Investment Strategy Essays
A Vaccum of Optimism
By: Stewart Massey
Yesterday's vote in favor of Great Britain to leave the European Union clearly caught global markets by surprise. Asset pricing over the past several weeks clearly indicated expectations for a "Stay" outcome. While the impact on equity, currency and fixed income pricing was swift and severe, Britain's exit from the EU and the renegotiation of trade agreements will take years. Given all of the unknowns, coupled with the usual items on the worry list (China, presidential election cycle, global growth, etc.), we expect markets to reprice to levels of maximum uncertainty. To quote Peter S. Goodman from the New York Times, "The collective imagination leads to dark places." We expect significant volatility in the coming months as investors position for worst case outcomes. There will be a vacuum of optimism.
Let's Take a Hike
By: Stewart Massey
The Federal Reserve Bank has been implementing a near zero interest rate policy for nearly six and a half years. Extraordinarily low interest rates, combined with several rounds of quantitative easing, helped pull the economy out of the depths of the financial crisis. This unprecedented strategy was successful and is now being used as a blueprint in the Eurozone and Japan to help spur their economies along. Three questions remain: when will the Federal Open Market Committee (FOMC) begin to hike the Fed Funds rate, how quickly will subsequent rate increases come and what impact will this have on various asset classes?
An Improving Environment for Active Equity Management?
By: Chris Moore
In a December 2014 white paper entitled, “The Quest for Alpha,” Chris Moore, Massey Quick’s Chief Investment Officer, explored the dynamics of active vs. passive exposure in client portfolios and highlighted the impact that the increased popularity of passive ETFs has had on the markets. In short, as discussed in the below excerpt from said strategy piece, lower levels of volatility and increased use of passive investments has led to lower levels of differentiation among company returns.
The Quest for Alpha
There is no doubt that the information age has negatively impacted the opportunity to exploit inefficiency in capital markets. It was initially the internet that allowed investors to access data at their fingertips. The popularity of smartphones and tablets combined with the adoption of social media, newswire alerts and text messaging now allows for information to be transmitted almost instantaneously. Access to information has only improved as technology improves. Additionally, the investment management business has multiplied in size and popularity since its infancy. As competition for capital increases and information becomes more accessible, the ability to uncover inefficiencies in markets has become even more challenging.
Myth or Fact? Hedge Funds Are...
While hedge fund performance disappointed many investors from 2010 through 2012, the last 6-9 months have been a much different story. The reduction in macroeconomic factors, including, but not limited to, quantitative easing brought correlations across asset classes and individual investments down to more normal levels. For example, the long/short equity asset class has been a major beneficiary of the education in correlations. The chart to the right highlights the cross correlations of the S&P 500 components relative to the performance of the HFN Equity Hedge Index. As correlations have come down, the performance of the index has improved.
Investment decisions lie at the heart of many economic activities. Each day, individual investors, banks, and fund management firms try to optimize their portfolio investments at international financial markets around the globe. Corporations buy parts of other corporations or sell divisions of their own activities in the worldwide mergers and acquisitions market in order to adjust the strategic direction of their business model. On the other hand, firms face constantly the challenge to determine their optimal investments into new factories, marketing strategies, or fundamental research activities.
Many of these investment decisions are rather complex. Usually, they involve complicated considerations on expected gains out of the transaction as well as a thorough analysis of the risk related to the investment. Hence, a sound investment evaluation is the prerequisite for any sound investment decision. Financial economics has developed numerous theoretical models as well as an abundance of empirical studies that aim to assess investment opportunities and thereby try to explain investment decisions.
This dissertation sheds light on several important aspects of investment evaluation and investment decisions. Throughout this work, I use both empirical analysis as well as theoretical models to introduce some new features into well-known topics in empirical asset pricing and the theory of optimal investment decisions. In the first three chapters I concentrate on issues surrounding investments in financial markets. First, I compare various novel approaches to estimate the equity risk premium, one of the key variables in investment theory. In the next chapter, I analyze whether it is possible to generate excess returns in equity markets by investing into stock on the basis of publicly available information in form of analysts' forecasts. In chapter three, I test whether these analysts' forecasts can also be used to predict stock returns. In the fourth chapter then, I shift the analysis towards corporate investment decisions in the real economy. More precisely, I examine how a decision maker's attitude towards uncertainty affects the investment behavior of firms.