<h3>Practical Applications Summary</h3> In <b><i>Utilizing Low-Volatility Assets to Mitigate Sequence Risk in Retirement Investing</i></b>, from the August 2019 issue of <b><i>The Journal of Investing</i></b>, <b>Wei Ge</b> of <b>Parametric Portfolio Associates</b> investigates the relationship between low-volatility assets and sequence risk in retirement investment portfolios. Ge finds that constructing a 60/40 portfolio in which the 60% growth asset allocation was invested in a low-volatility asset significantly reduced the uncertainty associated with retirement investment outcomes. This reduction in sequence risk was reflected in narrower final wealth ranges and reduced failure rates. Ge suggests that retirement plan managers incorporate low-volatility assets into the portfolios they manage in order to mitigate sequence risk. <b>TOPICS</b>: Retirement, portfolio construction, simulations, performance measurement

<h3>Practical Applications Summary</h3> In <b>Trade-Off in Multifactor Smart Beta Investing: <i>Factor Premium and Implementation Cost</i></b>, from the 2019 Quantitative Special Issue of <b><i>The Journal of Portfolio Management</i>, Feifei Li</b> and <b>Joseph (Yoseop) Shim</b> (both of <b>Research Affiliates</b>) investigate the effects of implementation costs on multifactor portfolio construction. They examine the performance impact of rebalancing multifactor portfolios by looking at portfolio characteristics such as volume, tilt, turnover, and turnover concentration. They find that multifactor portfolios that included all six style factors under consideration—value, low beta, profitability, investment, momentum, and size—yielded the highest information ratios, both before and after trading costs, with a very small negative impact on Sharpe ratios compared with multifactor portfolios composed of fewer factors. The authors also determine that a uniform concentration level of 25% for all factors provides the greatest performance in the presence of implementation costs. Overall, they suggest investors pursue multifactor portfolios composed of the top 25% of stocks in each of the six style factors. <b>TOPICS:</b>Analysis of individual factors/risk premia, portfolio construction, VAR and use of alternative risk measures of trading risk

<h3>Practical Applications Summary</h3> In <b><i>The Size Effect Is Alive and Well, and Hiding Behind Calendar Anomalies</i></b>, in the September 2019 issue of <b><i>The Journal of Portfolio Management</i></b>, <b>David YechiamAharon</b> (<b>Ono Academic College</b>) and <b>Mahmoud Qadan</b> (<b>University of Haifa</b>) investigate the size-effect asset-pricing anomaly and its possible recurrence during different calendar periods. Using nearly 90 years of monthly, weekly, and daily data to test for the tenacity of the size effect’s small-cap premium, the authors assess whether and to what degree this pricing anomaly occurs within familiar calendar-based anomalies. Recent research has cast doubt on the presence of the size effect. One such critique holds that, according to the efficient market hypothesis, pricing anomalies cannot persist because investors would invariably exploit them, and the anomalies would disappear. In this article, the authors present conflicting evidence, showing that although the size effect does somewhat diminish over time, it still persists—and even thrives in some cases—within well-known calendar anomalies. Even when controlling for such variables as return type (value-weighted versus equal-weighted), sample periods, and regression-estimation type, the authors observe a frequently robust size effect across multiple seasonal anomalies—a finding notably consequential to investment decisions. <b>TOPIC:</b>Factor-based models

<h3>Practical Applications Summary</h3> In <b>Mature and Not Mature Enough: <i>Comparing Private Equity in Developed and Emerging Markets</i></b>, which appeared in the Spring 2019 edition of <b><i>The Journal of Private Equity</i></b>, <b>Darek Klonowski</b> of <b>Brandon University</b> compared the current trends in the private equity industry in both developed and emerging markets. He found that both markets are proceeding along a developmental track from initiation to growth, maturity, and eventual decline. However, developed and emerging markets differ in their phases and, therefore, in their associated challenges in this process. Private equity in developed countries is mature, and is experiencing slowing and even declining returns. In contrast, private equity in most developing countries is still in the growth stage of development but is proceeding along the evolutionary trajectory in unpredictable ways. Both situations present challenges for general partners and limited partners looking to invest in private equity. <b>TOPICS:</b>Private equity, developed, emerging, equity portfolio management

<h3>Practical Applications Summary</h3> In <b>“Flexicure” Retirement Solutions: <i>A Part of the Answer to the Pension Crisis?</i></b>, from the July 2019 issue of <b><i>The Journal of Portfolio Management</i></b>, authors <b>Lionel Martellini</b> (of <b>EDHEC-Risk Institute</b>), <b>Vincent Milhau</b> (of <b>EDHEC-Risk Institute</b>), and <b>John Mulvey</b> (of <b>Princeton University</b>) introduce a range of goal-based retirement investing strategies that allow for both security and flexibility. They describe such strategies as “flexicure,” a portmanteau of “flexible” and “secure.” The authors also describe how combining bonds, annuities, and equities can lead to improvements in the use of existing multi-asset products for retirement investing. They explain how to apply principles of goal-based investing in the retirement context and highlight the benefits of their strategies. <b>TOPICS:</b>Retirement, portfolio construction, quantitative methods

<h3>Practical Applications Summary</h3> In <b><i>Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts</i></b> from the Fall 2018 issue of <b><i>The Journal of Retirement</i></b>, author <b>Ganlin Xu</b> (of <b>GuidedChoice</b>) constructs a framework to help investment professionals find the most tax-effective way for clients to fund their retirement. He focuses on retirees who have assets in both traditional and Roth IRAs. Financial advisors often recommend a standard sequence of withdrawals from different types of accounts, but the author shows that approach does not take into account market conditions and retirees’ changing tax circumstances. He finds that taking withdrawals first from a traditional IRA saves taxes in an up market, taking withdrawals first from a Roth IRA saves taxes in a down market, and taking simultaneous withdrawals from both a traditional and a Roth IRA saves more taxes overall. He then provides easy-to-use tables showing the tax-optimal withdrawal combinations from traditional and Roth IRAs. In general, single filers save more in taxes by withdrawing more, earlier from Roth IRAs, married joint filers save more by simultaneously withdrawing equal amounts from traditional and Roth IRAs, and married joint filers with high IRA balances save more by taking most of their withdrawals from traditional IRAs. <b>TOPICS:</b>Retirement, statistical methods, legal/regulatory/public policy, wealth management

Practical Applications Summary In (Il)liquidity Premium in Credit Markets: A Myth?, which appeared in the Winter 2019 edition of The Journal of Fixed Income, Scott Richardson and Diogo Palhares (both of AQR Capital Management) investigated the notion of the liquidity premium in corporate bond markets. They conducted several analyses based on multiple measures of liquidity, including the bid–ask spread, average daily trading volumes, issue size, price impact, and frequency of zero trading days. In almost every analysis, they found, illiquidity did not translate into positive risk-adjusted returns that were statistically significantly different from zero. The only relevant liquidity-related bond characteristic the authors discovered was time since issuance: older bonds were associated with higher future credit-excess returns. However, the authors did not interpret this finding as evidence for a liquidity premium, as more direct measures of liquidity had no relation to returns. Rather, the authors suggest that the higher positive returns on older bonds are due to the tendency of investors to avoid those bonds for some other, non-observable reason.

Practical Applications Summary In For Style Factors, One Size Does Not Fit All, from the Winter 2017 issue of the Journal of Investing, Melissa R. Brown (of Axioma) argues that investment managers who use factors to generate alpha should consider those factors’ performance across time and geographic location to determine the appropriateness of the associated risk. Not all factors are compensated over time, and risk-only factors (e.g., leverage, liquidity, and exchange rate sensitivity) can add significant risk to a portfolio. Brown draws on annualized returns for several major factors from 1999 through 2016 in the United States, Europe, and Japan to illustrate the wide variety in factor returns over time and region. Ultimately, she argues that one size does not fit all in factor investing; investors must first define their goals before selecting factors to include in their portfolios. TOPICS:Analysis of individual factors/risk premia, portfolio construction

<h3>Practical Applications Summary</h3> In <b><i>What Happens to Stocks When Interest Rates Rise?</i></b>, published in the Summer 2018 issue of the <b><i>Journal of Investing</i></b>, author <b>Andrew Berkin</b> of <b>Bridgeway Capital Management</b> in Houston demonstrates that, contrary to popular perception, stocks perform well even when interest rates rise. Investors who hold high-dividend stocks or shares of companies in the durables and utilities industries may experience short-term relative underperformance. <b>TOPICS:</b>Security analysis and valuation, legal/regulatory/public policy, risk management