In <b><i>Is Tactical Allocation a Winning Strategy?</i></b>, from the Fall 2021 issue of <b><i>The Journal of Index Investing</i></b>, authors <b>Srinidhi Kanuri</b> (of the <b>University of Southern Mississippi</b>), <b>James Malm</b> (of the <b>College of Charleston</b>), and <b>D.K. Malhotra</b> (of <b>Thomas Jefferson University</b>) analyzed the performance of actively managed mutual funds that pursue tactical asset allocation (TAA) strategies. In such a fund, the manager frequently reallocates investments among different asset classes, based on performance predictions. The goals are to improve diversification, protect against short-term losses, and achieve positive alpha. The authors measured the performance of all tactical allocation funds from January 1994 to October 2016 and compared it to the performance of benchmarks consisting of broad-market indexes and static mixed portfolios that did not reallocate. They found that tactical allocation funds underperformed all the benchmarks and showed negative alpha—meaning that fund managers failed to predict which assets would outperform the market. While TAA funds did have some short-term risk reduction benefits, the authors nevertheless concluded that investors are better off investing in passive funds that follow indexes.

In <b><i>Employee Opinions about Partial Annuitization in a Retirement Plan</i></b>, from the Winter 2022 issue of <b><i>The Journal of Retirement</i></b>, authors Michael Finke (of <b>The American College of Financial Services</b>) and Jason J. Fichtner (of the <b>Bipartisan Policy Center</b>) report the results of a survey they conducted among defined-contribution (DC) retirement plan participants that measures interest in allocating contributions to an annuity option inside the plan. Annuities are not popular with retirement savers, but past researchers have asked savers only if they planned to put all or none of their retirement savings into annuities. Instead, the authors asked savers if they wanted the option of putting some of their retirement savings into annuities for lifetime income. The authors reported that 49.5% of respondents preferred a plan that offers stocks, bonds, and annuities; 24% preferred full annuitization; and 26.5% preferred only stocks and bonds. Respondents indicated they would allocate an average of 33.5% of savings to annuities to receive guaranteed lifetime income. The authors say that if plan administrators wish to encourage allocations to annuities, they should frame them as guaranteeing participants the ability to maintain a stable level of spending every year for life.

In <b><i>Does Rare Whisky Add Value in Multi-Asset Portfolios?</i></b> from the Spring 2022 issue of <b><i>The Journal of Alternative Investments</i></b>, <b>Lars Tegtmeier</b> at <b>Merseburg University of Applied Sciences</b> finds that investing in rare whisky¹ adds value to a portfolio. He explains that supply and demand factors driving whisky prices are different from many other assets. This difference stems in part from the whisky aging process, so the current supply is due to production decisions made many years in the past. Past demand and supply imbalances led to a shortage in rare whisky and subsequently a dramatic increase in auction sales of whisky bottles and high returns. Tegtmeier explains that the unique pricing factors driving returns are uncorrelated with other major asset classes. He then studies the impact of adding rare whisky to multiasset portfolios. Additionally, he reviews several methods of accessing rare whisky exposure and the associated costs in this small but developing market.

<h3>Abstract</h3> As global vaccination campaigns against SARS-CoV-2 proceed, there is emerging interest in the longevity of immune protection, especially with regard to increasingly infectious virus variants. Neutralizing antibodies (Nabs) targeting the receptor binding domain (RBD) of SARS-CoV-2 are promising correlates of protective immunity and have been successfully used for prevention and therapy. To assess neutralizing capacity, we developed a bead-based multiplex ACE2 RBD competition assay as a large scalable, time-, cost-, and material-saving alternative to infectious live-virus neutralization tests. By mimicking the interaction between ACE2 and RBD, this assay detects the presence of Nabs against SARS-CoV2 in serum. Using this multiplex approach allows the simultaneous analysis of Nabs against all SARS-CoV-2 variants of concern and variants of interest in a single well. Following validation, we analyzed 325 serum samples from 186 COVID-19 patients of varying severity. Neutralization capacity was reduced for all variants examined compared to wild-type, especially for those displaying the E484K mutation. The neutralizing immune response itself, while highly individualistic, positively correlates with IgG levels. Neutralization capacity also correlated with disease severity up to WHO grade 7, after which it reduced.

In <b><i>What Portfolio in Europe Makes Sense?</i></b> from the July 2021 special issue on non-US financial markets of <b><i>The Journal of Portfolio Management</i></b>, author <b>Gueorgui Konstantinov</b> (of <b>LBBW Asset and Wealth Management</b>) analyzes European stock and bond performance. Investors have generally preferred European bonds, which have outperformed European stocks. However, eurozone economic development and demand for low-risk investments has recently driven bond yields down into negative territory. This, combined with poor long-term European stock performance, casts doubt on whether a balanced European portfolio with a large allocation to bonds can provide attractive returns. The author analyzes long- and short-term European stock and bond returns and calculates the past performance of a model set of balanced portfolios. He finds that the popular European 40/60 stock/bond balanced portfolio is unlikely to provide desirable future returns because European bonds, not stocks, are now the riskier investment. This is due to the bonds’ negative yields and high volatility, plus rising inflation. However, European emerging-market bonds have the best risk–return profile, and European stock returns are improving. The author says balanced-fund managers may wish to add emerging-market bonds and derivatives to portfolios, while investors may wish to switch to a 60/40 stock/bond allocation.

Many investors expect a well-crafted asset allocation strategy to provide exceptional risk management through diversification. However, research has shown that asset returns can be highly correlated during down markets and periods of extreme market turmoil, reducing the effectiveness of diversification. In <i><b>Macro Factor Investing with Style</b></i>, from the 2022 Quantitative Strategies special issue of <i><b>The Journal of Portfolio Management</b></i>, <b>Alexander Swade</b> (<b>Invesco</b>), <b>Harald Lohre</b> (<b>Invesco</b>), <b>Mark Shackleton</b> (<b>Lancaster University</b>), <b>Sandra Nolte</b> (<b>Lancaster University</b>), <b>Scott Hixon</b> (<b>Invesco</b>), and <b>Jay Raol</b> (<b>Invesco</b>), propose that investors diversify using macroeconomic factors instead of asset allocation. Macro factors have proven to be better at clarifying the variation of investment returns across asset classes and style factors in specific economic situations. The authors demonstrate that focusing on three relevant macro factors—growth, inflation, and defensive—enhances portfolio risk management by investing in macro factors that show high exposure to different market states.

In <b><i>The Best of Both Worlds: Forecasting US Equity Market Returns Using a Hybrid Machine Learning–Time Series Approach</i></b>, published in the Spring 2021 issue of <b><i>The Journal of Financial Data Science,</i></b><b>Haifeng Wang, Harshdeep Singh Ahluwalia, Roger Aliaga-Díaz, and Joseph Davis</b> (all at<b> Vanguard</b>) revisit the long-term equity return forecasting performance of a popular time-series model based on Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio. Noting that its performance had deteriorated due to structural economic changes, they considered additional variables, econometric methods, and machine learning (ML) techniques. Using their domain knowledge in the data science arena, the authors sought to improve the out-of-sample predictive accuracy of long-run stock return forecasts. They compared the performance of various approaches, including linear regressions, vector autoregressive (VAR) models, random forests, gradient boosting machines, and gated recurrent units. They found that a two-step approach that estimates a VAR model with ML techniques and uses outputs in an additive component model of returns works best. Using an ensemble of ML techniques within a robust economic framework yields more accurate long-run return predictions than using any of the methods alone.

In <b>The Role of Contracts in Venture Capital Returns</b>, published in the Fall 2021 issue of <b><i>The Journal of Alternative Investments</i></b>, <b>Sarina Liu</b> of <b>Wells Fargo</b> creates a novel dataset to empirically test the hypothesis that traditional methods overestimate the post-money value of startup firms. Data about contract terms display four general convertible preferred stock types that are often provided to venture capitalists (VCs). After combining the data on contract terms with two additional datasets, the author analyzes cash flows to the VCs, revealing several interesting statistics regarding early- and late-stage investors in small and large acquisitions for each of the four types of convertible preferred stocks. While possible outcomes include failures, acquisitions, or initial public offerings (IPOs), most involve small acquisitions. Importantly, the traditional method for estimating the post-money value is inaccurate because the assumption of using common stock does not capture the significant added value of preferred stock.

In <b><i>Risky Corporate Bonds in 2021: A Bubble, or Rational Underwriting in a Low-Rate Environment?</i></b>, which appeared in the November 2021 issue of <b><i>The Journal of Portfolio Management</i></b>, authors <b>Edward Altman (Stern School of Business</b>, <b>New York University,</b> and <b>NYU Salomon Center for the Study of Financial Institutions)</b> and <b>Mike Harmon (Gaviota Advisors, LLC)</b> attempt to determine whether current market factors have driven a “bubble” in the US high-yield bond market. In order to determine whether the current market conditions in high yield truly represent those of a “bubble,” the authors analyze the highest-risk segment of this market. Based on historical average default and recovery rates, they conclude that the expected returns from the securities analyzed are not commensurate with the high risk associated with those securities. Furthermore, the authors’ analysis of key factors influencing future default and recovery rates yields the conclusion that there are more potential scenarios for investors to underperform than there are for investors to outperform. Although the conditions analyzed do not represent a true “bubble” as defined by the authors, they do express concern over other potential negative repercussions resulting from investors’ assumption of excessive risk.

In <b>An Inconvenient Fact: <i>Private Equity Returns and the Billionaire Factory</i></b>, from the December 2020 issue of The <b><i>Journal of Investing</i></b>, author <b>Ludovic Phalippou</b> (of the <b>Saïd Business School</b> at the <b>University of Oxford</b>) challenges the perception that private equity (PE) provides institutional investors with higher returns that justify its higher fees. PE is not available to the general public—and since PE investments are not continuously traded, there are no publicly available measures of PE rates of return. Therefore, PE firms use internal rate of return (IRR) as their primary advertised performance measure. However, a more appropriate measure of PE performance is based on a net present value (NPV) calculation, such as the public market equivalent (PME). Using this performance measure, Phalippou shows that US PE has produced about the same net-of-fees returns as the most common US stock indexes since 2006. Meanwhile, a small number of PE managers have become billionaires by receiving incentive fees based on absolute performance, not performance relative to any benchmark. The author questions who really benefits from PE investing, explains why pension funds and universities continue to embrace it, and offers suggestions to make PE investing more sustainable. <b>TOPICS:</b>Private equity, statistical methods, performance measurement