Strategies

Fund Strategies For 2016-2017

Each year the Fund Mangers perform a detailed study of the state-of-the-art in finance theory. Each strategy is critically analyzed for theoretical soundness, implementability, and performance history. This study results in new candidate strategies, that are evaluated against previously implemented strategies. The new strategies are then carefully executed in parallel with surviving existing strategies.

Asset Growth Strategy

  • The Asset Growth Strategy is based on Cooper, Gulen and Schill's paper "Asset Growth and the Cross-Section of Stock Returns" and based on the premise that companies that over-invest underperform the market.
  • Asset Growth can occur in multiple ways, several of which have been studied in isolation such as equity and debt offerings, mergers and acquisitions and retained earnings. Often, asset growth leads to expanding in to peripheral investments that are not consistent with the companies' core competency and as a results, the earnings suffer compared to the total assets.
  • The strategy invests in the 10% of companies with the lowest year over year asset growth and shorts the 10% of companies with the highest year over year asset growth
  • The strategy is modified to include the most recent data of large cap US stocks.

 

Gross Profitability / Percent Accruals (GPPA)

  • GPPA is a combination of two strategies: Gross Profitability strategy and Percent Accruals strategy.

        Gross Profitability strategy:

  • Based on research paper "The Other Side of Value: Good Growth and the Gross Profitability Premium," by Robert Novy-Max (2012)
  • General Premise: gross profit has great explanatory power on the cross-section of average returns. Gross profit is also a strong predictor for long-term growth in earning, free cash flow and future gross profit. 
  • Aims to generate excess returns by investing in large-cap stocks with high gross profit-to-asset ratio, as opposed to just high return-on-assets factor (ROA).

        Percent Accruals Strategy:

  • Based on the research paper, "Percent Accruals," by Nader Hafzalla, Russell Lundholm, and E. Matthew Van Winkle (2010)
  • General Premise: Low percent accruals stocks, scaled by earnings, yields significant alpha
    • Improves position in low accrual stocks
    • Selects firms where the difference between sophisticated and naive forecasts are the most extreme consistent with the earnings fixation hypothesis
    • Scaled by absolute value of net income because it focuses on the composition of earnings distinguishing how much is cash and how much is accrual
  • Percent Operating Accruals = (Net Income - CFO) / |Net Income|

Risk Parity

  • Two reference pagers: "Risk Parity Portfolios: Efficient Portfolios through True Diversification" by Edward Qian, and "The All Weather Story" by Bridgewater Associates.
  • Risk parity strategies seek portfolio diversification by balancing asset weights relative to risk contribution.  
  • In traditional asset allocation portfolios, equity risk tends to dominate other risks and contributes an outsize portion of the volatility.  For example, in a traditional 60/40 equity and fixed income portfolio, equity risk contributes roughly 80% of the volatility.  
  • The risk parity strategy seeks to balance risks across assets such that the marginal contribution of risk from each asset is equal.  In doing so, we hope to generate stronger risk adjusted returns than traditional heuristic portfolios and generate alpha for ASAM.

Value and Momentum 

  • The long-only strategy implementation is based on a variation of an academic paper written by Gregg Fisher, Ronnie Shah, and Sheridan Titman called Combining Value and Momentum
  • The paper considers several popular portfolio implementation techniques that maximize exposure to value and/or momentum stocks while taking into account transaction costs. 
  • Furthermore, the paper illustrates how a strategy that simultaneously incorporates both value and momentum outperforms a strategy that combines pure-play value and momentum portfolios that are formed independently.
  • Value and momentum characteristics have natural negative correlation. Negative returns reduce market equity, low momentum stocks tend to have high book-to-market ratios, and since positive returns increase market equity, high momentum stocks tend to have low book-to-market ratios. 
  • Combining value and momentum approach increases average returns by taking into account unfavorable information on both characteristics by avoiding value stocks that have negative momentum and positive momentum stocks that are growth-oriented.

Past Strategies

Fund Mangers in previous ASAM classes have conducted in-depth studies on several other strategies.

Detailed findings of Class 2016 research can be found in the ASAM annual report 2016.

Analyst Bias

  • Variant of Professor Mark Grinblatt's paper Analysts' Forecast Bias and the Mispricing of High Credit Risk Stocks.
  • The premise of the strategy is that we are able to run a reasonably accurate regression that predicts how excessively inflated or deflated analyst expectations have become on various securities. With this information, (and by focusing on high credit risk companies) by shorting the high-analyst-bias companies and going long the low-analyst-bias companies we should be able to achieve 19% annual alpha. 
  • Modified the strategy to take into account a 4 month data lag and a 6 month holding period of securities to come up with statistically significant alpha in a reverse strategy, going long high-analyst bias companies and short low-analyst bias companies.
  • The reason we feel confident in our reverse strategy (apart from statistics) is because it is reasonable to assume that high-analyst bias companies have their drop in price during our 4-month data delay window, and when we do actually buy them, they are on a mean-reversion/reverse-momentum upward trend. That is the alpha we believe we can capture.


Gross Profitability

  • Influenced by the 2005 research paper, The Other Side of Value: Good Growth and the Gross Profitability Premium, authored by Robert Novy-Marx .  
  • Based on the observation that gross profit has great explanatory power on the cross-section of average returns. Gross profit is also a strong predictor for long-term growth in earning, free cash flow and future gross profit. 
  • Aims to generate excess returns by investing in large-cap stocks with high gross profit-to-asset ratio, as opposed to just high return-on-assets factor (ROA).
  • Added book-to-market ratio as an complementary factor to improve portfolio selection.


Percent Accruals 

  • Percent Operating Accruals is based on the research paper, Percent Accruals, by Nader Hafzalla, Russell Lundholm, and E. Matthew Van Winkle.   
  • General Premise - percent accruals, scaled by earnings, yields larger annual hedge returns
    Percent accruals, scaled by earnings, yields larger annual hedge returns: Percent Operating Accruals = (Net Income - CFO) / |Net Income| 
    • Improves position in low accrual stocks
    • Selects firms where the difference between sophisticated and naive forecasts are the most extreme consistent with the earnings fixation hypothesis
    • Scaled by absolute value of net income because it focuses on the composition of earnings distinguishing how much is cash and how much is accrual


Tactical Asset Allocation (TAA)

  • Seeks to exploit market price anomalies related to changes in economic variables found to be significant in explaining asset price returns, as described in Advanced Theory and Methodology of Tactical Asset Allocation by Wai Lee.
  • Tactically rebalances asset class weightings away from a pre-determined Strategic Asset Allocation (SAA), which is mean variance optimized using long-dated historical time series of key macroeconomic indicators
  • Tactical asset allocation decisions are made via factor signals shown to be predictive of excess returns for a particular asset class; relative weightings are scaled relative to aggressiveness factors related to the strength of the factor signal

Detailed findings of Class 2015 research can be found in the ASAM annual report 2015.

F-Score

Fundamental Index

  • Influenced by the 2005 research paper, Fundamental Indexation, by Robert Arnott, Jason Hsu, and Philip Moore.  
  • The strategy rejects the notion that market-cap weighted indices are mean-variant efficient as cap-weighted indices inherently overweight overpriced securities and underweight underpriced securities.
  • Seeks to outperform a traditional market-cap weighted index by using alternate measures of a company's economic footprint.  By breaking the "price link" associated with traditional indices, fundamental indices place more weight on securities which are intrinsically less expensive.
  • Takes advantage of correlation effects among alternative fundamental-weighted indices to create a composite portfolio designed to outperform the index on both a total return and risk-adjusted basis.

Earnings Announcement Return (EAR)

  • Based on the academic research paper Earnings Announcements are Full of Surprises by Santa Clara, Brandt, Kishore and Venkatachalam
  • Variation of an earnings drift strategy which seeks to exploit the earnings drift anomaly; attempts to capture all information, quantitative and qualitative, surrounding a company's earnings release
  • Takes long positions in companies whose stocks have experienced the highest quintile of excess returns around earnings announcements