show their ability to make a judgment call on a stock, take a position (bullish or bearish), and not have it mooted by the whims of the overall market. Conversely, for index investors, the authors’ findings suggest that the time to rebalance toward a passive approach would be during non-earnings season when Chinese stock market return synchronicity appears to be at a higher level. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

Sell-side research report on Best World International Ltd. Initiate a Buy Call with upside of 47.7%. Includes: - detailed report of analysis - slide deck to pitch the stock recommendation - financial model with detailed accounting adjustments, performance analysis, forecasts and valuations

WHAT'S THE INVESTMENT ISSUE?
During the last 18 months, China has witnessed a flurry of securities fraud investigations and arrests involving a wide cross-section of the industry, from high-rolling financiers to humble accounting professors, and even some regulators. The insider-trading crackdown is partly an effort to wash away perceived stains of corruption following the crash of summer 2015. Even before that, though, Chinese insider trading cases had begun to mount as the market, and mechanisms to regulate it, matured. Despite its relative inexperience, China’s stock market is the second largest on earth. Still, an assumption persists (and is studied by researchers such as Chi) regarding the relative information inefficiency and asymmetry of less developed markets such as China. In his article, Chi makes no secret of his own perceptions about the pervasiveness of non-public information used for investing. One given in the hypothesis suggesting there are greater inefficiencies to potentially exploit in China relative to the United States is the fact that most Chinese mutual funds can outperform the index—certainly not the case in the United States. For Chi, then, the driving question becomes: To what extent is private information exploited in a less developed financial market such as China? To a significant degree, as it turns out. Chi’s research suggests that at a minimum, the insider buy is a powerful predictive tool for the generally upward direction of the stocks being bought, particularly for issues from state-owned enterprises (SOEs), and even more so for highly volatile stocks.

HOW DOES THE AUTHOR TACKLE THIS ISSUE?
Chi sets out to study insider trading in China via a proxy that, although an obvious choice, is nevertheless not to be conflated with criminal insider trading. That is, he looks at legal, disclosed trades made by corporate insiders, which, despite being purportedly aboveboard, still carry a connotation of information advantage. By creating a basic strategy to mimic insider buys, Chi demonstrates, at least on paper, the ability to add considerable alpha. Note that mimicking insider sells is not a good idea because sellers can have multiple motivations (e.g., liquidity or diversification needs). Buyers, on the other hand, generally are motivated by positive information. Mimicking insider buys may once have worked in the United States, when its stock market was nascent. Today, however, although by no means devoid of insider trading, the US market is viewed in academic terms as "efficient in semi-strong form." More informally, the system is not "rigged." If it were, Chi asserts, more US mutual fund managers would beat the index. In China, the perception of a rigged system became increasingly rampant after the summer of 2015 crash, as traders such as Xu Xiang (the Carl Ichan of China) seemed impervious to the market collapse when most other investors were crushed. Xu would later admit to conspiring with executives to control the timing of corporate announcements. To explore how private information is wielded in China, the author tapped the Wind Information database to study trading activity of corporate insiders (top executives, board members) between April 2007 and June 2014, focusing on the A-share market on two exchanges (Shanghai and Shenzhen) comprising some 2,555 stocks with a combined market cap (in 2013) of RMB20 trillion, or USD$3.3 trillion. The insiders' trading activity amounted to RMB900 billion, or 0.3% of total trading. Chi found the following: • Insiders reap large profits trading their company stocks. • Insider buys possess predictive power to stock prices; insider buys from SOEs have even stronger predicative power. • A rudimentary “mimicking-strategy” implemented for 12-month periods added 14.4% worth of annual alpha above the benchmark. And guess what else he found? The best-performing Chinese mutual funds' returns strongly correlated to the insider-mimicking strategy. Importantly, the fact that a fund trades in the same direction as insiders does not necessarily imply trading on material inside information. The author merely claims “that more correlated trading patterns point to a higher likelihood of private information shared by stock funds and corporate insiders." Because of data limitations, he cannot make a further claim about how fund managers obtain such private information.

WHAT ARE THE IMPLICATIONS FOR PORTFOLIO MANAGERS?
Before one delves into the art and science of insider-mimicking strategies, it is important to note an additional finding by the author. Chi split his six-year study into two three-year periods. In the latter period, the predicative power of the insider buy diminished significantly compared with the first period. So, as time passed, the Chinese market appears to have become more, not less, efficient. Here’s one last bit of material information that is hardly any secret: China’s recent insider trading crackdown will serve only to accelerate this trend. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the author(s) and do not represent the official views of CFA Institute or the authors’ employers.

Building upon the success of CAR’s Folklore of Finance: How beliefs and behaviors sabotage success in the investment management industry, this18-month flagship study sought an answer to the pressing question: How can motivators produce better financial outcomes in the investment management industry? - Developed in partnership with the CFA Institute, Discovering Phi: Motivation as the Hidden Variable of Performance is based on input from nearly 7,000 survey respondents across 20 countries, interviews with more than 200 global industry leaders, as well as extensive secondary research and quantitative modeling. - “Phi” is derived from the motivational forces of purpose, habits and incentives that direct our behaviors and actions. It drives behaviors and attitudes among investors to reach higher levels of engagement and progress towards long term goals. - This presentation covers the study’s Japan individual investor results specifically. Please visit www.statestreet.com/CAR, www.cfainstitute.org/motivations for more information.

Building upon the success of CAR’s Folklore of Finance: How beliefs and behaviors sabotage success in the investment management industry, this18-month flagship study sought an answer to the pressing question: How can motivators produce better financial outcomes in the investment management industry? - Developed in partnership with the CFA Institute, Discovering Phi: Motivation as the Hidden Variable of Performance is based on input from nearly 7,000 survey respondents across 20 countries, interviews with more than 200 global industry leaders, as well as extensive secondary research and quantitative modeling. - “Phi” is derived from the motivational forces of purpose, habits and incentives that direct our behaviors and actions. It drives behaviors and attitudes among investors to reach higher levels of engagement and progress towards long term goals. - This presentation covers the study’s Hong Kong individual investor results specifically. Please visit www.statestreet.com/CAR, www.cfainstitute.org/motivations for more information.

Building upon the success of CAR’s Folklore of Finance: How beliefs and behaviors sabotage success in the investment management industry, this18-month flagship study sought an answer to the pressing question: How can motivators produce better financial outcomes in the investment management industry? - Developed in partnership with the CFA Institute, Discovering Phi: Motivation as the Hidden Variable of Performance is based on input from nearly 7,000 survey respondents across 20 countries, interviews with more than 200 global industry leaders, as well as extensive secondary research and quantitative modeling. - “Phi” is derived from the motivational forces of purpose, habits and incentives that direct our behaviors and actions. It drives behaviors and attitudes among investors to reach higher levels of engagement and progress towards long term goals. - This presentation covers the study’s China individual investor results specifically. Please visit www.statestreet.com/CAR, www.cfainstitute.org/motivations for more information.

Building upon the success of CAR’s Folklore of Finance: How beliefs and behaviors sabotage success in the investment management industry, this18-month flagship study sought an answer to the pressing question: How can motivators produce better financial outcomes in the investment management industry? - Developed in partnership with the CFA Institute, Discovering Phi: Motivation as the Hidden Variable of Performance is based on input from nearly 7,000 survey respondents across 20 countries, interviews with more than 200 global industry leaders, as well as extensive secondary research and quantitative modeling. - “Phi” is derived from the motivational forces of purpose, habits and incentives that direct our behaviors and actions. It drives behaviors and attitudes among investors to reach higher levels of engagement and progress towards long term goals. - This presentation covers the study’s Australia individual investor results specifically. Please visit www.statestreet.com/CAR, www.cfainstitute.org/motivations for more information.

EBLSL prepares Equity Insight Report on regular basis that provides brief company insights based on fundamental analysis along with a preview of respective industry in which the company operates. Besides, factors affecting stock prices i.e. investment positives and negatives are also presented in the report.

EBLSL prepares IPO Notes for the newly listed issues that provide brief company insights based on fundamental analysis along with a preview of respective industry in which the company operates. Besides, factors affecting stock prices i.e. investment positives and negatives are also presented in the report.

This report is published on January 2017.

This is a research report on Sustainability, published by S&P Dow Jones Indices.

This is a research paper published in February 2017.

National Savings is Government of Pakistan's initiative to encourage savings locally, and especially targets to provide financial security to certain segments of the society including women, senior citizens etc. The presentation highlights the savings rate in Pakistan and important achievements of National Savings and how it works.

EBLSL prepares Equity Insight Report on regular basis that provides brief company insights based on fundamental analysis along with a preview of respective industry in which the company operates. Besides, factors affecting stock prices i.e. investment positives and negatives are also presented in the report.

Equity insight report is part of a regular product from EBLSL Research Portfolio. The attached report contains brief analysis and investment insight on Olympic Accessories Limited.

Industry analysis is a part of EBLSL research product basket. The attached report contains the current market condition and competitive structure of the steel industry in Bangladesh. Besides, the report also contains a comparative review on the listed steel manufacturing companies in the capital market of Bangladesh.

MDRI-CESD | February 2015

Lee, Cassey; Lee, Chew Ging; Yeo, Micheal | February 2016

Fundamental analysis on Bangladesh Steel Re-Rolling Mills Limited

This is the presentation powerpoint presented by Heather Brilliant at CFA Institute 7th India Investment Conference, on 13 January 2017.

This is the presentation powerpoint presented by Peter Berezin at CFA Institute 7th India Investment Conference, on 13 January 2017.

Are Tightened Trading Rules Always Bad? Evidence from the Chinese Index Futures Market

Using historical monthly index data with an in-sample data-based mean-variance optimization approach, weight constraints on overseas market allocations and FDR taxes applied to PIEs are shown to reduce the RR gains from diversification to statistically insignificant levels compared to the domestic market portfolio.

China Concept Stocks’ “returning home”, privatization and relisting, is a hot topic in recent years. And private equity firms play important roles in this trend. However, understanding to private equity’s investment decisions and roles in this area is very limited. Motivated by this phenomenon, this paper combines theoretical analysis and the case study of CITIC PE investing 3S Bio, one of the latest and most successful cases, to conduct comprehensive research. Innovatively, this paper highlighted special considerations for private equity firms in the following 4 aspects: 1) favored characteristics of the target companies for privatization and relisting projects 2) considerations in choosing relisting exchange 3) intrinsic value creation of the target company 4) return creation of such investments.

This study examines the tracking performance and tracking error of New Zealand Exchange Traded Funds (ETFs). We document that New Zealand ETFs do not replicate their corresponding indexes perfectly. At the daily frequency, we observe that the ETFs have substantially different exposures to their underlying indexes from what they should be, which is confirmed by cointegration analysis. At the monthly frequency, tracking performance improves, but still shows significant differences between the ETF and its underlying index. When we examine the tracking errors of the ETFs, we observe that these are substantial, and that there is considerable variation in tracking error. Regression analysis shows that both characteristics of the ETF and the constituents of the index the ETF tracks, as well as the volatility of the underlying benchmark are determinants of the tracking error of the ETFs.

In the paper, we use unique and proprietary information on industry stop-loss rules to evaluate the feasibility of currency carry trades considered by academic researchers. We find that these rules cause reported carry trade profitability to largely disappear, with most trades having to be closed out early. The much-vaunted profitability of the carry trade appears to depend on staying the course, contrary to standard risk management policies. This calls into question much of the literature that seeks to explain reported carry trade returns.

QIC recently partnered with Asian Investor magazine to conduct a survey to gauge the attitudes of Asian investors towards infrastructure as an asset class. Questions revolved around; allocation strategies, likely exposure trajectories, factors effecting manager choices as well as what challenges they face. The results have been illuminating, and on the whole they show a growing interest in infrastructure as an asset class that is well suited to current market conditions

This report takes a strategic review of "Own Solvency Risk Assessment (ORSA)" for a insurance company to undertake under Solvency 2 and local regulations.

Description on key concepts that can be practically applied at an insurance company for ERM.

One of the most important risk management tools that can be used by an insurer is Reinsurance. The insurer can utilize reinsurance in order to reduce its insurance risks and the volatility of its financial results, stabilize its solvency, use its available capital more efficiently, improve its ability to withstand disasters, increase its underwriting capacity and draw on the reinsurer's expertise with respect to product development.

There are several factors which affect the reinsurance program and strategy of which some of the more important ones have been discussed in this report.

The basic purpose of modeling for reinsurance optimization should be to help develop an appropriate cession strategy that will maximize achievement of the reinsurance goals. This involves modeling a variety of mixes of reinsurance coverage at various limits and retention and with various loss-sensitive features in order to achieve an optimal program.

This article will concentrate on highlighting a number of key considerations to be taken by reinsurers when pricing for reinsurance in the GCC region especially for small and national reinsurers that generally lack the skills available to global multinational reinsurers.

This reports highlights briefly the practical considerations when handling with different aspects of reinsurance.

This study illustrates methods for estimating fund capacity, highlighting the sensitivity of estimates to the approach and identifying key drivers. The analysis applies measures to an actual equity fund; coupled with modeling for Momentum and Value signals.

This is one of the presentation powerpoint in CFA China Conference on 20 August 2016.

This is one of the presentation powerpoint in CFA China Conference on 20 August 2016.

This is one of the presentation powerpoint in CFA China Conference on 20 August 2016.

This is one of the presentation powerpoint in CFA China Conference on 20 August 2016.

Investment performance is certainly an important consideration for any investor, but operational failures can be a stumbling block to investors’ investment decisions. Hence, apart from generating competitive investment returns, investment managers also need to demonstrate their commitment to protecting investors’ best interests by adhering to fundamental ethical principles, professional conduct, applicable rules and regulations, and industry best practices if they want to build a sustainable business. This is where operational due diligence (ODD) comes in.

This paper examines the sample selection bias in portfolio horse races. Numerous studies have developed mean-variance portfolio rules to outperform the naive 1/N portfolio rule. However, this outperformance is often justified with a small number of pre-selected datasets. Using a novel performance test based on a large number of datasets, this paper compares various “1/N outperformers” with the naive rule. The results show that a majority the “1/N outperformers” on average underperform the 1/N rule. More surprisingly, none of the mean-variance rules significantly outperform the naive benchmark in more than 10% of the datasets. To further understand portfolio performance, this paper explores the theoretical relations between assets’ return moments and the performance of optimal versus naive diversification. These relations not only imply strong performance predictability, but also can be exploited to deliver out-of-sample portfolio benefits.

The paper aims to model and forecast the volatility in the stocks traded at the Karachi Stock Exchange before and during the recent financial crisis using the GARCH, EGARCH and GJR-GARCH models. We find the stock return volatility to be characterized by clustering and displaying asymmetries. Results point to the capability of the EGARCH(1,1) model at forecasting for both periods lending support to the use of GARCH family of models for emerging markets during crisis. We find evidence for a synthetically constructed index based on trading volume capturing the volatility structure of the market as well as that based on market capitalization which has important implications for investors.

The opinion piece highlights some of the prominent reasons for doing FDI and FPI in Pakistan.

This paper examines whether the media can drive the presence of investor sentiment around the IPO event through the tone channel. Using word frequency analysis to define whether one newspapers article is positive or negative and measuring media tone as the number of positive in excess of negative newspapers articles in the pre-IPO period, we find robust evidence that media tone is positively related to IPO first-day returns while negatively related to long-run abnormal returns for a sample of Chinese book-built IPOs over the 2005-2012 period. One positive newspapers article can predict not only an increase of up to 6.95 percentage points in first-day returns but also a decrease of 10.93 percentage points in three-year abnormal returns. Further analysis suggests that media tone tends to increase first-day retail trading and attracts more retail investors to subscribe new shares in the primary market. Taken together, these findings are consistent with our hypothesis that media tone drives retail demand for IPOs, leading to a temporary deviation from fundamentals in post-IPO prices.

This is the paper to be presented at AFB conference. For consideration for the CFA award.

Commonality in idiosyncratic volatility can be decomposed into two components, both of which are priced in the cross section. We propose a multivariate GARCH model to fit the data.

Buying low turnover winner stocks and shorting high turnover loser stocks (early-stage momentum) improves significantly over simple momentum strategies in 36 countries.

This research report is published on 14 November 2016 by BOCOM.

This research report is published on 14 November 2016 by BOCOM.

2016 CFA China Conference

Principles of Risk Management for Takaful: Policies & Procedures

overcoming crises before they start by taking a pro-active approach to risk management.

This report serves as a broader ERM framework structure, which would allow any company (especially insurance company) to set in-place an ERM implementation approach. ERM framework encapsulates, in a single structured document, the company-wide risk management principles and processes.

examing the Risk Policy Structure for General Insurance/takaful.

examing risk policy structure for a life insurance/takaful company.

stress testing banks and results.

investment strategy making for takaful insurance companies.

Conditioning the Information in Portfolio Optimization

Days to cover, short interest ratio divided by average daily share turnover, and not short interest ratio measures the rewards to entering crowded trades.

We provide novel evidence that arbitrageurs use exchange-traded funds (ETFs) as an avenue to circumvent short-sale constraints at the stock level. Using a large sample of U.S. equity ETF holdings, we document that shorting activity on ETFs rises with the difficulty of shorting the underlying stocks. Stocks that are heavily shorted via their holding ETFs underperform those lightly shorted by 94 basis points per month. The return predictability of ETF short selling on individual stocks is distinct from stock-level shorting measures, and is concentrated among stocks that face the most severe arbitrage constraints. Across a broad set of capital market anomalies, we find that anomaly returns are significantly attenuated when ETF ownership is high. Our evidence suggests that ETFs contribute to a more informationally efficient market by allowing arbitrageurs to target overpriced stocks that are otherwise difficult to short.

Examines investing in emerging markets from an Australian perspective; noting how currency relationships reduce risk for Australian investors.

Australian institutional investors are interviewed to learn how they choose between active and passive management, select active equity managers and construct multi-manager portfolios.

Equity home bias for Australian super funds is modelled as a 2-asset choice under the influence of legacy, a trade-off between expected returns against portfolio risk and peer risk, and adaptive expectations, and taxation differences.

Skill is identified for a comprehensive sample of active Australian equity funds by analyzing trades inferred from monthly holdings, including examining performance by different types of categorizing trades and across funds styles.

Examines the implications of dividend imputation for stock prices and returns, cost of capital, project evaluation, capital structure, payout policy and investor portfolios. it is argued that its removal would be detrimental.

Examines DCF valuations and earnings yields, and finds at best mixed and largely unconvincing evidence of imputation credits being capitalised into share price levels for Australian shares.

Investigates performance persistence for Australian equity funds using holdings data. Significant persistence is found among outperformers rather than underperformers, and is primarily related to security selection skill.

Addresses how investment management organizations might be built to successfully pursue long-term investing. The discussion is illuminated by insights and examples drawn from the Future Fund.

Examines the issues and methods for evaluating the capacity of a fund that invests on an investment signal. Discusses how capacity is defined; identifies ten drivers; and outlines approaches for conducting capacity analysis.

Models the tax drag for Australian active equity funds versus passive indices. Tax erodes 65% of the 0.74% excess return in Broad Market funds, but only 21% of the 1.80% excess return in Small-Cap funds for superannuation investors.

This report examines the Australian superannuation default fund landscape following the introduction of MySuper at the beginning of 2014.

Comparison of New Zealand's KiwSaver with Australia's MySuper default pension funds.

Australian superannuation fund members are surveyed to gauge motivations behind defaulting, as well as their wants and needs from their pension fund. Comparison is made with findings from interviews of fund executives.

Reports on interview with Australian superannuation fund executives about how their organisations responded to the MySuper regulatory framework for default retirement savings funds that was put in place at the beginning of 2014.

Summary of CIFR project examining the ‘MySuper’ default superannuation fund regime. Outputs includes 5 working papers plus multiple journal articles; and includes industry analysis, interviews with executives and a member survey.

This paper reports on interviews with executives from the Australian superannuation industry around in-sourcing of asset management. A framework is proposed that asset owners can use for making and implementing decisions to manage in-house.

This paper examines the sample selection bias in portfolio horse races. Numerous studies have developed mean-variance portfolio rules to outperform the naive 1/N portfolio rule. However, this outperformance is often justified with a small number of pre-selected datasets. Using a novel performance test based on a large number of datasets, this paper compares various “1/N outperformers” with the naive rule. The results show that a majority the “1/N outperformers” on average underperform the 1/N rule. More surprisingly, none of the mean-variance rules significantly outperform the naive benchmark in more than 10% of the datasets. To further understand portfolio performance, this paper explores the theoretical relations between assets’ return moments and the performance of optimal versus naive diversification. These relations not only imply strong performance predictability, but also can be exploited to deliver out-of-sample portfolio benefits.

Discusses how the difficulty of investing for the long-term is compounded by the need for principals to monitor agents under uncertainty over payoffs that may not arrive anytime soon. Solutions are offered for investment organizations.

It is a blog posted on CFA Institute's website on 20 September 2016

There is this article from Clear Eye Investing I would like to share. It touches on some problems that I observed recently during the REIT ran up as well as some investors. There is an absence of looking at the importance of valuation. In most models the much discussed aspects have been the Business, the Cash Flow nature, and the operation conditions. With that in mind, a stock like SATS with a business model that does seems very sturdy when it was announced we will have terminal 4 and 5. Some will look at 4-4.5% as a good return with a 3% growth rate and buy based on that premise. At times the share price of 3.40 could have already baked in a 4% yield growing at 3%. In fact, to be worthy of 3.40, the growth rate would need to be 7-8%. Is that possible? Perhaps. You have to be right on the conditions for it to grow above average. What happens if you overpay?

Commonality in idiosyncratic volatility can be decomposed into two components, both of which are priced in the cross section. We propose a multivariate GARCH model to fit the data.

We investigate which stocks new mutual funds choose for their starting investment portfolio and how investors respond?

A direct measure of the cyclicality of momentum at a given point in time, its bottom-up beta with respect to the market, forecasts both the returns and the risk of the strategy. Challenging a potential risk-based explanation, a highly cyclical momentum portfolio forecasts both higher risk and lower returns for the strategy. The results show robustness out-of-sample (OOS) and controlling for other variables. One predictive regression of monthly momentum returns on its bottom-up beta produces an OOS R-square of 2.41%. This contrasts with the usual negative OOS R-squares of similar predictive regressions for the market excess return.

This paper examines the dynamic conditional correlations between the Chinese sector returns and the S&P500 index returns and offers an interpretation for the heterogeneity of sector-level return correlations. Using a sample of 12 Chinese sectors for the period of 2006-2014, we first observe that their conditional correlations with the S&P500 index vary signicantly across sectors and across the two crises, namely, the 2008-2009 Global Financial Crisis and the 2010-2011 European Debt Crisis. We then interpret the heterogeneity of sector-level conditional correlations as arising from their heterogeneous sensitivities to investment shocks. We finally verify our interpretation. Our main finding is that sector-level investment opportunities, as proxied by book-to-market ratio, capital expenditure, long-term debt ratio, growth rate of industry size, and Tobin's Q, are significantly associated with the magnitude of their dynamic conditional correlations. This paper thereby advances our understanding of sectoral heterogeneities from the perspective of their responses to an outer investment shock.

Stock indexes are passive ‘value-weighted’ portfolios and should not have alphas which are significantly different from zero. If an index produces an insignificant alpha, then significant alphas for equity funds using this index can be attributed solely to manager performance. However, recent literature suggests that US stock indexes can demonstrate significant alphas, which ultimately raise questions regarding equity fund manager performance in both the US and abroad. In this paper, we employ the Carhart four-factor model and newly available Asian-Pacific risk factors to generate alphas and risk factor loadings for eight Australian stock indexes from January 2004 to December 2012. We find that the initial full sample period analysis does not provide indication of significant alphas in the indexes examined. However, by carrying out 36-month rolling regressions, we discover at least four significant alphas in seven of the eight indexes and factor loading variability. As previously reported in the US, this paper confirms similar issues with the four-factor model using Australian stock indexes and performance benchmarking. In effectively measuring Australian equity fund manager performance, it is therefore essential to evaluate a fund’s alpha and risk factors relative to the alpha and risk factors of the appropriate benchmark index.

A research paper to be presented in the 29th AFBC, which re-examines the beta effect under implied cost of capital settings.

This is a blog post describing various ways investors can construct portfolios in an environment where low interest rates have lead to high asset prices. It is written from the perspective of an US equity investor although the conclusions apply to all countries.

A review of industry surveys suggests that a blended business model combining both robo and face-to-face advice would best fit investor needs - both across the range of investor categories as well as flexibly accommodating the evolving demand by investors for different forms of advice through time.

This paper investigates the impact of earning asset diversification on Chinese bank efficiency from 2006 to 2011. To do so, we adapt the Simar and Wilson (2007) (Journal of Econometrics) approach to panel data context so that approach allows for technology change over time. Regression results reveal that increasing the asset share of other earning assets (including securities and derivatives) is positively associated with bank efficiency. Decreasing the share of nonearning assets in total assets or increasing total equity has a similar impact. Our results also suggest that financial reforms currently being undertaken in China, including removing the regulatory requirement concerning the ratio of loans to deposits (a new draft amendment to the existing commercial banking law) and interest rate liberalization (a proposed draft amendment), are likely to induce a significant positive effect on bank efficiency in China.

This article appear on WenXin's blog "洪灝的中国市场策略" on 13 September 2016.

This article appear on WenXin's blog "Hong Hao China Strategy" on 12 September 2016.

Title: Private Information in the Chinese Stock Market: Evidence from Mutual Funds and Corporate Insiders

Environmental Protection Funds Recommendation

SOE Reform Funds Recommendation

The aim of this research was to examine the propositions of Campbell et al. and Mirza et al. on pricing of leverage in stock returns using a comprehensive set of firms listed on the Karachi Stock Exchange (KSE) over a period of 13 years. This is original research published by Economic Research (Impact Factor 0.46).

Original research by author

Pakistan Market has been upgraded from Frontier Markets to Emerging Market status by MSCI with significant positive impact.

Briefly describes the author's recommendations for pursuing investment strategy in Pakistan

Medical & Healthcare Funds Recommendation

This is a research report published by UCON Investments in July 2015.

This is a presentation made to members of the CFA Society Melbourne on 14 July 2016.

此项研究确定了 TASS 数据库中一项未曾报告过的偏差。由于和崔盟 (Tremont) 数据库合并，1999 年 4 月至 2001 年 11 月期间添加到 TASS 数据库的基金中，60% 可能得以幸存（例如，仅从截至 1999 年 3 月 31 日时存在的基金中选取的基金）。由此产生了巨大的生存偏差，平均每年超过 5%。通常被界定为回填期间的词语实际上代表了隐性生存。于是提出排序算法，来排除这些基金的历史。

The book "Asset Management: A Systematic Approach to Factor Investing" is written by Prof. Andrew Ang from University of Columbia Business School. It is published in 2014.

This article appears on CFA Institute's Magazine Nov/Dec 2014.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

This article appears on CFA Institute Hedge Fund Journal 2016 issue, season 1.

Managing Multi-Asset Strategies identifies key challenges the investment management industry faces today in providing a sound solution to investors. The insights shared here by some of the most sophisticated institutional investors and the brightest minds in academia form the foundation for tackling these critical issues. Paul Smith, CFA President and CEO CFA Institute

This is a blog posted on CFA Institute's website on 26 January 2015.

This is a blog posted on CFA Institute's website on 27 July 2015 .

This is a blog posted on CFA Institute's website on 11 November 2015.

This is a blog posted on CFA Institute's website on 26 January 2015.

This is a blog posted on CFA Institute's website on 22 April 2014.

This is a blog posted on CFA Institute's website on 29 April 2014.

This is a blog posted on CFA Institute's website on 28 May 2014.

This is a blog posted on CFA Institute's website on 7 July 2014.

This is a blog posted on CFA Institute's website on 28 July 2014.

This is a blog posted on CFA Institute's website on 14 January 2014.

This is a blog posted on CFA Institute's website on 17 November 2014.

This is a blog posted on CFA Institute's website on 10 March 2014

This is a blog posted on CFA Institute's website on 26 November 2014.

This is a blog posted on CFA Institute's website on 20 October 2014.

This is a blog posted on CFA Institute's website on 16 July 2014.

This is a blog posted on CFA Institute's website on 21 July 2014.

This is a blog posted on CFA Institute's website on 12 August 2014.

This is a blog posted on CFA Institute's website on 19 November 2014.

This article appeared on CFA Institute's website on 29 May 2015.

This is a blog posted on CFA Institute's website on 4 August 2015

This is a blog posted on CFA Institute's website on 21 July 2015

This is a blog posted on CFA Institute's website on 11 May 2015.

This is a blog posted on CFA Institute's website on 8 March 2016.

This is a blog posted on CFA Institute's website on 10 March 2015.

This is a blog posted on CFA Institute's website on 8 March 2016.

This is a blog posted on CFA Institute's website on 10 February 2015.

This is a blog posted on CFA Institute's website on 3 February 2015.

This is a blog posted on CFA Institute's website on 8 March 2016.

Investigate the basic tenets of deep learning and why deep learning is becoming very important for investments.

Relevance of impact investments to Property & Casualty Insurance

This article is published on 17 May 2016.

This article is published on 10 June 2016.

This article is published on 16 June 2016.

This article is published on 22 June 2016.

This article is posted on 24 May 2016.

This is a blog posted on CFA Institute's website on 26 January 2012.

This is a blog posted on CFA Institute's website on 12 March 2012.