ActiveBeta Indexes Capturing Systematic Sources of Active Equity Returns

by Ghayur, Khalid; Heaney, Ronan G.; Komon, Stephen A.; Platt, Stephen C.; Lo, Andrew W.

• ISBN13: 9780470610022
• ISBN10: 0470610026
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-03-08
• Publisher: Wiley

Summary

An informative guide to implementing innovative active beta strategiesActive Beta Strategies presents exciting new research that shows how above market returns, or alpha, can be achieved in a low-cost, transparent, risk-adjusted fashion through indices uncovering persistent excess returns that are typically attributed to active portfolio management.Developed by leading investment practitioners at Westpeak Global Advisors, Active Beta Strategies introduces active betas, explains the systematic sources of equity returns in short-term earnings and price momentum, examines long-term earnings expectations behaviors and value, and then decomposes momentum and value returns and explains how they persist. Examines how to achieve alpha-type returns at a low cost and in a transparent fashion Details a groundbreaking new index and presents new findings that could change the face of active portfolio management Explores the historical performance of active beta indicesPortfolio managers, asset managers, wealth advisors, pensions and endowments, and other institutional investors seeking to improve returns while reducing costs will find Active Beta Strategies a solution to their performance needs in these challenging times.

Author Biography

Khalid Ghayur is the CEO and CIO of Westpeak Global Advisors, LP. He was director of research policy, a member of the Global Executive Committee, and chairman of the Index Policy Committee at Morgan Stanley Capital International (MSCI) Barra. Prior to this, he was global head of quantitative research and strategy for HSBC Global Asset Management. He is a CFA charterholder, has served on the Board of Governors of the CFA Institute, and is a former trustee of the CFA Institute Research Foundation. He received an MBA in finance and international business from the École Nationale des Ponts et Chaussées and an MA and BA in economics from the University of Karachi.

Ronan G. Heaney is Director of Research at Westpeak. Before joining Westpeak, he was a software architect with Multum Information Services and a senior software developer at Swiss Bank Corp. He holds an MS in computer science from Purdue University and a BS in applied physics from Dublin City University, Ireland.

Stephen A. Komon is a Senior Portfolio Manager at Westpeak. Prior to this, he was vice president of foreign exchange and commodities at J.P. Morgan & Co., and he also held positions with UBS AG/Swiss Bank and Dean Witter Reynolds. He holds an MBA in finance and accounting from the University of Chicago Booth School of Business and a BS in commerce from the University of Virginia. He is also a CFA charterholder.

Stephen C. Platt is Director of Portfolio Management at Westpeak. Before joining Westpeak, he cofounded and was a senior vice president of Cordillera Asset Management. He holds a BS in finance from the University of Colorado Leeds School of Business and is a CFA charterholder.

Table of Contents

Foreword	p. xi
Preface	p. xiii
Background
The Evolution of Market Indexes and Index Funds	p. 3
The Early Days of Indexing	p. 3
The Inception of the Mutual Fund Industry	p. 5
Enter Academia	p. 6
The Advent of Index/Passive Mutual Funds	p. 7
Index Mutual Funds for the Public	p. 8
Conclusion	p. 9
The Evolution of Equity Style Indexes	p. 11
Empirical Challenges to Financial Theories	p. 11
Theoretical Explanations of Anomalies	p. 13
Establishing Equity Styles	p. 14
Equity Style Index Methodology	p. 16
Pitfalls of Current Equity Style Indexes	p. 17
Conclusion	p. 17
ActiveBeta Conceptual Framework
Introducing Active Betas	p. 21
Defining Active Betas	p. 21
Identifying the Drivers of Equity Returns	p. 24
Verification	p. 26
Exploring the Behavior of Return Drivers	p. 28
Behavior of Short-Term Earnings Expectation and the Link with Price Momentum	p. 29
Analysis Methodology	p. 29
Relationships Studied	p. 31
Decomposing Momentum Returns	p. 48
Conclusion	p. 51
Appendix: Regression Analysis and Correlation Coefficient	p. 51
Behavior of Long-Term Earnings Expectation and the Link with Value	p. 53
Relationships Studied	p. 53
Investment Horizon of Value Strategies	p. 70
Implications for Stock Risk Premium	p. 74
Decomposing Value Returns	p. 76
Conclusion	p. 79
Pricing and Persistence of Systematic Sources of Active Equity Returns	p. 81
Pricing of the Systematic Sources of Active Equity Returns	p. 81
Persistence of the Systematic Sources of Active Equity Returns	p. 89
Momentum, Value, and Risk Aversion	p. 94
ActiveBeta Framework: A Summary of Relationships	p. 99
ActiveBeta Indexes
ActiveBeta Index Construction Methodology	p. 103
Investment Process Indexes	p. 104
Objectives of Investment Process Indexes	p. 105
Conflicting Objectives	p. 108
Transparency, Understanding, and Rationale of the ActiveBeta Momentum Index	p. 110
ActiveBeta Index Construction Process	p. 110
Differences in Construction between ActiveBeta Indexes and Other Public Style Indexes	p. 112
Achieving Objectives	p. 114
Conclusion	p. 120
Appendix: ActiveBeta Index Construction Process Example	p. 120
Historical Performance of ActiveBeta Indexes	p. 123
ActiveBeta Index Construction Process Overview	p. 123
ActiveBeta Index Performance: Highlights	p. 126
ActiveBeta Index Performance: Detailed Analysis	p. 127
ActiveBeta Index Exposures	p. 149
Conclusion	p. 153
ActiveBeta Index Applications	p. 155
Style Investing: A New Framework	p. 155
Performance Attribution: Decomposing Active Manager Returns	p. 160
Portfolio Structuring: Revisiting the Alpha-Beta Return Separation	p. 164
Performance Benchmarking	p. 169
Research and Analysis	p. 172
Investment Vehicles	p. 174
ActiveBeta Customizable Solutions
Alternative Solutions for Capturing Active Betas	p. 179
ActiveBeta Custom Indexes	p. 179
ActiveBeta Custom Solutions	p. 183
A Word on Traditional Active Management	p. 194
Conclusion	p. 197
Concluding Remarks	p. 199
Disclosures	p. 201
Bibliography	p. 203
About the Authors	p. 207
Index	p. 209
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