Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 7 Number 1, 1998

The Shareholder Wealth Effects of CalPERS' Activism
(pp. 1-10) DOWNLOAD FULL-TEXT ARTICLE
Claire E. Crutchley, Carl D. Hudson, Marlin R.H. Jensen

ABSTRACT
In the past decade, institutional investors have become more active in monitoring management and voting the shares they control. The California Public Employees' Retirement System (CalPERS) was a leader in this wave of activism. This study investigates the long-term returns an investor with public information could earn by buying a portfolio of firms targeted by CalPERS and whether the success of CalPERS' activism depends on the aggressiveness of the targeting. The evidence supports the idea that visible and aggressive activism leads to substantial increases in shareholder wealth while a quieter activism does not.

A Tax-Free Exploitation of the Turn-of-the-Month Effect: C.R.E.F.
(pp. 11-23) DOWNLOAD FULL-TEXT ARTICLE
Robert A. Kunkel, William S. Compton

ABSTRACT
By applying knowledge of the "turn-of-the-month" effect investors will improve the risk-adjusted performance of their retirement accounts by using a simple and easily implemented "switching" strategy. Our exploitation of the turn-of-the-month anomaly achieves a 17.7 percent average annual rate of return by switching between a money market account and a broad market indexed stock account. This is compared to a 15.6 percent average annual rate achieved by simply buying and holding the stock account, or a 5.8 percent average rate on the money market account. Additionally, volatility is cut in half and there are no tax consequences or transaction fees when the switching strategy is used within a retirement account. Our results suggests that this strategy might be successfully implemented, under current tax laws, in qualified retirement plans and in variable annuities.

Term Spreads and Predictions of Bond and Stock Excess Returns
(pp. 25-44) DOWNLOAD FULL-TEXT ARTICLE
Dale L. Domian, William Reichenstein

ABSTRACT
Several studies conclude that a long-short term spread, in conjunction with one or more other variables, jointly predict returns on long-term corporate bonds and stocks. We extend these studies by examining the predictive content of intermediate-short term spreads, and by examining regressions of excess returns on 1.5-year to 20-year Treasury bonds. We show that the bond market prices an intermediate-short term spread, and not a long-short spread. We believe individuals should vary their debt-equity mix with the level of a default risk premium or the stock market's dividend yield, and vary their debt portfolios' maturity with an intermediate-short term spread.

Explaining Persistence in Mutual Fund Performance
(pp. 45-55) DOWNLOAD FULL-TEXT ARTICLE
Larry Detzel, Robert A. Weigand

ABSTRACT
This study investigates the determinants of persistence in mutual fund performance. Previous research that uses factor-mimicking portfolios and characteristic benchmarks to model fund performance fails to explain all the persistence in fund returns. This study employs a model that directly relates mutual fund returns to the characteristics of the stocks held by funds. Adjusting fund returns for the size of the stocks in which funds invest and financial ratios intended to capture fund manager investment styles explains all the persistence in mutual fund returns from 1976-1985, the period in which persistence is most prevalent.

The Performance Persistence of Experienced Mutual Fund Managers
(pp. 57-68) DOWNLOAD FULL-TEXT ARTICLE
Gary E. Porter, Ph.D., Jack W. Trifts, Ph.D.

ABSTRACT
This study examines the performance of 93 fund managers over the 10 year period 1986 through 1995 using relative percentile ranks based on quarterly compounded, annual total returns measured against funds with the same investment objective. On average, managers with 10-year track records at the same fund do not perform better than managers with shorter track records. Also, for these experienced managers, superior performance in one five-year period is not predictive of superior performance over the next five years. However, inferior performance persists particularly for funds with above average expense ratios.


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 7 Number 1, 1998 The Shareholder Wealth Effects of CalPERS' Activism (pp. 1-10) DOWNLOAD FULL-TEXT ARTICLE Claire E. Crutchley, Carl D. Hudson, Marlin R.H. Jensen ABSTRACT In the past decade, institutional investors have become more active in monitoring management and voting the shares they control. The California Public Employees' Retirement System (CalPERS) was a leader in this wave of activism. This study investigates the long-term returns an investor with public information could earn by buying a portfolio of firms targeted by CalPERS and whether the success of CalPERS' activism depends on the aggressiveness of the targeting. The evidence supports the idea that visible and aggressive activism leads to substantial increases in shareholder wealth while a quieter activism does not. A Tax-Free Exploitation of the Turn-of-the-Month Effect: C.R.E.F. (pp. 11-23) DOWNLOAD FULL-TEXT ARTICLE Robert A. Kunkel, William S. Compton ABSTRACT By applying knowledge of the "turn-of-the-month" effect investors will improve the risk-adjusted performance of their retirement accounts by using a simple and easily implemented "switching" strategy. Our exploitation of the turn-of-the-month anomaly achieves a 17.7 percent average annual rate of return by switching between a money market account and a broad market indexed stock account. This is compared to a 15.6 percent average annual rate achieved by simply buying and holding the stock account, or a 5.8 percent average rate on the money market account. Additionally, volatility is cut in half and there are no tax consequences or transaction fees when the switching strategy is used within a retirement account. Our results suggests that this strategy might be successfully implemented, under current tax laws, in qualified retirement plans and in variable annuities. Term Spreads and Predictions of Bond and Stock Excess Returns (pp. 25-44) DOWNLOAD FULL-TEXT ARTICLE Dale L. Domian, William Reichenstein ABSTRACT Several studies conclude that a long-short term spread, in conjunction with one or more other variables, jointly predict returns on long-term corporate bonds and stocks. We extend these studies by examining the predictive content of intermediate-short term spreads, and by examining regressions of excess returns on 1.5-year to 20-year Treasury bonds. We show that the bond market prices an intermediate-short term spread, and not a long-short spread. We believe individuals should vary their debt-equity mix with the level of a default risk premium or the stock market's dividend yield, and vary their debt portfolios' maturity with an intermediate-short term spread. Explaining Persistence in Mutual Fund Performance (pp. 45-55) DOWNLOAD FULL-TEXT ARTICLE Larry Detzel, Robert A. Weigand ABSTRACT This study investigates the determinants of persistence in mutual fund performance. Previous research that uses factor-mimicking portfolios and characteristic benchmarks to model fund performance fails to explain all the persistence in fund returns. This study employs a model that directly relates mutual fund returns to the characteristics of the stocks held by funds. Adjusting fund returns for the size of the stocks in which funds invest and financial ratios intended to capture fund manager investment styles explains all the persistence in mutual fund returns from 1976-1985, the period in which persistence is most prevalent. The Performance Persistence of Experienced Mutual Fund Managers (pp. 57-68) DOWNLOAD FULL-TEXT ARTICLE Gary E. Porter, Ph.D., Jack W. Trifts, Ph.D. ABSTRACT This study examines the performance of 93 fund managers over the 10 year period 1986 through 1995 using relative percentile ranks based on quarterly compounded, annual total returns measured against funds with the same investment objective. On average, managers with 10-year track records at the same fund do not perform better than managers with shorter track records. Also, for these experienced managers, superior performance in one five-year period is not predictive of superior performance over the next five years. However, inferior performance persists particularly for funds with above average expense ratios.