Value

Over the past decade and a half, the US equities have set the hard-to-beat performance benchmark. Nearly all of the other countries, no matter if small or big, emerging or developed, have lagged behind. However, what are the forces behind this outperformance? Why did most of the other markets and even investing styles bow to the US large-cap growth dominance? A new paper written by David Blitz nicely analyses the rise of the behemoth.

Can we simplify the complexities of the stock market and distill them into a simple set of quantifiable metrics? A lot of academic papers suggest this, and they offer formulas that should make the life of a stock picker easier. Some of the most compelling methodologies within this realm are the F-Score, Magic Formula, Acquirer’s Multiple, and the Conservative Formula. These quantitative strategies are designed to identify undervalued stocks with robust fundamentals and potential for high returns. But do they really work out-of-sample? A new paper by Marcel Schwartz and Matthias X. Hanauer tries to answer this interesting question…

Active Share is a popular metric used to gauge how actively managed a portfolio is compared to its benchmark, but its predictive power for fund performance is questionable. Our research suggests that high Active Share often reflects exposure to systematic equity factors rather than genuine stock-picking skill. Additionally, inaccuracies in benchmark selection can distort the metric’s insights, making it unreliable as a standalone measure. A more effective approach is to conduct a factor analysis of alpha to better understand a manager’s performance and true sources of over/underperformance.

Today, we will venture a little into the fundamental analysis corner, and we will give you a glimpse of an intriguing paper (Hillenbrand and McCarthy, 2024) that discusses the advantages of using ‘Street’ earnings over traditional GAAP earnings. The paper suggests that ‘Street’ earnings provide better valuation estimates and improved financial analysis. Is this a way how to improve the performance of the struggling equity value factor?

Equal-weighted benchmark portfolios are sometimes overshadowed by the more popular market capitalization benchmarks but are still popular and often used in practice. One of the advantages of equal-weighted portfolios is that academic research shows that in the long term, they tend to outperform their market-cap-weighted peers, mainly due to positive loadings on well-known factor premiums like size and value. So, if equal weighting outperforms market-cap weighting (in the long term), what options do we have if we want to outperform equal weighting? A recent paper by Cirulli and Walker comes to our aid with an interesting proposal …

We mentioned multiple times that we at Quantpedia love historical analysis that spans over a long period of time as it offers a unique glimpse into the different macro environments and periods of political and economic instabilities. These long-term studies help a lot in risk management, and they also help investors set the right expectations about the range of outcomes in the future. Historical analysis of equity and fixed-income markets is not rare, but currency markets are less explored. Therefore, we are happy to investigate a recent paper by Joseph Chen that analyzes carry, momentum, and value strategies in the currency markets over the 200-year history.