Practical analysis for investment professionals
14 November 2011

Ahead of Print: Articles from the November/December FAJ

Posted In: Best Of

Active Management in Mostly Efficient Markets
Robert C. Jones, CFA, and Russ Wermers

This survey of the literature on the value of active management shows that the average active manager does not outperform but that a significant minority of active managers do add value. Further, studies suggest that investors may be able to identify superior active managers (SAMs) in advance by using public information. Investors who can identify SAMs should be able to improve their overall Sharpe ratio by including a meaningful exposure to active strategies.

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When Two Anomalies Meet: The Post–Earnings Announcement Drift and the Value–Glamour Anomaly
Zhipeng Yan, CFA, and Yan Zhao

This study of the post–earnings announcement drift and the value–glamour anomaly finds that value stocks have greater information uncertainty, exhibit more-muted initial market reactions to earnings surprises, and have better (more positive or less negative) post–earnings announcement drifts than do glamour stocks. A trading strategy based on these findings can generate an average annual abnormal return of 16.6–18.8 percent before transaction costs.

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Trading Relative Performance with Alpha Indexes
Jacob S. Sagi and Robert E. Whaley

Relative performance is central to investment management, and yet relative performance securities do not trade directly. Complex trading strategies must be devised to capture relative gains. The authors introduce a suite of relative performance indexes and index derivatives that offer new and attractive payoff structures. They demonstrate a variety of ways in which these products can provide a more efficient and cost-effective means of realizing investment objectives than can traditional futures and option markets.

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Most Likely to Succeed: Leadership in the Fund Industry
Robert Pozen and Theresa Hamacher, CFA

The authors’ review of mutual fund industry rankings over the past two decades suggests critical factors for success in the business. Surprisingly, the critical factors are not fund performance or marketing. Instead, the firms that are most likely to succeed are dedicated to the asset management business and are structured as partnership-like organizations controlled by their investment professionals.

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The Impact of International Institutional Investors on Local Equity Prices: Reversal of the Size Premium
Hao Jiang, CFA and Takeshi Yamada

Using comprehensive company-level ownership data from Japan, the authors found that the equity size premium correlates strongly with the investment flows of international institutional investors. When investment flows intensified and shifted into larger stocks in the mid-1990s, the equity size premium was reversed. Their findings suggest that a large fraction of the time variation in the size premium is driven by price pressures, regardless of any shift in the fundamentals of small and large companies.

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About the Author(s)
Rodney Sullivan, CFA

Rodney Sullivan, CFA, is former head of publications at CFA Institute and editor of the Financial Analysts Journal. He was previously director of research at Trigon Healthcare, Inc. (now Anthem Healthcare, Inc.), where he oversaw portfolio strategy and execution that included asset allocation, risk analytics, and equity and fixed-income portfolio management. He holds a BS and an MA from Virginia Commonwealth University.

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