Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 5 Number 1, 1996

Equity Fund Size and Growth: Implications for Performance and Selection
(pp. 1-12) DOWNLOAD FULL-TEXT ARTICLE
Conrad S. Ciccotello, C. Terry Grant

ABSTRACT
Should individuals choose the largest or smallest equity funds for investment? This study explores the relationship of equity fund size to performance. Historical returns of large funds are found to be superior to their smaller peers. Yesterday's best performing funds tend to become today's largest funds as individuals invest heavily in response to the communications about the fund's past success. But the findings suggest that, once large, equity funds do not outperform their peers. Especially for funds in aggressive growth objectives, the advantages of being small appear to outweigh the disadvantages. For individual investors with aggressive growth objectives, a strategy of investing in smaller funds may thus be wealth maximizing.

Professional Stock Analysts' Recommendations: Implications for Individual Investors
(pp. 13-29) DOWNLOAD FULL-TEXT ARTICLE
M. Mark Walker, Gay B. Hatfield

ABSTRACT
Conclusions regarding analyst performance often depend on the evaluation technique employed. Using a wide variety of techniques, we find that although there is some evidence that analysts do have the ability to identify undervalued and overvalued securities, individual investors generally experience inferior portfolio performance by analyst recommendations published in the "Market Highlights" section of USA Today (even before transaction costs are included). As a result, individual investors should view studies that purport to show superior performance with skepticism. This statement is particularly true when the assertions are based on stock index comparisons.

Computing Yields on Enhanced CDs
(pp. 31-42) DOWNLOAD FULL-TEXT ARTICLE
Robert Brooks

ABSTRACT
In this paper, we seek to provide a framework for comparing certificates of deposit (CD) products that vary in their features. There are now fixed-rate Cds with no early withdrawal penalties as well as floating-rate Cds with guaranteed floors. With the model developed here, we examine the required change in the effective annual rate required in basis points to make CD products with embedded derivatives (called enhanced Cds) comparable with the standard CD products (ones with large early withdrawal penalties). This framework is beneficial for both retail customers seeking to make rational comparisons and bank executives seeking to provide optimal liability products and seeking to manage the resulting interest rate risk.

Churning: Excessive Trading in Retail Securities Accounts
(pp. 43-56) DOWNLOAD FULL-TEXT ARTICLE
Stewart L. Brown

ABSTRACT
Churning involves excessive trading by stockbrokers in order to generate commissions. Current practice uses the turnover ratio to detect excessive trading. The turnover ratio is a flawed indicator of the actual harm of excessive trading which is commissions. This paper examines the intersection of law and financial analysis in the retail securities arena. A unique set of data from 23 actual churning cases is used to argue that the turnover ratio should be replaced by a more direct measure of the trading costs: the commission to equity ratio. An appropriate benchmark related to the return on common stocks is suggested to gauge excessive trading in a commission context.

Ratios and Benchmarks for Measuring the Financial Well-being of Families and Individuals
(pp. 57-70) DOWNLOAD FULL-TEXT ARTICLE
Sue A. Greninger, Vickie L. Hampton, Karrol A. Kitt Joseph A. Achacoso

ABSTRACT
Financial planners and educators comprised a panel of 156 experts in the Delphi study designed to identify and refine ratios and benchmarks for measuring financial well-being. Consensus between the two groups existed for benchmarks on 20 of 22 ratios in the areas of liquidity, savings, asset allocation, inflation protection, tax burden, housing expenses, and insolvency/credit. Consensus regarding the usefulness of specific ratios was observed for liquidity and tax burden but not for inflation protection and insolvency/credit. The preferred ratios were generally less complex and more easily measured than many of the ratios used in previous work. From the findings, a profile of financial well-being for the typical family/individual was proposed.

ABSTRACT
The past 20 years have witnessed growth in personal financial planning-as a profession and as a separate body of knowledge worthy of attention by the academic community. The Certified Financial Planner Board of Standards is a private, nonprofit, regulatory organization that has emerged as the group bringing these new practitioners and the personal finance academics together in the quest towards an independent body of knowledge developed exclusively for personal financial planning. The CFP© Board has funded its own research, through job analyses and market surveys and academic research through grants and monetary awards for seminal articles and research papers.


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 5 Number 1, 1996 Equity Fund Size and Growth: Implications for Performance and Selection (pp. 1-12) DOWNLOAD FULL-TEXT ARTICLE Conrad S. Ciccotello, C. Terry Grant ABSTRACT Should individuals choose the largest or smallest equity funds for investment? This study explores the relationship of equity fund size to performance. Historical returns of large funds are found to be superior to their smaller peers. Yesterday's best performing funds tend to become today's largest funds as individuals invest heavily in response to the communications about the fund's past success. But the findings suggest that, once large, equity funds do not outperform their peers. Especially for funds in aggressive growth objectives, the advantages of being small appear to outweigh the disadvantages. For individual investors with aggressive growth objectives, a strategy of investing in smaller funds may thus be wealth maximizing. Professional Stock Analysts' Recommendations: Implications for Individual Investors (pp. 13-29) DOWNLOAD FULL-TEXT ARTICLE M. Mark Walker, Gay B. Hatfield ABSTRACT Conclusions regarding analyst performance often depend on the evaluation technique employed. Using a wide variety of techniques, we find that although there is some evidence that analysts do have the ability to identify undervalued and overvalued securities, individual investors generally experience inferior portfolio performance by analyst recommendations published in the "Market Highlights" section of USA Today (even before transaction costs are included). As a result, individual investors should view studies that purport to show superior performance with skepticism. This statement is particularly true when the assertions are based on stock index comparisons. Computing Yields on Enhanced CDs (pp. 31-42) DOWNLOAD FULL-TEXT ARTICLE Robert Brooks ABSTRACT In this paper, we seek to provide a framework for comparing certificates of deposit (CD) products that vary in their features. There are now fixed-rate Cds with no early withdrawal penalties as well as floating-rate Cds with guaranteed floors. With the model developed here, we examine the required change in the effective annual rate required in basis points to make CD products with embedded derivatives (called enhanced Cds) comparable with the standard CD products (ones with large early withdrawal penalties). This framework is beneficial for both retail customers seeking to make rational comparisons and bank executives seeking to provide optimal liability products and seeking to manage the resulting interest rate risk. Churning: Excessive Trading in Retail Securities Accounts (pp. 43-56) DOWNLOAD FULL-TEXT ARTICLE Stewart L. Brown ABSTRACT Churning involves excessive trading by stockbrokers in order to generate commissions. Current practice uses the turnover ratio to detect excessive trading. The turnover ratio is a flawed indicator of the actual harm of excessive trading which is commissions. This paper examines the intersection of law and financial analysis in the retail securities arena. A unique set of data from 23 actual churning cases is used to argue that the turnover ratio should be replaced by a more direct measure of the trading costs: the commission to equity ratio. An appropriate benchmark related to the return on common stocks is suggested to gauge excessive trading in a commission context. Ratios and Benchmarks for Measuring the Financial Well-being of Families and Individuals (pp. 57-70) DOWNLOAD FULL-TEXT ARTICLE Sue A. Greninger, Vickie L. Hampton, Karrol A. Kitt Joseph A. Achacoso ABSTRACT Financial planners and educators comprised a panel of 156 experts in the Delphi study designed to identify and refine ratios and benchmarks for measuring financial well-being. Consensus between the two groups existed for benchmarks on 20 of 22 ratios in the areas of liquidity, savings, asset allocation, inflation protection, tax burden, housing expenses, and insolvency/credit. Consensus regarding the usefulness of specific ratios was observed for liquidity and tax burden but not for inflation protection and insolvency/credit. The preferred ratios were generally less complex and more easily measured than many of the ratios used in previous work. From the findings, a profile of financial well-being for the typical family/individual was proposed. An Emerging Partnership: AFS and the CFP© Board (pp. 71-81) DOWNLOAD FULL-TEXT ARTICLE Dede Pahl ABSTRACT The past 20 years have witnessed growth in personal financial planning-as a profession and as a separate body of knowledge worthy of attention by the academic community. The Certified Financial Planner Board of Standards is a private, nonprofit, regulatory organization that has emerged as the group bringing these new practitioners and the personal finance academics together in the quest towards an independent body of knowledge developed exclusively for personal financial planning. The CFP© Board has funded its own research, through job analyses and market surveys and academic research through grants and monetary awards for seminal articles and research papers.