Presents patent-pending
Table of Contents
Foreword by Andrew W. Lo xi Preface xiii
SECTION ONE Background
CHAPTER 1 The Evolution of Market Indexes and Index Funds 3
The Early Days of Indexing 3
The Inception of the Mutual Fund Industry 5
Enter Academia 6
The Advent of Index/Passive Mutual Funds 7
Index Mutual Funds for the Public 8
Conclusion 9
CHAPTER 2 The Evolution of Equity Style Indexes 11
Empirical Challenges to Financial Theories 11
Theoretical Explanations of Anomalies 13
Establishing Equity Styles 14
Equity Style Index Methodology 16
Pitfalls of Current Equity Style Indexes 17
Conclusion 17
SECTION TWO ActiveBeta Conceptual Framework
CHAPTER 3 Introducing Active Betas 21
Defining Active Betas 21
Identifying the Drivers of Equity Returns 24
Verification 26
Exploring the Behavior of Return Drivers 28
CHAPTER 4 Behavior of Short-Term Earnings Expectation and the Link with Price Momentum 29
Analysis Methodology 29
Relationships Studied 31
Decomposing Momentum Returns 48
Conclusion 51
Appendix: Regression Analysis and Correlation Coefficient 51
CHAPTER 5 Behavior of Long-Term Earnings Expectation and the Link with Value 53
Relationships Studied 53
Investment Horizon of Value Strategies 70
Implications for Stock Risk Premium 74
Decomposing Value Returns 76
Conclusion 79
CHAPTER 6 Pricing and Persistence of Systematic Sources of Active Equity Returns 81
Pricing of the Systematic Sources of Active Equity Returns 81
Persistence of the Systematic Sources of Active Equity Returns 89
Momentum, Value, and Risk Aversion 94
ActiveBeta Framework: A Summary of Relationships 99
SECTION THREE ActiveBeta Indexes
CHAPTER 7 ActiveBeta Index Construction Methodology 103
Investment Process Indexes 104
Objectives of Investment Process Indexes 105
Conflicting Objectives 108
Transparency, Understanding, and Rationale of the ActiveBeta Momentum Index 110
ActiveBeta Index Construction Process 110
Differences in Construction between ActiveBeta Indexes and Other Public Style Indexes 112
Achieving Objectives 114
Conclusion 120
Appendix: ActiveBeta Index Construction Process Example 120
CHAPTER 8 Historical Performance of ActiveBeta Indexes 123
ActiveBeta Index Construction Process Overview 123
ActiveBeta Index Performance: Highlights 126
ActiveBeta Index Performance: Detailed Analysis 127
ActiveBeta Index Exposures 149
Conclusion 153
CHAPTER 9 ActiveBeta Index Applications 155
Style Investing: A New Framework 155
Performance Attribution: Decomposing Active Manager Returns 160
Portfolio Structuring: Revisiting the Alpha-Beta Return Separation 164
Performance Benchmarking 169
Research and Analysis 172
Investment Vehicles 174
SECTION FOUR ActiveBeta Customizable Solutions
CHAPTER 10 Alternative Solutions for Capturing Active Betas 179
ActiveBeta Custom Indexes 179
ActiveBeta Custom Solutions 183
A Word on Traditional Active Management 194
Conclusion 197
CHAPTER 11 Concluding Remarks 199
Disclosures 201
Bibliography 203
About the Authors 207
Index 209
