Internal Research/Position Papers
Irrational Behavior Illustrated
This provides a vivid depiction of how BRC views the world. A chart of Apple stock (AAPL) over a seven year period showing actual analyst earnings revisions, company earnings announcements, our proprietary behavioral model “Alpha” scoring and the performance of the stock. Essentially this slide is an illustration of the irrational and inefficient aspects of the market that we attempt to monetize.
• The green triangles represent analyst upward earnings revisions that actually took place; the red triangles represent the downward revisions
• The green circles represent company upward earnings surprise announcement that actually took place; the red circles represent negative surprises
• The gray bars on the graph represent AAPL’s Alpha score over time
• The Blue Line represents the relative total return for AAPL versus the S&P 500 index
• A random and efficient market would not look like this. This illustration shows biases and other heuristics; behavior that we believe is predictable
• Clustering of positive/negative earnings revision could be attributed to concepts of “herding”, “anchoring” and degrees of “risk aversion”
• These are not short-term events, the inefficiently persists. There is a cyclical nature to the behavior and extends over a 7-14 month period
• The model-generated Alpha score demonstrates the effectiveness of the quantitative valuation techniques that capture this behavior
There are two main ideas that determine the success of BRC’s strategy – 1) Whether or not we can predict the events illustrated on the slide – represented by the red and green triangles and circles; and 2) Whether or not the investing public responds positively to these events – represented by the blue line. If we are able to predict the behavior that we believe influences the movement of stock prices and investors continue to react to this behavior; buy a stock when analysts or the company express positive earnings revisions or surprises and sell when they express negative earnings revisions and surprises, then this should be a good thing for the portfolio. This slide illustrates these two points working together over time.
Excess Returns by Factor Environment
Proprietary research conducted on monthly gross-of-fee returns of the BRC Large Cap Concentrated Institutional composite from January 1998 through March 2015 have been analyzed with respect to Momentum and Value factors. The investment process creates exposures to both factors. Performance returns have been classified into High, Medium and Low Momentum and Value categories. The average excess returns for all cross-classifications have been tabulated.
• In stable momentum and value environments, the BRC Large Cap Concentrated portfolio has outperformed by an average of +.29% per month, gross of fees.
• The most positive excess returns have been observed in High Momentum and High Value environments.
• The worst have occurred in Negative Momentum and Negative Value periods.
• Due to the negative correlation between Momentum and Value, the probability of experiencing the worst environment is low.
Based on this research, the large cap strategy has been able to generate a +.29% average excess return, gross of fees, when both Momentum and Value factors are classified as Medium; which was 57% of the observations over the 17 year period. The behavioral valuation techniques used in our quantitative models are incorporated into all our investment products.
Has the World Really Changed?
Since the onset of the financial crisis in the fall of 2008, the structure of equity returns has changed dramatically from earlier periods. Analyst uncertainty is near record highs, correlations between individual stock returns are at levels not seen in at least 30 years and the value of active management seems to be at all-time lows. Is this “new order” a permanent structural change or simply the latest example of investors’ propensity to overweight recent events and ignore long-term relationships?
Momentum Returns Repeat Predictable Pattern
Returns to simple momentum strategies have become exceedingly volatile during the tumultuous market conditions experienced over the past year. BRC investigates the extent to which episodes of severe negative momentum returns may be predictable. Our research suggests that periods of negative returns to momentum may be related to changing investor risk attitudes and may also be at least partially predictable.
Stocks Continue to Slide, but Asset Class Diversification Remains Critical
March 6, 2009
Despite the equity market’s current negative slide, we continue to believe in the long-term viability of capitalism and in the returns that have historically rewarded patient investors. Like always, diversification remains essential.
Heading for the Sidelines – A Value Added Strategy?
BRC investigates the validity of the natural human tendency to exit a declining equity market until conditions improve. BRC research suggests that using recent dramatic market moves as signals for making market timing decisions is not supportable.
In mid-August 2007, the US equity market was buffeted by extreme movements in fundamental factor returns. BRC explores the nature and possible explanations for these historic events.
Thinking the Unthinkable
Over the past 100 years, the US equity markets have been buffeted by numerous dramatic and sometimes calamitous external shocks. We examine the major sources of risk faced by investors in common stocks as well as some of the reasonable steps that investors should in order to diversify and protect their portfolios.
Earnings Announcements and the Torpedo Phenomenon
The behavioral models developed by BRC result in portfolios that have benefited from a disproportionate number of positive earnings surprises. The positive portfolio impact of positive surprises could be mitigated if we also experience a greater than normal share of earnings “torpedoes”. This paper investigates this likelihood and actually finds evidence supporting the opposite conclusion. BRC portfolios tend to experience fewer negative EPS torpedo announcements than would be expected in random portfolios.