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Abstract:
Value investing was first identified by Graham and Dodd in the mid-30's as an effective approach to investing. Under this approach stocks are rated as being cheap or expensive largely based on some valuation multiple such as the stock's price-to-earnings or book-to-market ratio. Numerous studies have found that value investing does perform well across most equity markets but it is also true that over most reasonable time horizons, the majority of value stocks underperform the market. The reason for this is that the poor valuation ratios for many companies are reflective of poor fundamentals that are only worsening. The typical value measures do not provide any insights into those stocks whose performance is likely to mean-revert and those that will continue along their recent downhill path.

The hypothesis in this paper is that the value stocks most likely to mean-revert are those that are financially sound. Further, it is proposed that we should be able to gain some insights into the financial strength of the value companies using fundamental accounting data. We apply a Bayesian model averaging approach to a set of fundamental accounting variables to forecast, the probability of each value stock outperforming the market. These probability estimates are then used as the basis for enhancing a value portfolio that has been formed using some valuation multiple. The positive note from our study of the US, UK and Australian equity markets is that it appears that fundamental accounting data can be used to enhance the performance of a value investment strategy. The bad news is that the sources of accounting data that play the greatest role in providing such insights would seem to vary both across time and across markets.

Abstract:
Perhaps the most important consequence of pricing efficiency is its implications for the allocation of scarce capital resources. The proposition being that the higher a company's stock price, the easier access that it has to capital at a favourable cost. We have recently experienced an extended run up in stock prices in many markets amounting to what many would describe as a bubble that was followed by a major correction. Such market behaviour would appear to be consistent with many of the market anomalies that have been identified in markets and has led many to have reservations about the existence of efficient pricing. In this paper, we examine the conditions that would lead to efficient pricing and question the extent that these conditions exist even in the most developed markets. In particular, we highlight a general move in markets towards two investment styles, index investing and momentum investing, where investments decisions are made without any reference to fair value. In order to further investigate the implications of such investment styles for security pricing, we model pricing behaviour in markets with different compositions of fundamental, momentum and index investors. We find evidence to suggest that compositions that are fairly typical of the mix of investors in current day markets will lead to price behaviour similar to that found by other writers: an underreaction to new information followed by an overreaction. This suggests that, without any major change in the composition of styles followed by investors, we will continue to see evidence of market anomalies into the future and pricing bubbles particularly at times when we experience highly correlated information signals. Further, there would seem to be no natural end to this type of pricing behaviour as both momentum and index investing remain eminently sensible strategies to pursue from the perspective of the individual investor.

Abstract:
Financial analysts are viewed as playing an important intermediary role in gathering and interpreting information and passing it onto the investment community. However, in recent years, it has become more apparent that the analysts come under much internal and external pressure when making their forecasts and recommendations. Jegadeesh et al (2004) have highlighted that this results in US equity analysts being biased towards high momentum growth stocks when making their recommendations which presumedly causes then to add little or no value in their own right. However, they find that their recommendations changes do provide useful incremental investment insights. In this paper, we find that Australian analysts also consistently favour stocks with the similar characteristics and that their recommendations, if anything, have negative value with the exception of those made in relation to low momentum growth stocks. Similarly, we find that one could use the changes in the analysts' recommendations as a useful input into one's investment decisions. When we divided our sample up into the growth market of the last 1990's and the falling market of the early 2000's, we find that evidence to suggest that we might gain true insights into the unbiased views of the analysts by observing their recommendations changes. During the boom years, the analysts were moving their recommendations towards high momentum growth stocks but this changed during the gloom years with the recommendation changes then being tilted towards value stocks with a reduced emphasis on momentum and size. This suggests that although over time the analysts' recommendations reflect the internal and external pressures under which the analysts operate, that they do chase prevailing market conditions in the revisions that they make to these recommendations. Finally, the paper demonstrates a way for obtaining a fitted value for recommendation revisions which might provide a good way of incorporating them into one's investment decisions process.

Abstract:
The single-minded aim of retirement savings policy is to maximize after-cost returns to members while providing products and services to meet individual needs. In that it fails. The dominant cause of failure is ineffective and unnecessary competition. The dominant solution is greater cooperation. This article demonstrates how excessive competition has undermined investors’ ability to save for retirement through inefficient pricing, agency costs, and excessive choice. To ensure more cooperation, and less competition, the authors propose a three-pronged approach: Structuring management arrangements to extract maximum economic growth and investment returns; taking steps to rid the system of over-servicing; and, structuring relationships to minimize agency costs. While the authors use Australia as their institutional setting, their (im)modest, and likely (un)popular proposal has universal (un)appeal and applicability.

Agency Costs, Co-opetition, Industry Rationalization, Market Failures, Pension Fund