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Abstract:
In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return of 12% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by potential structural biases towards asset classes with high risk premiums, nor the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away.

GTAA, value effect, momentum, global asset allocation

Abstract:
In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return exceeding 9% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by implicit beta exposures or the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away.

GTAA, Asset Allocation, Tactical Asset Allocation, Momentum, Value, Alpha

Abstract:
We present empirical evidence that stocks with low volatility earn high risk-adjusted returns. The annual alpha spread of global low versus high volatility decile portfolios amounts to 12% over the 1986-2006 period. We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process.

alpha, strategic asset allocation, volatility, volatility effect, low risk stocks, CAPM, Fama-French factors, international

Abstract:
We propose a practical investment framework for dynamic asset allocation across different economic regimes, which we illustrate using a sample of U.S. data from 1948 to 2007. We identify four regimes in the economic cycle and find that these regimes capture pronounced time-variation in the risk and return properties of asset classes. Time-variation is also observed in the risk of a traditional, static strategic asset allocation portfolio. In order to stabilize risk across the economic cycle we propose a dynamic strategic asset allocation approach, which has the potential to enhance expected return as well. The proposed approach is found to be robust to variations in the variable composition of the regime model and can easily be extended with different economic variables and/or additional assets.

asset allocation, TAA, economic regimes, business cycle, portfolio choice, time-varying risk, time-varying return

Abstract:
In this paper we critically examine the novel concept of fundamental indexation. We argue that fundamental indexation is by definition nothing more than an (elegant) value strategy, because the weights of stocks in a fundamental index and a market capitalization-weighted index only differ as a result of differences in valuation ratios. Moreover, fundamental indices more resemble active investment strategies than classic passive indices, because (i) they appear to be at odds with market equilibrium, (ii) they do not represent a buy-and-hold strategy and (iii) they require several subjective choices. Last but not least, because fundamental indices are primarily designed for simplicity and appeal, they are unlikely to be the most efficient way of benefiting from the value premium. Compared to more sophisticated, multi-factor quantitative strategies, fundamental indexation is likely to be an even more inferior proposition.

Indexation, Fundamental Indexing, Alternative Beta, Value Premium, Capitalization Weighting, Non-Cap Based Indexing, Portfolio Construction

Abstract:
In this paper we critically examine the novel concept of fundamental indexation. We argue that fundamental indexation is by definition nothing more than an (elegant) value strategy, because the weights of stocks in a fundamental index and a market capitalization-weighted index only differ as a result of differences in valuation ratios. Moreover, fundamental indices more resemble active investment strategies than classic passive indices, because (i) they appear to be at odds with market equilibrium, (ii) they do not represent a buy-and-hold strategy and (iii) they require several subjective choices. Last but not least, because fundamental indices are primarily designed for simplicity and appeal, they are unlikely to be the most efficient way of benefiting from the value premium. Compared to more sophisticated, multi-factor quantitative strategies, fundamental indexation is likely to be an even more inferior proposition.

Indexation, Fundamental Indexing, Alternative Beta, Value Premium, Capitalization Weighting, Non-Cap Based Indexing, Portfolio Construction

Abstract:
By having the flexibility to take on short positions, so-called 130/30 funds provide classic beta exposure in combination with an enhanced potential for generating alpha. We discuss the main theoretical pros and cons of 130/30 investing and compare various ways in which 130/30 funds are being constructed in practice. We conclude that a 130/30 approach potentially offers significant efficiency gains, but that sufficient alpha generating capability is required to actually capitalize on this potential, especially on an after-cost basis. We are skeptical with regard to 130/30 equity funds that do not attempt to create an integrated 130/30 portfolio, and also with regard to several recent variations on the 130/30 theme, such as 130/30 bond funds and 130/30 indices.

Portfolio Management, Portfolio Construction, 130/30, Short-Extension, Alpha-Extension, Enhanced Active Strategies, Long-Only Constraint, Short Positions, Alpha, Beta, Equity Strategies, Hedge Fund Strategies, Alternative Investments, Hedge Fund Strategies

Abstract:
European index funds and exchange-traded funds underperform by 50 to 150 basis points per annum compared to gross total return benchmark indexes. This underperformance is significantly larger than the shortfall reported for U.S. passive funds and also larger than one would expect based on the funds’ reported expenses. We show that the underperformance can be attributed to European funds suffering a significant performance drag as a result of dividend withholding taxes. Dividend withholding taxes and fund expenses have a comparable impact on fund performance and jointly explain the entire performance shortfall. In addition, dividend taxes explain performance differences between funds tracking different benchmark indexes and are an important determinant for time variation in fund performance. Our results imply that when
mutual funds are confronted with dividend withholding taxes, it is crucial to account for this factor when evaluating fund performance.

passive investing, index fund, ETF, dividend taxes, performance evaluation

Abstract:
We present empirical evidence that stocks with low volatility earn high risk-adjusted returns. The annual alpha spread of global low versus high volatility decile portfolios amounts to 12% over the 1986-2006 period. We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process.

alpha, strategic asset allocation, volatility, volatility effect, low risk stocks, CAPM, Fama-French factors, international