The Handbook of Equity Style Management Third Edition T DANIEL COGGIN FRANK J FABOZZI EDITORS John Wiley & Sons, Inc Copyright © 2003 by Frank J Fabozzi All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley, visit our web site at www.wiley.com ISBN: 0-471-26804-6 Printed in the United States of America 10 Contents About the Editors Preface Overview of the Book Contributing Authors CHAPTER Style Analysis: Asset Allocation and Performance Evaluation Arik Ben Dor and Ravi Jagannathan CHAPTER The Many Elements of Equity Style: Quantitative Management of Core, Growth, and Value Strategies Robert D Arnott and Christopher G Luck CHAPTER Models of Equity Style Information Robert C Radcliffe ix xi xiii xv 47 75 CHAPTER Style Analysis: A Ten-Year Retrospective and Commentary R Stephen Hardy 109 CHAPTER More Depth and Breadth than the Style Box: The Morningstar Lens Paul D Kaplan, James A Knowles, and Don Phillips 131 CHAPTER Using Portfolio Holdings to Improve the Search for Skill Ronald J Surz 159 v vi Contents CHAPTER Are Growth and Value Dead?: A New Framework for Equity Investment Styles Lawrence S Speidell and John Graves 171 CHAPTER The Style of Investor Expectations Hersh Shefrin and Meir Statman 195 CHAPTER The Effects of Imprecision and Bias on the Abilities of Growth and Value Managers to Outperform their Respective Benchmarks Robert A Haugen CHAPTER 10 Style Return Differentials: Illusions, Risk Premiums, or Investment Opportunities Richard Roll CHAPTER 11 The Persistence of Equity Style Performance: Evidence from Mutual Fund Data Ronald N Kahn and Andrew Rudd 219 229 259 CHAPTER 12 How the Technology Bubble of 1999–2000 Disrupted Equity Style Investing Kari Bayer Pinkernell and Richard Bernstein 273 CHAPTER 13 Multistyle Equity Investment Models Parvez Ahmed, John G Gallo, Larry J Lockwood, and Sudhir Nanda 293 CHAPTER 14 A Comparison of Fixed versus Flexible Market Capitalization Style Allocations: Don’t Be Boxed in by Size 315 Marc R Reinganum CHAPTER 15 A Plan Sponsor Perspective on Equity Style Management Keith Cardoza 333 Contents vii CHAPTER 16 An Analysis of U.S and Non-U.S Equity Style Index Methodologies H David Shea 359 CHAPTER 17 Country-Level Equity Style Timing Clifford Asness, Robert Krail, and John Liew 407 CHAPTER 18 Value Investing and the January Effect: Some More International Evidence Bala Arshanapalli, T Daniel Coggin, and William Nelson 419 CHAPTER 19 Exploring the Mathematical Basis of Returns-Based Style Analysis Thomas Becker 435 CHAPTER 20 Trading (and Investing) in “Style” Using Futures and Exchange-Traded Funds Joanne M Hill 455 INDEX 483 About the Editors T Daniel Coggin, Ph.D is a nationally recognized investment management consultant with over 25 years experience in investment management and consulting Dr Coggin is a frequent speaker at investment industry conferences, has co-edited three books and written numerous articles and book chapters on quantitative investment management He earned his Ph.D in political science from Michigan State University in 1977 with an emphasis on econometrics and quantitative methods Frank J Fabozzi, Ph.D is editor of the Journal of Portfolio Management and an adjunct professor of finance at Yale University’s School of Management He is a Chartered Financial Analyst and a Certified Public Accountant Dr Fabozzi is on the board of directors of the Guardian Life family of funds and the BlackRock complex of funds He earned a doctorate in economics from the City University of New York in 1972 and in 1994 received an honorary doctorate of Humane Letters from Nova Southeastern University Dr Fabozzi is a Fellow of the International Center for Finance at Yale University He is an Advisory Analyst for Global Asset Management (GAM) with responsibilities as Consulting Director for portfolio construction, risk control, and evaluation ix 482 THE HANDBOOK OF EQUITY STYLE MANAGEMENT CONCLUSION Equity style indexes have become an integral part of investing for both retail and institutional investors, with the primary use as benchmarks for active strategies They capture important differences in returns across stocks and provide a shorthand way of measuring the performance of similar sectors of the equity market They are also important as a basis for passive investing, with combined assets of $72 billion as of mid-2002 Tradable vehicles have recently emerged with the launch of equity style index ETFs These products are expected to continue to grow in popularity and become important tools for efficient fund management Index Abnormal Profit, 220–227 Absolute Value, 192–193 Accuracy, quality, 99–104 Active bets See Negative active bets Active equity style management strategies, 302 Active management, 25 factors, usage, 73–74 passive management, contrast, 9–10 relationship See Factor returns Active managers, 9–10, 19, 54 stock-picking abilities, 20 Active style management, 304–313 Adjusted factor scores, 90 Agarwal, V., 35 Ahmed, Parvez, 302, 304, 313 AIMR See Association for Investment Management and Research Alliance Capital Growth & Income fund, 42 Large Growth fund, 351 Alliance Large Cap Growth, 338 All-or-nothing strategy, 329–331 Alpha, 73, 261 American Stock Exchange (AMEX), 233 common stocks, 319 Analytical tools, 191–192 laundry list, 187 Appraisal ratio See Treynor-Black APT See Arbitrage Pricing Theory Arbitrage See Risk-free arbitrage ability, 215 portfolio, holding, 424 Arbitrage Pricing Theory (APT), 84, 231 See also Multifactor APT factors, 257 returns, time series, 246 model, usage See Five-factor APT model predictions, 243 risk model See Multi-factor APT risk model Ariel Capital, 337–338, 341 information ratio, 347 performance, 338 Arnott, Robert D., 59, 163, 220, 294, 299, 300, 359 Arshanapalli, Bala, 295, 296, 408, 419, 421, 422, 425 Asness, Clifford S., 302, 408, 409, 412–413 Asset allocation, 1, 75 style consistency, relationship, 17–19 mix See Effective asset mix Asset classes, 10 See also Real Estate Investments Trust; Return-based style analysis; Style excess return, 333 exposures, 9, 298 See also Style model, usage, 304 Association for Investment Management and Research (AIMR), 187 AT&T, 260 Attribution analysis, skill/style focus, 164–167 definition See Performance AXA Rosenberg, 173 Axiom Fund, 43–44 benchmarks, 28, 33 Baker, N., 226 Balanced funds, 152 Balanced Index fund See Vanguard Bankruptcy, 88 Banz, Rolf W., 255, 316, 420 Barberis, Nicholas, 313 Barclays Global Index Fund, 343 Barclays Global Investors, 338, 361 BARRA, 277–278 approach, 61 Growth Index, 171, 187 indexes, 361–367 Research and Indexes, 364 style indexes, 396–398 usage See Price to book ratio Value and Growth futures, 49 Barry, Christopher B., 295, 296 Bauman, W Scott, 422 Becker, Thomas, 298 Benchmarking, 117–122 See also Returns-based style analysis diversification, 112–117 Benchmarks, 74, 173–176 See also Blended benchmarks; Blended style benchmarks; Custom benchmarks; Designer benchmarks; Growth; Long-short blended style benchmarks; Single style benchmarks adequacy, 25 beating, exclusivity, 22 outperforming, 219 quality, 118 return See Style selection, 262 Best estimate, 220–221 483 484 Beta, 62, 85, 195, 315 See also Capital Asset Pricing Model; Ex ante beta; Ex post beta; Negative beta; World market control, 255 returns, relationship, 202 Bias, 223–226 See also Industry bias effects See Growth; Value Bienstock, S., 51 Biggs, Barton M., 172 Black, Fischer, 196, 230, 255 Bland, Bryce N., 293 Blended benchmarks, 122 Blended style benchmarks, 337–338, 341 See also Long-short blended style benchmarks contrast See Excess return usage, 346, 349–351 Bond mutual funds, underperformance, 261 Book equity/market (B/M), 234 equity, 232–233 Book to price (B/P) ratios, 192, 301, 407, 409 See also Country-level B/P average, 412 level, 411 Book/price ratios, 51 Book-to-market (B/M) ratio, 195, 198, 200, 203 coefficient, 207 proxies, 198 realized returns, relationship, 210 usage, 231–232, 423 Brady-type bonds, 44 Breen, William, 420 Breusch, T.S., 251 Brown, G., 261 Brown, Melissa R., 359, 392, 394 Brown, Philip, 304 Brown, Stephen J., 230, 232, 436 Brush, John S., 64 Bubbles See Nifty 50; Technology bubble Buckets assignation, 137 level, 138 Buetow, Gerald W., 124 Callan indexes, 168 Capaul, Carlo, 55, 172, 407, 422, 424 Capital Asset Pricing Model (CAPM), 53, 61–62, 113, 252 See also Single-factor CAPM beta, 211 test, 211 usage, 243 Capital-intensive industries, 179 Capitalization See Small cap stocks companies, 47 ladder, 322 portfolios See Market return characteristics See Market range, 382 style allocations comparison See Fixed market capitalization style allocations policy, benefits See Flexible capitalization style allocation policy value index, 12 weighting, 325 Index Capitalized economic profits, 176 CAPM See Capital Asset Pricing Model Cash Flow Return on Investment (CFROI), 192 Cash-flow-to-price, 195, 203, 221 Catalysts See Fundamental catalysts Cattell, R., 84 Center for Research in Securities Prices (CRSP), 233 Centroids, usage See Funds Ceteris paribus, 242 CGM Capital Development, 119 Chan, Louis K.C., 231, 422 Characteristics-based styling (CBS), 76 accuracy, 80–81 contrast See Factor-based styling cost, 79–80 information, pros/cons, 79–81 review, 78–81 timeliness, 80 Chen, Nai-Fu, 231, 300 Chicago Investment Analytics, 190 Chopra, Navin, 426 Christopherson, Jon A., 294, 298 Citigroup, 139 Citigroup Asset Management, 388 Coca-Cola, 180 Coggin, T Daniel, 163, 220, 225, 232, 294–296, 304, 359, 408, 419, 421, 422, 425 Cognitive errors See Realized returns hypothesis, 196 Cohen, R., 408, 412–413 Columbine, 190 Commercial index developments, 403–405 Commodity Futures Trading Commission (CFTC), 26 Commodity prices, 70 Commodity Trading Advisors (CTAs), 26, 28, 32 Competitive entry, speed, 223 Complementary funds, 134 Complementary investments, identification, 154 COMPUSTAT, 200, 230, 392–393 Connor, Gregory, 245 method, 245–248 Conover, C Mitchell, 422 Constrained multivariate linear regression, 438, 452 Constrained multivariate regression, contrast See Returns-based style analysis Contingency tables, usage, 264–265 Conventionals, 215 Convertible bonds, 125 Convexity issues, ignoring, 412 Copeland, W., 59 Core inclusion, 168 Core long equity strategies, 73 Core strategies, quantitative management, 47 Corporate bonds, 10 Correlation coefficients, 85, 87 matrix, 84, 363, 372 minimization, contrast See Sharpe’s method squared, 448–450 Cost accounting See Historical cost accounting Cottle, Sidney, 172 Counter-cyclicals, 147 Country selection, value (impact), 409–411 Country-level B/P, 411 485 Index Country-level equity style timing, 407 Country-level timing, 412–415 Covariance matrix, inversion, 245 Credit Suisse First Boston (CSFB)/Tremont, 45 Event Driven index returns, 32 futures, 28 Cross-border influences, 71 Cross-factor relationships, 69 Cross-holdings, 136 Cross-portfolio dependence, degree, 251 Cross-product terms, 243 Cross-section variation See Realized returns; Returns Cross-sectional association See Stocks Cross-sectional average return differences, 231 Cross-sectional dependence, correction, 249–252 Cross-sectional regression, 77, 244, 246 model, examination, 94 Cumulative performance, 167 Cumulative return, 55, 352 Curve-fitting interpretation, 446 Curve-fitting problem See Returns-based style analysis Custom benchmarks, 117, 122 Cyclical growth, 172 Cyclicality, 71, 146–148 measurements, 133 Daily returns data, 298 usage, 127 DAIS, 190 Daniel, Kent, 420 Data availability See Ten-Factor Model errors, 259 mining hypothesis, 198, 211 Davis, James, 421 De Bondt, Werner F M., 195, 198, 205–206, 317, 426 framework, 209 Deep Value, 192–193 investors, 191 Deep-value managers, 341 Depression See Great Depression Designer benchmarks, 160 Dhyrmes, Phoebus J., 84, 232 DiBartolomeo, Daniel, 80 Differential performance, 297 Differentials See Style returns, forecast See Small capitalization Directional strategies, 27 Dispersion measure (creation), size/value/growth distributions (combination), 153–154 Diversification, 154 See also Benchmarking Dividend growth, 85, 94 payouts, sustainability, 393 yield, 70, 82–85, 88, 360 Dividend Discount Model (DDM), 192 Dodd, David L., 172, 187 Doukas, John, 295, 296, 408, 419, 421, 422, 425 Dow Jones averages, 373 Global Equity Style Indexes, 378 Global Indexes (DJGI), 373–378, 399 usage, 404 indexes, 373–379 sector indexes, construction, 24 STOXX indexes, 373 U.S Equity Style Indexes, 373, 400 Draper, N., 36 Draper, P., 261 Drift, Drucker, Peter, 187 Dunn, P., 260 Dybvig, H., 27, 35 Dynamic styling, 106–107 contrast See Fixed style boxes EAFE See Morgan Stanley Capital International Earnings forecast, 290 future growth, prediction earnings growth expectations, impact, 180–183 price/book impact, 180–183 growth, 85, 196 expectations, price/book (reflection), 176–180 price, following, 176 revisions, 192 surprise, 192 Earnings Momentum Growth, 193 Earnings per share/price (E/P) ratio, 232–234, 257, 301 Earnings to price (E/P) ratio, 192 portfolios, 233–234 Earnings/price ratio, 51 Earnings-to-price, 200 Economic activity, 299 Economic cycles, 147 Economic differences, 81 Economic factors, 82–83 Economic profits See Capitalized economic profits Economic Value Added (EVA), 192 Effective asset mix, 15, 435 Efficient market line, 221–227 Elton, E., 260 Emerging markets, 379 Employee Retirement Income Security Act (ERISA) of 1974, 294 Energy allocation, 128 Enterprise Value/Earnings Before Interest Taxes Depreciation and Amortization (EV/EBITDA), 192 EPS revisions, 301 Equity benchmark, 60 fund, 132 growth funds, 270 investment styles, 315 See also Multistyle equity investment models definition, 131 framework, 171 map, 190–193 managers See Long-tenure equity managers models See Multistyle equity models returns, 69 selection returns, 268 strategies See Core long equity strategies Equity style analysis, 160–162, 262–263 future, 169 classifications, 168–169 consistency, 350–351 486 Equity style (Cont.) consistency measurement R-squared, usage, 351–352 tracking error, usage, 351 defining, 48–52 improvement, 49–51 definitions, 294–296 elements, 47 information, models, 75 investing, 293 disruption, technology bubble (1999-2000) impact, 273 exceptions, 283–287 manager style determination, asset/return characteristics, 53 map, 338–340 models See Multi-asset class equity style models; Multifactor equity style models prevalence, 305 return dispersion, 334 rotation, 282 performing, 310 timing See Country-level equity style timing Equity style indexes, 360–388 See also Prudential Securities alternatives, 388 construction, rules, 168–169 methodologies, analysis See Non-U.S equities; U.S equity style index methodologies sample, 169–170 Equity style management approaches, 52–74 plan sponsor perspective, 333 strategies, 302–313 Equity style performance measures, 261–262 mutual fund data, evidence, 259 persistence, 259 perspective, 270–271 research, 260–261 methodology, 263–265 studies, 265–270 Equity style-oriented screening indexes, 394 Estimated growth, Frank Russell Company (usage), 173 Euclidean space, 436 See also Returns approximation See Returns-based style analysis Europe Australia and Far East (EAFE) See Morgan Stanley Capital International EVA See Economic Value Added Evaluators, 163 See also Performance EV/EBITDA See Enterprise Value/Earnings Before Interest Taxes Depreciation and Amortization Event Driven index returns See Credit Suisse First Boston/Tremont Ex ante beta, 197 Ex ante mean-variance efficient portfolio, 257 Ex ante regression, 70 Ex post beta, 197 Excess return, 240, 261–262, 345–346 See also Asset classes; Stocks achievement, 348 blended style benchmark, contrast, 356 computation, stock selection/style (usage), 346–347 Index series, 448–449 tracking error, 333 variance, 440 Excess world market return, 429 Exchange-traded funds (ETFs), 361 Expanded FBS Model, 94 Expected returns, 213, 229 Expected total return, 165 Explained variance, 443, 448–450 Extra-risk performance, detection, 248 Extra-risk return, 249, 257, 258 nonstationarity, 252–256 Fabozzi, Frank J., 59, 163, 220, 294, 359 Factor 1, meaning, 88 2, meaning, 88–89 analysis See Portfolios definition/usage, 299 models, 7, 301–302 See also Macroeconomic factor models style management, relationship, 61–63 portfolios, 300 scores, 82 See also Adjusted factor scores; Portfolios examination See Growth; Value usage See Active management Factor Based Style model, 91 Factor returns active management, relationship, 63 forecasters, character/performance, 71–72 forecasting, 69–71 prediction process, 70–71 value, 63 variables, 69–70 perfect foresight tests, 65–66 variability, 66–69 Factor-based styling (FBS), 76, 81–90 accuracy, 99–100 CBS, contrast, 100–104 model See Expanded FBS Model style regression, 92 Factor/screening portfolios, 388–399 Fair Disclosure rules See Securities and Exchange Commission Fama, Eugene F., 172, 195–196, 198, 202, 205, 223, 231, 295, 316, 361, 407, 408, 410, 420–422, 425, 429 arguments, 212 Fama-French equity style indexes, 361 Farrell, Jr., James L., 294 FAS 106/109 write-offs, 50 Fathi, Vahid, 131 Federal Reserve System, Board of Governors, Fidelity Convertible Securities fund, 15, 23 Fidelity Low Priced Stock, r-squared, 118 Fidelity Magellan Fund, 103, 119 database, 113 Field, Laura, 229 Financial Soundness, measurement, 212 Firms risk, 88 scores, 90 size, 429–431 impact See World market movements Index First Call Corporation, 197–199 Analyst Rating, 214 analysts, 207, 211 First-factor risk, 248 Firsthand Technology Fund, 149 Five-factor APT model, usage, 247 Fixed cap style allocation policy, 324 Fixed income funds, 152 Fixed market capitalization style allocations, flexible market capitalization style allocations (comparison), 315 Fixed style boxes, dynamic styling (contrast), 104–107 Fixed-target weights, 317 Flexible capitalization style allocation policy, benefits, 325–328 Flexible market capitalization style allocations, comparison See Fixed market capitalization style allocations Flexible Value, 193 Float, definition, 136 Float-weighted trimmed mean factor value, 137 Foreign exchange rates, 70 Foresight tests See Factor returns Fortune (magazine), data/respondents, 198–202, 206, 211–214 Frank Russell Company, 40 growth and value indexes, creation, 277 Growth Index, 220 indexes, 49, 168, 367–371 SSB indexes, comparison, 387 Mid Cap index, decline, 317 Russell 1000 Growth benchmark, 352, 355–356 return rates, 78 Stock Index, 219 style indexes, 50, 51, 74 Value and Growth indexes, 74, 78, 91–92 Value index, 120, 355, 367–368 Russell 2000, 340 Growth index, 79, 340–341 index, 11, 22, 367 Small Cap index, 110 Small Value index, 119 style indexes, 50, 51 value, 17 Value and Growth indexes, 91–92 Value index, 118–119, 334, 338, 346, 368 Russell 3000, 110, 112, 334, 336 benchmark, 337, 345–346 Growth benchmark, 352 index, 368 index, 11, 367, 399 structure, 334–336 Russell Canada equity style indexes, 371 Russell Japan Equity Indexes, 371 Russell Large Cap Growth index, 116 Russell Top 200, 340 Russell U.S equity style indexes, 367 equity style, 334–343 structure, 334–343 usage See Estimated growth Value benchmarks, 340 Value Index, 219–220 487 White Papers, 50 Free-float adjusted market capitalization, 404 French, Kenneth R., 172, 195–196, 198, 202, 205, 223, 231, 295, 316, 361, 407, 408, 410, 420–422, 425, 429 arguments, 212 Friedman, Jacques A., 302, 408, 412–413 Friend, Irwin, 84, 232 Front-load commission, 14 Fundamental catalysts, 192 Funds See Equity category classifications, 153 classification, centroids (usage), 152–153 holdings, distribution, 151 persistence, manager persistence (contrast), 269–270 style information, 157 measurement, 150–154 Fung, William, 2, 26, 27, 34 GAAP accounting, 189 Gallo, John G., 303 GARCH, 300 GARP See Growth at a Reasonable Price Geewax Terker, 338 All Cap Growth, 351–352 General Electric, 139 Generalized least squares multivariate regression, 251 Geographic diversification, 149 Geographic exposure, 148–149 Geography, 146 Gibbons, Michael R., 252 Global/multicountry indexes, 378–388 Glosten, L., 34, 35 Goetzmann, William N., 230, 261, 436 Goldman Sachs (GS) Growth & Income Fund, 4, 13, 41 Goldreyer, Elizabeth, 295, 296 Good fund/bad portfolio, problem, 146–147 Government-held blocks, 136 Graham, Benjamin, 172, 187 Great Depression, 172 Griffiths, William E., 240 Grinblatt, Mark, 35, 260 Grinold, Richard C., 263 Gross, LeRoy, 216 Growth benchmarks, 270 characteristics, 139 definition, 276–278 distributions, combination See Dispersion measure expectations See Earnings impact See Returns factor scores, examination, 142–146 funds See Equity historical returns, 53–54 managers, 152 performance, imprecision/bias effects, 219 measures, 185 momentum managers, 341 performance, comparison See Value portfolio, return, 423 prediction See Earnings spread See Value-growth spread stocks, 144 488 Growth (Cont.) strategies, 419 quantitative management, 47 usage See Projected growth usefulness, 171 value (divergence), explanation, 287–289 Growth and income funds, 13–14 objective/investment strategy, 41–42 Putnam Fund, 41 Growth at a Reasonable Price (GARP), 193, 225 Growth Fund of America, 100 Growth orientation, 135 determination See Net value/growth orientation distinctions, 139 measurement, 140 See also Stocks considerations, 134–136 presentation See Stocks scores, interpretation, 141–146 Growth-oriented core, 53 Gruber, Martin J., 163, 260, 261 GS See Goldman Sachs Gultekin, N Bulent, 84, 232 Gupta, Aditya, 359 Hamao, Yasushi, 422 Harmon, H., 84 Haugen, Robert A., 223, 226, 421 Hedge Fund Research Company (HFR), 27–28, 45 Hedge funds, 26–27 See also Market neutral description, 43–44 indexes, 45 managers, 26 relationship See Style analysis returns, optionlike features, 32–36 style analysis, application, 27–28 systematic risk, 35 Hedge portfolios, returns, 306 Hendricks, D., 261 Henry (John W.) & Company (JWH) benchmarks, 28, 33 financial/metals portfolio, 44 High minus low (HML), 410–411 strategy, 412 High yield bonds, 125 Hill, R Carter, 240 Hillsdale U.S Market Neutral Equity Fund, 43 return, 28 Historical cost accounting, 189 Historical information, usage, 297 Hobson’s choice, 162 Hocking, R.R., 36 Holding returns, 325 Holdings-based equity style analysis, 159, 169 Holdings-based style analysis (HBSA), 159–161 definition, 160 Holdings-based styling (HBS), 78 style regression, 92 Hold-out sample, 233 Holland Capital, equity style, 350 Homogeneous clusters, 299 Horse race comparison, 36 Hsieh, David A., 2, 26, 27, 34, 231 Hunter, John E., 232 Ibbotson, Roger G., 163, 230, 261 Index I/B/E/S See Institutional Brokers Estimate System IBM, 139 IC See Information coefficient IIA See Independence Investment Associates, Inc Illinois State Board of Investment (ISBI), 333–334 goal, 348–349 performance measurement, 343–357 U.S equity managers, 336–337 Imprecision, 220–223 effects See Growth; Value Income-Growth character, 97 Independence Investment Associates, Inc (IIA), 361, 422–423 sample, 431 Index fund strategy, 297 Indexes See Equity style; Global/multicountry indexes; Single-country indexes arbitrage See Standard & Poor’s comparisons, 399–405 developments See Commercial index developments Europe-Pacific regional markets comparison, 402–403 Japanese market comparison, 400–402 returns, 70 U.S market comparison, 399–400 Industrial production, 70 Industry bias, Inflation, 299 measures, 70 Information coefficient (IC), 72 Information ratio, 261, 265, 347–348 See also Ariel Capital achievement, 268 t-statistics, 270 Information, usage See Historical information Initial price offerings (IPOs), 201 In-sample period, 269 Institutional Brokers Estimate System (I/B/E/S), 11, 173, 176–179 Estimated growth, 190 expectations, 177 forecast, 367, 393 Growth fund, 50 Long-Term Growth (LTG) Estimates, 179–185 Institutional investing, 172 Institutional investment plan sponsors, 175 Institutional pension plan, consultants, 175 Institutional portfolios, 73 Intended style bets, 302 Intermediate-term momentum variable, 329 Internal growth See Sustainable internal growth International bonds, 125 International equities, 125 International exposure, 124 International stocks, 81 International style returns, style switching (relationship), 55–58 Intertemporal robustness, 233 Investing disruption, technology bubble (1999-2000) impact See Equity style evolution, 186–190 history See Value January effect, international evidence See Value investing Index Investment Company Act of 1940, Investments horizons, 317 identification See Complementary investments models See Multistyle equity investment models opportunities, 229 performance See Style strategy, 105 styles, 192–193 See also Equity investment styles measurement, 132 Investor expectations data/methodology, 198–202 style, 195 ITG, Inc., 301 Jagannathan, R., 34, 35 January effect impact See World market movements international evidence See Value investing relationship See World market movements Japanese stocks, performance, JDS Uniphase, 187 Jensen, Gerald R., 304 alpha, 34 Jensen, M., 260 John W Henry & Company See Henry Johnson, Paul, 189 Johnson, Robert R., 304 Jonker, Ed, 359 J.P Morgan, 338 Research Enhanced Index, tracking error, 344 tracking error, 344–345 Judge, George G., 240 JWH See Henry (John W.) & Company Kahn, Ronald N., 163, 259, 263 Kahneman, Daniel, 214, 216 Kane, Ian, 359 Kao, Duen-Li, 299, 305 Karpenko, Alex, 359 Kauke, Stephen, 359 King, Benjamin, 84 Kinney, William R., 421 Kippola, Tom, 189 Kleidon, Allan W., 304 Klein, Robert A., 422 Knowledge-based companies, 187, 189 Korajczyk, R.A., 35 method, 245–248 Korajczyk, Robert A., 245 Koski, J.L., Kothari, S.P., 230 Krail, Robert J., 302, 408, 412–413 Kritzman, M., 260 Kumar, Praveen, 359 Ladanyi, Agnes, 359 Laing, B., 27 Lakonishok, Josef, 172, 195, 196, 203, 205, 207, 407, 420–423, 426 Large capitalization exposure, 400 investing, 419 portfolio, 322–328 489 differential return forecast See Small capitalization portfolio higher-order coefficients, 252 stocks, 140, 317–328 Large-growth manager, 116 Lederman, Jess, 422 Lee, Tsoung-Chao, 240 Lehman non-U.S bond index, 11 Lehmann, B., 260 Leinweber, David, 299, 300 Leverage definition, 65 factor, 71 usage, 65 Levis, Mario, 305 Liew, John M., 302, 408, 409, 412–413 Lintner, John, 231 Liodakis, Manolis, 305 Lo, Andrew W., 420 Loadings, 168 Lobosco, Angelo, 80 Lockwood, Larry J., 295, 296, 303, 313 Longleaf Partners Small Cap fund, 101 Long-run reversal effect, 329 variable, 329 Long-short blended style benchmarks, 340–341 map, 341–343 Long-short portfolios, 64–65 Long-tenure equity managers, 270 Long-term earnings growth, 145 estimates, 146 score, 144 Long-term growth (LTG) estimate, 177 Long-term reversal effect, 329 Long-term style forecasts, 59–60 LSV Large Cap Value, variance, 337 measurement, 345 LTG See Institutional Brokers Estimate System; Long-term growth Luck, Christopher, 299, 300 Lütkepohl, Helmut, 240 MacKinlay, A Craig, 420 Macroeconomic data, 70 Macroeconomic factors, 304 models, 299–301 Macroeconomic variables, 300 Malkiel, Burton G., 261 Managers See Active managers; Micro capitalization; Passive managers choices See Money manager luck/skill, 354–355 persistence, contrast See Funds risk/return profile, 38 self-disclosed strategies, 28 style changes, 125 consistency, 112 MAR Futures, 28, 45 Market bias, 224 breakdown, 402 capitalization-weighted index, 10 490 Market (Cont.) conditions Morningstar Style Box sizes, usage, 140 Ten-Factor Model, adaptability, 139 frictions, 310–311 indexes See Style-based market indexes inefficiencies, 220 line See Efficient market line opportunities, 229 pricing, imprecision, 222 risk, 315 See also Single-factor market risk weights, 328 Market capitalization (MC), 67, 85, 96, 151, 277 exposure, 316 portfolios, 318–324 return characteristics, 321–325 proxy, 212 returns, relationship, 202 style allocations, comparison See Fixed market capitalization style allocations targeting, 404 usage, 195, 318, 378 Market Core, 79 Market neutral hedge funds, 32 portfolios, 64–66 strategies, 73 Market-cap weight, 51 Markowitz, Harry, 63 Marsh, Terry A., 304 Martin, Steve, 164 Maverick firms, 190 MC See Market capitalization Mean-variance benchmark portfolio, 197 Mean/variance framework, 263 Median funds, 260 Mega cap portfolio, 319 Mega cap stocks, 322–325 portfolio, 321 Mercer, Jeffrey M., 304 Merrill Lynch analysts, forecasts, 275 database, 278 Security Risk Evaluation, 200 Merton, R.C., 27 Methodology quality, examination See Style MFMs See Multifactor models Michaely, Roni, 201 Michaud, Richard O., 175 Micro capitalization managers, 341 stocks, 136, 140, 321–324 style boxes, 324 Mid-capitalization band, 136 stocks, 140, 322–325 Miller, Robert E., 422 Mitchell, M., 34 Mobius Group, 161 Model misspecification, example, 23–25 Modest, D., 260 Money manager, choices, 216 Moore, Geoffrey, 189 Moran, Wally, 359 Index Morgan Stanley Capital International (MSCI), 40, 55 data, usage, 409 database, 423, 431 EASEA, 11 EM, 23 EM Free, 11 equity style indexes, 379 Europe Australia and Far East (EAFE) index, 170, 176, 180, 182, 403 Growth index, 379 indexes, 15, 379–386 analysis, 402 Japan, 11 style indexes, 401 Small Capitalization Indexes, 404 usage See Price to book ratio value indexes, 173 Morningstar, Inc., 145, 151, 153 See also Ten-Factor Model classification, 11 common stock, 136 universe, 135 database, 269 indexes applications, 157 structure, 155–156 Large Cap Index, 155 Lens, 131, 133 components, 134–139, 146–157 Mid Cap Index, 156 records, 17 sectors, usage, 147 Small Cap Index, 156 Style Box, 133, 140–143 sizes, usage See Market Total Core Index, 155 Total Growth Index, 155 Total Value Index, 155 U.S Market Index, 155–156 U.S stock indexes, 134 Mott, Claudia E., 359, 392, 394 Multi-asset class equity style models, 297–298 Multifactor APT, 258 Multi-factor APT risk model, 245 Multifactor equity style models, 298–301 Multifactor models (MFMs), 61 mathematical formulation, 62 MFM-based approach, 63 return-based style analysis (comparison), 7–9 Multifactor probabilistic style definitions, 51–52 Multifactor Risk Model, 66 Multifactor valuation models, 360 Multi-fund portfolio, 154 Multiple managers, side-by-side evaluation, 352–357 Multiple-factor risk profiles, 257 Multiple-manager equity style portfolios, performance, 303 Multiple-manager portfolios, style analysis (usage), 15–17 Multistyle equity investment models, 293 Multistyle equity models, 297–302 Multivariate linear regression, 451 See also Constrained multivariate linear regression Index Multivariate regression See Generalized least squares multivariate regression Mutual funds, 276 daily returns, database, 128 data, evidence See Equity style performance manager, 26 underperformance, 259 See also Bond mutual funds Mutual Qualified Z, 119 Naik, Narayan, 35 Nanda, Sudhir, 302, 313 NASDAQ 100 stocks, 149 common stocks, 319 technology stocks, 275 Natural style boxes, 104 Negative active bets, 64 Negative betas, 426 Nelson, William, 422 Net value/growth orientation, determination, 138 Net-of-fees return data, 27 New Economy, 187 industries, 189–190 New York Stock Exchange (NYSE), 233 common stocks, 319 Nicholas Applegate funds, 341 Mini cap fund, 337, 338, 340 Nicholson, S.F., 316 Nielsen, Lars, 407 Nifty 50 bubble, 283 non-so-nifty 50, contrast, 290–291 Nikkei 225, 43 Nippon Performance Fund, 43 return, 28 Noise, 196 inclusion, 139 reduction, 20 Nondirectional strategies, 27 Nondiversifiable volatility risk, 89 Noninstitutional share blocks, 136 Non-singularity, 94 Nonstationarity, 256 See also Extra-risk return Non-U.S equities, 422 style index methodologies, analysis, 359 Non-U.S investors, 179 Non-U.S markets, 378, 403 Normal portfolio benchmarks, 160 Nortel, 187 Not-so-nifty 50, contrast See Nifty 50 Ohlson, J., 88 Old Economy, 188–189 Olsen, Peter, 131 Option-based strategies See Standard & Poor’s 500 Orthogonal projection See Sharpe’s method OTC stocks, 233, 257 Ownership Zone, 134 applications, 152 concept, 150–151 Pagan, A.R., 251 PanAgora Asset Management, 313 491 Parametric Portfolio Advisors, 361 Parcella, Greg, 359 Passive equity style management strategies, 302 Passive management, contrast See Active management Passive managers, 9–10, 19 Passive style management, 303–304 Past returns, 196 Patel, Amita, 163 Patel, J., 261 Peer evaluation results, 32 usage, 28–32 Peer-group approach, 28 Pension fund manager, 26 Perfect foresight, 305, 311 style switching, 54–55 tests See Factor returns Performance See Cumulative performance attribution analysis, 169 definition, 160 evaluation, 1, 19–21, 77 definition, 160 evaluators, 163 measurement See Illinois State Board of Investment significance See Style Persistence evidence, 260–270 identification, 164, 167 test, 263–265 Plan sponsor perspective See Equity style management tracking error, usage, 344 POD See Portfolio Opportunity Distribution Polk, C., 408, 412–413 Pontiff, J., Portfolio-based style analysis, 3–6 Portfolios See Factor/screening portfolios; Institutional portfolios; Market neutral benchmarks See Normal portfolio benchmarks characteristics, 82 factor analysis, 84–89 concentration, 128 construction techniques, 73 effective mix, 298 factor scores, 89–90 holdings, usage See Skill search income-growth character, 79 inferred allocation, 297 investment performance See Style management, 294 companies, 80 managers, style timer, 20 optimization, usage, 63–64 return, 262 characteristics See Market capitalization month-to-month variation, 16 risk/return profiles See Style style analysis, usage See Multiple-manager portfolios classes, grouping, 105–106 information, 157 value-growth characteristics, 83 492 Present value See Risk-adjusted present value Price to book (P/B) proxy, 176 Price to book (P/B) ratio, 4, 11, 79, 82–85, 91 BARRA, usage, 173 calculation, 48 change, 105 definitions, 53 impact See Earnings MSCI, usage, 173 reflection see Earnings relationships, 179, 180 split, 49 style definitions, 60 usage, 185, 419 Price to earnings (P/E) ratio, 4, 70, 79, 82–85, 91 change, 105 consideration, 133 factors, 144 usage, 186, 230, 360, 419 Price trend/reversal components, 330 Price-to-book value, 360 Price-to-dividend ratio, 419 Pricing efficiency, 257 Probabilistic style definition, 58–60 Profit cycle acceleration, 282 deceleration, 283, 289 investing, exceptions, 283–287 Profitability, zone, 72 Profits cycle, exceptions, 283–287 importance, 282–283 Projected growth, usage, 277 Prudent Expert Rule, 294 Prudential Securities, Inc (PSI), 161 equity style indexes, 392–394 screening indexes, 395 Pulvino, T., 34 Pure Growth, 225 Pure Value, 225 Pure value portfolio, 277 Putnam Fund See Growth and income funds Putnam Utilities Growth and Income, 23–24 Quadratic programming, 63 Quality alternative, 283 definition, 278–282 normal cycle, maintenance, 285 valuation, 289–290 variable, 85 Quantitative management See Core strategies; Growth strategies; Value Quartile analysis, 267–269 Queen, M., 88 Ramasamy, Bala, 359 Random walk, 317 Ratner, Hal, 124 Real Estate Investments Trust (REIT), 89, 395 asset classes, 23 Realized returns, 205 cognitive errors, 212–217 cross-section, 212–217 Index cross-sectional variation, 202–206, 210 differentials, 196 expectations, comparison see Returns relationship See Book-to-market Rebalancing, 169 Refined style techniques, usage See Value Regression, 71, 91 See also Cross-sectional regression analysis, performing, 429 coefficients, 242 model, 245 parameters, 92 pools, 240 p-value, 329 usage See Stepwise regression Reinganum, Mark R., 84, 305, 317 REIT See Real Estate Investments Trust Relative value, 193, 360 Rentzler, J., 260 Residuals, 251 Retention rate, 85 Return on equity (ROE), 82–85, 395 Return on investment See Cash Flow Return on Investment Return prediction quality, 91–95 regressions, 92–95 Return-based analysis, 38 Return-based style analysis, 6–25 application, 10–15 examples, 11–15 asset classes, 39–40 relationship See Multifactor models Return-based style, versatility, 15 Returns See Cumulative return; Excess return; Past returns cross-section variation See Realized returns data, 263 See also Net-of-fees return data database See Mutual funds differences See Cross-sectional average return differences; Raw returns differentials, 229 See also Realized returns; Style returns dispersion See Equity style expectations, 131 cross-section variation, 206–210 realized returns expectations, comparison, 210–212 non-linear component, 35 nonstationarity See Extra-risk return prediction future growth expectations, impact, 183–184 price/book, impact, 183–184 profiles See Style rational model, 230 relationship See Beta; Market Capitalization series, Euclidean space, 444 style analysis, visualization, 444–446 usage See Daily returns volatility, monitoring, 157 Returns-based style analysis, 396 estimates, 97 models, 91 variables, 91–92 493 Index Returns-based style analysis (RBSA), 109, 160, 169, 297 benchmarking, 110–117 benefits, 298 calculation, input, 436 constrained multivariate regression, contrast, 450–452 curve-fitting problem, 439–443 definition, 160 Euclidean space, approximation, 444–450 limitation, 125–129 misconceptions/mistakes, 122–125 security analysis (contrast), 110–117 solutions, 126–129 style indexes, criteria, 168 Returns-based style analysis (RBSA), mathematics, 437–439 exploration, 435 notation, 436–437 prerequisites, 436 Returns-based styling (RBS), 75–76 accuracy, 80–81 cost, 79–80 information, pros/cons, 79–81 proponents, 97 qualitative analysis, 97–99 review, 78–81 style regression, 92 timeliness, 80 statistical analysis, 96–97 Risk adjustment, 242–247, 257 control constraints, 64 factors, exposures, 132 hypothesis, 198, 211–212 increment effect, 244 premiums, 229 profiles, 258 See also Multiple-factor risk profiles; Single-factor risk profiles; Style rational model, 230 tolerances, 131 Risk Attribute Model (RAM) See Salomon Smith Barney Risk controlled long-only portfolio, 64 Risk-adjusted present value, 220 Risk-adjusted returns, 261, 429, 433 Risk-free arbitrage, 215 Risk/return characteristics, 294 Ritter, Jay R., 426 Rodriguez, Mauricio, 295, 296 ROE See Return on equity Roll, Richard, 84, 88, 257, 300 Rolling-window methodology, 25 Rosenberg, Barr, 61 Ross, Stephen A., 27, 35, 84, 229–231, 257, 300 Rowley, Ian, 55, 172, 407, 422, 424 Rozeff, Michael S., 421 R-squared, 22–23, 123, 343–344 See also Out-ofsample r-squared amount, 125, 336, 352 implication, 25 improvement, 32 interpretation, 25 statistics, comparison, 338 usage, 330 See also Equity style values, 93, 337, 427 Rudd, Andrew, 163, 259 Russell Company See Frank Russell Company Salomon Smith Barney (SSB), 388 Broad Market Indexes, 387 classification technique, 51 Global Equity Index System, 386 usage, 404 indexes, 386–388 comparison See Frank Russell Company Risk Attribute Model (RAM), 301 U.S style indexes, 399–400 Salomon-Russell Indexes, 387 Screening portfolios See Factor/screening portfolios Scudder Technology Fund, 149 Sectors, 146–148 analysis, 127 Securities and Exchange Commission (SEC), Fair Disclosure rules, 187, 192 Security analysis, contrast See Returns-based style analysis indexes, 75 Security-based manager databases, 113 Seemingly-Unrelated Regressions (SUR) method, 251, 255–256 regressions, 255–256 usage, 258 Selection definition, providing, 10, 19 returns, t-statistics, 270 usage, Sequoia Fund, return, 120 Shanken, Jay, 230 Sharaiha, Yazid M., 173 Sharpe, William F., 2, 6, 7, 23, 48, 53, 55, 75, 109, 113, 172, 231, 232, 262, 293, 297, 407, 422, 424, 435 Sharpe’s method, 436–438, 441 contrast See Sum of squares correlation minimization, contrast, 447 orthogonal projection, 447–448 SHAZAM econometrics, 251 Shea, H David, 422 Shefrin, Hersh, 197, 201, 206, 215, 313 Shleifer, Andrei, 172, 195, 196, 198, 203, 205, 207, 313, 407, 420, 423 Short-run horizons, 317 Short-sale constraint, 8, 27 Short-term reversal effect, 329 Shumaker, Robert D., 299, 305 Single style benchmarks, 337 Single-country indexes, 361–377 Single-country markets, 361 Single-factor CAPM, 231, 258 Single-factor market risk, 244 Single-factor risk profiles, 257 Single-risk premium model, 231 Single-style rotation, 306 Single-style strategies, 313 Size premium, short-term reversals, 304 Skill evaluation, process, 164 focus See Attribution 494 Skill search, 162–164 definitions, 159–160 portfolio holdings, usage, 159 Sloan, Richard G., 230 Small capitalization band, 136 investing, 419 portfolios, 322–328 large capitalization portfolio, differential return forecast, 329–331 stocks, 140, 317–328 Small-large coefficients, 431 Smith, H., 36 Solt, Michael, 214 Sorensen, E., 51 S&P See Standard & Poor’s Standard & Poor’s 500 (S&P500), 65, 73, 277– 278, 341 Growth-Value return spreads, 59 index, 110, 114, 166, 343 arbitrage, 34 option-based strategies, 35 outperforming, 239 quality rating, 87–88 stocks, 276 index, 11, 20 Standard & Poor’s (S&P), 3–4, 290 1500 Super Composite Index, 362–364 Common Stock Rankings, 278 futures, 49 Global Index Services, 361 Growth index, 171, 187 indexes, 168, 361–367 midcap, 262 MidCap 400 Index, 362–364 outperforming, 285 quality rating, 101 size dimension style indexes, 363 SmallCap 600 Index, 362–364 S&P/ASX Australia equity style indexes, 364 S&P/TSX Canada equity style indexes, 364 style indexes, 396–398 Statman, Meir, 197, 206, 214, 313 Stepwise regression, usage, 36 Stevens, Ross, 408, 409 Stewart, Scott D., 163 Stock market capitalization, 319–321 Stocks See International stocks; Large capitalization; Mid-capitalization; Small capitalization; Super stocks; Value stocks characteristics, cross-sectional association, 195 excess return, 62 holdings, 125 market capitalization, 219 performance, 276 popularity, 146, 149–150 return, 157 sector, 133 selection, 48, 165, 338, 346 strategy, 13 usage See Excess return sorting, 48 style information, 157 Index usage See Excess return universe, selection, 48 Stocks, value/growth orientation, 142 measurement, 134–139 presentation, 140–141 scores, calculation, 136–138 ten factors, 136 Straight bonds, 125 Style allocation policy, benefits See Flexible capitalization style allocation policy asset class exposures, bets See Intended style bets boxes See Micro capitalization; Natural style boxes depth/breadth, 131 dynamic styling, contrast See Fixed style boxes choice, 21 classes, 73–74 grouping See Portfolios classifications, 90 coefficients, 435 consistency, 154 See also Managers relationship See Asset defining, 34 definitions improvements See Equity style refinement, 73–74 elements, 148–150 focus See Attribution forecasts See Long-term style forecasts time horizon, 58 illusions, 229 indexes, 160 criteria See Returns-based style analysis definition, 160 information, 75 management See Active style management; Equity style management; Passive style management relationship See Factor market allocation, 164 measurement See Funds methodology quality, examination, 91–104 performance measures/research See Equity style performance significance, 240–242 portfolios, 239 investment performance, 239–257 risk/return profiles, 247–249 profile, 165 providing, 10, 19 quality, judging, 77–78 switching, 58 See also Perfect foresight techniques, usage See Value timer See Portfolios usage, weights, 263, 435 coefficients, 446 Style Advisor software See Zephyr Associates Style analysis, See also Portfolio-based style analysis; Return-based style analysis application See Hedge funds definition, 160 hedge funds, relationship, 26–36 Index Style analysis (Cont.) results interpretation, pitfalls, 21–25 retrospective/commentary, 109 stock-oriented approach, 150 usage See Multiple-manager portfolios visualization See Returns Style benchmark asset classes, 19 near-constant difference, 441–442 return, Style Box See Morningstar, Inc Style returns differentials, 229 experimental design, 232–238 style switching, relationship See International style returns Style switching See Perfect foresight style switching relationship See International style returns strategies, implementation, 58–59 Style tilts implementation, 58–59 motivation, 53–54 Style-based market indexes, 154–157 Style-specific fund, 154 Subindex returns, 70 Sum of squares (minimization), Sharpe’s method (contrast), 446–447 Summers, Larry, 189 Super stocks, 226–227 Survival bias, 220 Sustainable internal growth, 85, 87 Systematic risk See Hedge funds Systematic sources, 299 TCW Group, 338 TCW Value Added, 346–347 Technology investors, 286 stocks, 290 boom (1998-2000), 147 Technology bubble, 283–291 definition, 274–276 impact (1999-2000) See Equity style Ten-Factor Model (Morningstar), 134, 137 adaptability See Market benefits, 139–140 data availability, 140 introduction, 133 Ten-Factor value/growth model, 135 Terdich, Matthew, 131 Terminal wealth, 328 differences, 318 Texas Instruments, 187 Thaler, Richard H., 195, 196, 198, 205–206, 317, 426 framework, 209 Theisen, R., 260 Thomas, Abraham, 359 Three-factor model, 316 Threshold amounts, calculation, 138–139 Throughput, 162 Time horizon See Style Time series regression, 246 Timeliness problem, 98 495 qualitative analysis See Returns-based styling quality, 96–99 statistical analysis See Returns-based styling Timing See Country-level equity style timing; Country-level timing Titman, Sheridan, 35, 260, 420 Total return See Expected total return; Value-weighted total returns usage, 356 Tracking error, 344–345 See also Excess return; J.P Morgan amount, 168 usage, 351 See also Equity style; Plan sponsor Trading amount, 58 costs, 54 Traditional growth, 193 Traditional Value, 192–193 Transaction costs, gross, 410 Trend axis, 191 Treynor-Black, appraisal ratio, 34 Trittin, Dennis, 175 Trzcinka, Charles A., 163, 220, 225, 232 t-statistics, 20, 258, 269 See also Information ratios; Selection absolute values, 246 measurements, 242 range, 200 significance, 309 Turnover ratio, 25 Tversky, Amos, 214, 216 Two-factor model, representation, 429 Ultra-large cap managers, 341 Umstead, David A., 422 Under-weighted consumer nondurables, 116 Unemployment, 70 Upside-downside capture, 348–350 U.S equity market, 334 U.S equity mutual funds, 77, 89 U.S equity style index methodologies, analysis, 359 See also Non-U.S equity style index methodologies U.S Market Neutral Equity Fund See Hillsdale U.S Market Neutral Equity Fund U.S Treasury bills (T-bills), 65, 117, 123 index, 262 rate, 426 recommendation, 125 Valuation dimension indexes, 375 Value addition, refined style techniques (usage), 60–61 characteristics, 139, 141 definition, 276–278 distributions, combination See Dispersion measure divergence, explanation See Growth factor scores, examination, 142–146 funds, 148 growth, performance (comparison), 66 historical returns, 53–54 impact See Country selection information, 420 managers, 53, 152 performance, imprecision/bias effects, 219 meaning, 185–186 496 Value (Cont.) measures, 185 orientation, 135 score, 143 portfolio See Pure value portfolio return, 423 strategies, quantitative management, 47 usefulness, 171 Value investing, 429–431 data description, 422–423 history, 172–173 January effect, international evidence, 419 world market movements, 425–429 Value orientation determination See Net value/growth orientation distinctions, 139 measurement, 140 See also Stocks considerations, 134–136 presentation See Stocks scores, interpretation, 141–146 Value stocks, 49, 191, 224 outperformance, 408 performance, 295, 426 purchase, 424 Value-as-a-Long-Term-Investment, 199–202, 206, 209–214 Value-core-growth (VCG), 137–138 indexes, 156 Value/growth axis, 141 factors, 142 findings, 305 orientation, 147 See also Stocks Value-growth factor dimension, 81 Value-growth spread, 423–425, 432 regressing, 427 Value-growth swap, 424 Value-oriented funds, 134 Value-weighted total returns, 239 Van Wagoner Emerging Growth fund, 149 Vanguard Balanced Index fund, 17 Growth & Income fund, 41 Strategic Equity portfolio, 124 Total Stock Market Fund, 101 Portfolio, 91 Windsor Fund, 11, 17–20, 25 Windsor mutual fund, 11–12 Variance See Explained variance VCG See Value-core-growth Vector length, minimization, 445 Vishny, Robert W., 172, 195, 196, 198, 203, 205, 207, 407, 420, 423 Index Volatility, 278 risk See Nondiversifiable volatility risk Von Germeten, J., 59 Vuolteenaho, T., 408, 412–413 Walmart, 139 Weighted windows, 71 Weighted-average score, 146 Weighted-relative scores, measurement, 144 Weinstein, Mark, 232 Welch, Ivo, 229 Welsh, Jack, 189 Whisper number, 192 Williams, C Nola, 294 Wilshire Associates 5000 Index, 305–309, 371 All Growth indexes, 302 indexes, 161, 168, 304, 371–373 Large Company Growth Index, 294 Large Growth Index, 371 Quantum Style indexes, 394 Small Cap 1750 Index, 371 Small Company Value Index, 294 Small Growth Index, 371 Target Indexes, 394–399 U.S Equity Risk Model model, 301 Windsor mutual fund See Vanguard Within-style long-short portfolios, 309 Womack, Kent, 198–199, 201 World market beta, 430 coefficients, 431 return See Excess world market return World market movements, 425–427, 429–432 See also Value investing firm size, impact, 429–431 firm size/January effect, relationship, 431 January effect, impact, 427–429 Yalovitser, Tatyana, 359 Yeh, Richard S., 173 Yield, 191 See also Dividend curve information, 70 Yield-Based Value, 192–193 Zacks, 190 Zeckhauser, R., 261 Zellner, Arnold, 251 Zephyr Associates Second Annual Users Conference, 114 Style Advisor software, 10, 109, 338, 371, 394, 396 options, 340 shorting ability, 341 ... 69 8 THE HANDBOOK OF EQUITY STYLE MANAGEMENT index portfolios during the relevant time period The sum of the terms in the square brackets is that part of the managed portfolio return that can... active strategy Part of the low R2 with respect to the benchmark is due to the fact that the S&P 500 may not be the best performance measure The S&P 500 had an 12 THE HANDBOOK OF EQUITY STYLE MANAGEMENT. .. value and small stocks, the rewards to taking the risk associated with the style bet should go to the investor To the extent the style bets involve superior style timing skills the rewards after