In <b>E, S, or G: <i>Analyzing Global ESG Performance</i></b>, in the Winter 2020 edition of <b><i>The Journal of Impact and ESG Investing</i>, Robert Bush, Jason Chen</b>, and <b>Eric Legunn</b>, all of <b>DWS Research Institute</b>, investigate ESG (environmental, social, governance) investing within and across four markets: the United States; Europe, Australasia, and the Far East (EAFE); emerging markets (EMs); and Canada. They apply a three-step framework to assess the risk and return with ESG investing. First, they use linear regressions to quantify any ESG-related excess returns over regional benchmarks. Next, they apply a multifactor model to assess whether any identified alpha comes from value or size premia. Finally, in regions where ESG investing seems to outperform benchmarks, the authors parse the specific pillar’s (i.e., “E,” “S,” or “G”) contribution to that alpha. They find statistically significant ESG-related alpha in EMs and Canada, largely unrelated to size and value factors. They note the pillar-sensitivity of alpha varies across regions: For example, the social pillar is a primary determinant in the United States, EAFE, and Canada. They also observe that the governance pillar, although historically most important to alpha generation in EMs, is declining in significance relative to the social and environmental pillars. <b>TOPICS:</b>ESG investing, portfolio theory, equity portfolio management, behavioral financial, theory, in portfolio management

<h3>Practical Applications Summary</h3> In <b><i>Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees</i></b>, from the Summer 2020 issue of <b><i>The Journal of Retirement</i></b>, authors <b>William Reichenstein</b> (of <b>Social Security Solutions, Inc.</b> and <b>Retiree, Inc.</b>) and <b>William Meyer</b> (also of <b>Retiree, Inc.</b>) explore strategies for optimizing Medicare premiums and taxes. Medicare premiums are based on one’s income from two years earlier, and they rise sharply at certain income thresholds. Meanwhile, taxes on Social Security benefits cause marginal tax rates for middle-income retirees also to rise sharply on a wide range of income, and then drop sharply at still higher incomes. This humplike rise and fall in rates is called the <i>tax torpedo</i>. Reichenstein and Meyer argue that some retirees should convert assets in their tax-deferred accounts (TDAs) into Roth IRAs if their income is at or beyond the end of the tax torpedo, thus allowing them to achieve a lower tax rate on the converted assets. However, those who will be on Medicare two years hence may need to limit their Roth conversions to avoid increasing their future Medicare premiums. <b>TOPICS:</b>Wealth management, retirement, social security

In <b>The Underpricing of Sin Stocks</b> in the June 2020 edition of <b><i>The Journal of Investing</i>, Robert Killins</b> and <b>Hongxia Wang</b> of <b>Coastal Carolina University</b> and <b>Thanh Ngo</b> of <b>East Carolina University</b> discuss “sin stocks,” and in particular, the relative performance of their initial public offerings (IPOs) compared to other IPOs. The authors characterize “sin firms” as those engaged in controversial businesses like alcohol, tobacco, and gaming. Even though the securities of these firms often offer favorable returns, they also often are shunned by investors, and particularly by institutions proscribed by societal norms. The negative reputations of sin firms may contribute to the underpricing of their stocks and their IPOs. The authors find that sin-stock IPOs are underpriced to a greater degree than other IPOs, after controlling for various issuance and company characteristics. Because of this underpricing and the negative reputations of the firms, sin stocks can offer unique return characteristics. Investors willing to ignore the opprobrium may benefit from a reputational risk premium. The authors suggest that managers and individuals take a closer look at these potentially underpriced IPOs and securities as alternative investments. <b>TOPICS:</b>Portfolio theory, portfolio construction

In <b>The Profitability of Technical Analysis during Financial Bubbles</b>, from the November 2020 issue of the <b><i>The Journal of Portfolio Management</i></b>, authors <b>Bala Arshanapalli, Matthew Lutey, William Nelson,</b> and <b>Micah Pollak</b> (all of <b>Indiana University Northwest</b>) identify an opportunity to use technical analysis to profit during financial bubbles. The authors use a moving-average technique to detect trends within bubbles that signal when it is profitable to sell an asset. They then test this technique and find that it outperforms a buy-and-hold strategy for three of five historical financial bubbles in the US stock market and for three international markets: France, Japan, and the United Kingdom. <b>TOPICS:</b>Developed markets, financial crises and financial market history, portfolio theory, technical analysis

In <b><i>Influence of Behavioral Biases and Decision-Making Tools on the Performance of Secondary Equity Investors</i></b>, from the August 2020 issue of <b><i>The Journal of Wealth Management</i></b>, authors <b>R. Renu Isidore (Loyola College), P. Christie (Xavier School of Management)</b>, and <b>C. Joe Arun (Loyola College)</b> examine two factors that influence successful investors in India: their biases and their decision-making tools. The authors measured nine behavioral biases and five decision-making tools and used an analysis of variance test to determine which biases and decision-making tools characterize investors who earn high returns from equity investments. The authors offer their findings as a framework to help equity investors earn good returns and be successful in the market. <b>TOPICS:</b>Wealth management, equity portfolio management, emerging markets

In <b><i>Securing Replacement Income with Goal-Based Retirement Investing Strategies</i></b>, from the Spring 2020 issue of <b><i>The Journal of Retirement</i></b>, authors <b>Lionel Martellini, Vincent Milhau</b> (both of <b>EDHEC-Risk Institute</b> in <b>Nice, France</b>) and <b>John Mulvey</b> (of <b>Princeton University</b>) address how to provide investors with their minimum required retirement income while offering the flexibility to invest for growth (and potentially higher retirement income). Annuities and target-date funds offer either guaranteed income or flexibility, but not both at the same time. Martellini, Milhau, and Mulvey recommend a goal-based investing (GBI) strategy that consists of building blocks designed to realize different goals. The first building block is a retirement goal-hedging portfolio (GHP) consisting of bonds whose principal and interest payments can generate sufficient income for the first 20 years of retirement. After that, a deferred annuity can cover retirees' income needs for the rest of their lives. The second building block is a performance-seeking portfolio (PSP) of long-term growth investments that offer the chance for upside and higher income after retirement. Financial advisors can be of great help to clients who adopt this strategy—constructing and managing GHPs and PSPs and recommending specific deferred annuities. <b>TOPICS:</b>Retirement, pension funds, wealth management

In <b>Portfolio Optimization with Active, Passive, and Factors: <i>Removing the Ad Hoc Step</i></b>, from the March 2020 issue of <b><i>The Journal of Portfolio Management</i>, Roger Aliaga-Diaz, Giulio Renzi-Ricci, Ankul Daga</b>, and <b>Harshdeep Ahluwalia</b>, all with <b>The Vanguard Group</b>, discuss a more streamlined way to optimize portfolios. They present a quantitative asset-allocation framework that incorporates active, passive, and factor strategies—and propose a utility optimization model that concurrently allocates assets among investments in these three dimensions. Their approach condenses portfolio optimization into one step that integrates investors’ risk tolerance into asset allocation. The model incorporates investor risk preferences shaped by the uncertainties inherent with active, passive, and factor investment returns. By clarifying investors’ decision-making, this approach steers them away from ad hoc portfolio allocations and permits them to customize their portfolios more deliberately. The authors highlight practical applications, including how the approach can be used to substitute lower-cost factor strategies for higher-cost active strategies and to create factor-tilted portfolios aligned with investors’ varying risk thresholds. <b>TOPICS:</b>Analysis of individual factors/risk premia, factor-based models, portfolio theory, portfolio construction

<h3>Practical Applications Summary</h3> In <b><i>Three Pillars of Modern Responsible Investment</i></b>, from the 2020 ESG Special Issue of <b><i>The Journal of Investing</i>, Lloyd Kurtz</b> of <b>Wells Fargo Private Wealth Management</b> dives into the three key tenets that support modern “responsible investment” activity. The first is <i>alignment</i> of portfolios with client interests. Alignment is usually accomplished through exclusions. The second is <i>integration</i> of environmental, social, and governance (ESG) factors into investment decision making. Integration emphasizes identifying factors that have a material influence on a company’s financial performance or valuation. The third is <i>impact</i>—achieving positive change though active ownership, usually in the form of engagement with corporate management. Evidence shows that exclusion-based alignment strategies can be applied without sacrificing the ability to closely track standard benchmarks. There is conflicting evidence as to whether asset managers can generate alpha based on integration of positive ESG factors, but somewhat stronger evidence exists to show that they can identify and manage risk based on negative ESG factors. Finally, some evidence supports the tenet that impact activities can produce improved financial results. <b>TOPICS:</b>ESG investing, portfolio theory, portfolio construction

Practical Applications Summary In Multifamily Development: Can You Always Lease It Up?, from the 2019 Special Real Estate Issue of The Journal of Portfolio Management, authors Mark Fitzgerald, Chenchao Zang, and Will McIntosh (all of USAA Real Estate Company) seek to validate the conventional wisdom that investing in multifamily property development is safer than investing in the development of other types of properties, because multifamily properties tend to have short lease-up periods. The authors examine the distribution of lease-up periods for US multifamily developments from 2008 to 2018. They also examine how the length of a property’s lease-up period affects its rents.

Practical Applications Summary In Active Indexing with ETFs: Disruption and Implications, from the Summer 2019 issue of The Journal of Index Investing, Joanne M. Hill of CboeVest discusses how exchange-traded funds (ETFs) have revolutionized the asset management, trading, and exchange businesses, and how investment professionals should respond. According to Hill, the proliferation, transparency, and cost/performance benefit of ETFs give investors greater choice, ease, and value. But at the same time, their wide availability and use of quantitative rules-based strategies are disrupting traditional asset management. Hill asserts that the strong relative performance of ETFs is causing investors to increasingly eschew traditional discretionary money management based on qualitative stock selection. Additionally, index firms—which provide the benchmarks for ETFs—are gaining influence in the development and marketing of investment products. Hill argues that the move toward rules-based, smart-beta investing means active management via ETF indexing will become more common as a trading strategy and in portfolio management, presenting a challenge to asset managers and financial markets. She advises ETF sponsors to apply new approaches to the content, marketing, and distribution of their products, and to train their sales forces to capably inform customers about all aspects of ETFs. TOPICS:Exchange-traded funds and applications, passive strategies, mutual fund performance