doi: 10.2469/faj.v61.n1.2675pmid: N/A
This piece provides information to FAJ readers from Jeffrey J. Diermeier, CFA.
doi: 10.2469/faj.v61.n1.2676pmid: N/A
This piece provides information to FAJ readers from Thomas A. Bowman, CFA.
doi: 10.2469/faj.v61.n1.2677pmid: N/A
The FAJ has played an important role in publishing some of the best thinking in the industry, positing new theories, and challenging established wisdom. “Reflections” pieces in this 60th anniversary year continue the tradition. Of several current accepted concepts that have fallen into question as a result of empirical observation, two discussed here are the capital asset pricing model and the capitalization-weighted market-clearing portfolio.
doi: 10.2469/faj.v61.n1.2678pmid: N/A
The mutual fund industry has undergone tremendous change in the past 60 years. Total assets, number of funds, and fund costs have increased exponentially, whereas both the duration of the funds' portfolio holdings and the duration of their shareholders' holdings have tumbled. The industry's ownership of corporate stocks is at an all-time high, yet mutual fund managers have been noticeably absent from the corporate governance debate. This article details 10 fundamental changes that have taken place in the mutual fund industry since 1945 and finds that, in the aggregate, they have benefited mutual fund managers to the direct and commensurate detriment of mutual fund investors.
doi: 10.2469/faj.v61.n1.2679pmid: N/A
Two classes of culprits contributed to the recent corporate scandals but have not been touched by the scandals or even mentioned in connection with misdoings. One group is us, the financial analysts; the other is the independent directors who are elected and paid by shareholders to represent the shareholders' interests. When we reform the performance we expect from these two groups—analysts and independent directors—we can say we are fixing the system.
doi: 10.2469/faj.v61.n1.2680pmid: N/A
Successful investing can be almost easy: Avoid harmful “accidents” and do what will achieve your own most important long-term objectives. The very human irony is that learning this lesson can take so many years that by the time we “get it,” it may be too late to use the lesson because the powers of compounding need time.
doi: 10.2469/faj.v61.n1.2681pmid: N/A
Logically, investment theory's next frontier is to put into practice the rich set of tools that academia has bestowed on the investment community—starting with Harry Markowitz's seminal article on portfolio selection in 1952. Or is it? In fact, the next frontier lies beyond simply engineering the implementation of new investment decision tools. The time has come to integrate the powerful insights offered by information theory and principal–agent theory into a holistic, comprehensive theory of investing. Only such an expanded theory offers any material hope of improving the economic prospects of the millions of clients/beneficiaries of today's mutual funds, pension funds, endowments, and foundations.
Campbell, John Y.; Viceira, Luis M.
doi: 10.2469/faj.v61.n1.2682pmid: N/A
Expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways. Furthermore, these shifts tend to persist for long periods. Changes in investment opportunities can alter the risk–return trade-off of bonds, stocks, and cash across investment horizons, thus creating a “term structure” of the risk–return trade-off. This term structure can be extracted from a parsimonious model of return dynamics, as is illustrated with data from the U.S. stock and bond markets.
Poon, Ser-Huang; Granger, Clive
doi: 10.2469/faj.v61.n1.2683pmid: N/A
A comparison is presented of 93 studies that conducted tests of volatility-forecasting methods on a wide range of financial asset returns. The survey found that option-implied volatility provides more accurate forecasts than time-series models. Among the time-series models, no model is a clear winner, although a possible ranking is as follows: historical volatility, generalized autoregressive conditional heteroscedasticity, and stochastic volatility. The survey produced some practical suggestions for volatility forecasting.
Cornell, Bradford; Roll, Richard
doi: 10.2469/faj.v61.n1.2684pmid: N/A
Asset-pricing theory has traditionally made predictions about risk and return but has been silent on the actual process of investment. Today, most investors delegate major investment decisions to financial professionals. This suggests that the instructions given by investors to their delegated agents and the compensation of those agents might be important determinants of capital market equilibrium. In the extreme, when all investment decisions are delegated, the preferences and beliefs of individuals would be completely superseded by the objective functions of agent/managers. A provocative illustration of the difference between direct and delegated investing is provided based on active asset management relative to a benchmark index, a common objective function in practice. With the growing preponderance of delegated investing, future asset-pricing theory will not only have to describe risk and return but, to be complete, must also be able to explain the observed objective functions used by professional managers.
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