2. Research Question
• Do Value Stocks outperform Growth Stocks in
International Markets?
• Do Small Stocks outperform Large Stocks in
International Markets
• Data are for 20 countries of the EAFE, plus
Canada.
• Quartiles formed of:
Value Stocks = low P/E, or low P/B, or low P/CF
(Quartile 1)
Growth Stocks = high P/E, or high P/B, or high P/CF
(Quartile 4)
“Growth versus Value and Large-Cap versus Small-Cap Stocks in International Markets”, with W.
Scott Bauman and Robert E. Miller, Financial Analysts Journal, March/April 1998, 54:2
3. Percent
-10
-5
0
5
10
15
20
25
30
Aust
ral ia
Aust
ria
Belg
ium
Cana
da
Denm
ark
Finla
nd
Fran
ce
Germ
any
Hong
Kong
Italy
Japa
n
M a la
ysia
Neth
(in U.S. $)
e rl a n
ds
Internationally
N o rw
ay
Sing
apor
e
Spai
n
Swe
den
Swit
zerla
Unite nd
d K in
gdom
Returns for Value and Growth Stocks
Value
Growth
Quartile
Quartile
4. Return and Risk for Value and Growth
Stocks For Entire Sample of International
Stocks
20
18
16
14
Mean Return
12
Percent 10 Standard Deviation
of Annual Portfolios
8
6
4
2
0
Value 2 3 Growth
Quartile Quartile
5. Return and Risk for Small and Large Stocks
for International Firms
25
20
15 Mean Return
Percent
Standard
10 Deviation of
Annual Portfolios
5
0
Small 2 3 Large
Quartile Quartile
6. Returns for International Value and Growth
Quartiles Subdivided by Company Size
Value 2 3 Growth
Smallest 27.5% 17.8% 18.5% 22.1%
2 16.6% 14.5% 10.5% 11.7%
3 13.9% 12.3% 10.4% 8.9%
Largest 14.5% 13.0% 10.8% 7.1%
7. Research Question
• Why do value stocks outperform
growth stocks in international
markets?
“Investor Overreaction in International Stock Markets” with W. Scott Bauman and Robert
E. Miller, Journal of Portfolio Management, Summer 1999, 24:4
8. Growth Rates of EPS for International Value
and Growth Quartiles
Value 2 3 Growth
Prior 3 Year EPS -22.9% -1.5% 12.5% 35.6%
Growth
EPS Growth in 11.3% 2.3% 0.7% 0.2%
Year t
9. Summary
• Value stocks outperform growth stocks on
a risk adjusted basis in most years and in
most countries
• Small company stocks have larger returns
than large company stocks
• The higher returns for value stocks appear
to be due to a reversion in EPS that
investors ignore when they price these
stocks
10. Research Question
• The relationship between monetary environment
and international stock returns:
• An expansive environment = Series of discount
rate decreases
• A restrictive environment = Series of discount
rate increases
• Data are for 16 developed countries from 1956 to
1995
“Monetary Environments and International Stock Returns” with Gerald R. Jensen and
Robert R. Johnson, Journal of Banking and Finance, 1999, 23:9
“Monetary Conditions and the International Diversification Decision”, with Gerald R.
Jensen and Robert R. Johnson, Financial Analysts Journal, July/August 1999, 55:4
11. Percent
-15
-10
-5
0
5
10
15
20
25
Aus
tr ia
Bel g
i um
Ca n
ada
Finla
nd
Fra n
ce
Germ
any
Irel a
nd
Italy
Japa
n
Ne th
erl a
nds
Ne w
Zea
land
So u
th A
fr ica
Swe
den
Swit
ze rl
Environment (in U.S. $)
Unit and
ed K
ingd
om
Unit
ed S
tate
s
Monthly Stock Returns By Local Monetary
Expansive
Restrictive
Environment
Environment
12. Percent
-15
-10
-5
0
5
10
15
20
25
30
Au st
r ia
Belg
iu m
Can
ada
Finla
nd
Fran
ce
Germ
any
Irela
nd
Italy
Japa
n
Neth
erlan
ds
New
Zeal
and
Sout
h Af
ri ca
Sw e
den
Environment (in U.S. $)
Sw it
zerla
Un it nd
ed K
ingd
om
Un it
ed S
tate
s
Monthly Stock Returns by U.S. Monetary
Expansive
Restrictive
Environment
Environment
13. Monthly Stock Returns by Combined Local and
U.S. Monetary Environment
(in U.S. $)
40
Percent Austria
35 Belgium
30 Canada
Finland
25
France
20
Germany
15 Ireland
Italy
10
Japan
5
Netherlands
0 New Zealand
South Africa
-5
Sweden
-10
Switzerland
-15 United
Expansive U.S. & Expansive Local Restrictive U.S. & Restrictive Local Kingdom
14. Summary
• Stock returns for most developed
countries are higher when monetary
conditions are expansive and lower when
conditions are restrictive.
• These patterns exist with respect to both
local and U.S. monetary environments.
• The higher returns in expansive
environments are not accompanied by
increased risk, in most countries.
15. Research Question
• Do these same patterns exist in emerging
markets during expansive and restrictive
U.S. monetary environments?
• What are the returns and risk in emerging
market?
• Data is from IFC from 1976 to 1999 for 20
countries.
“Emerging Markets: Are They Worth It?” with Gerald R. Jensen and Robert R.
Johnson, Financial Analysts Journal, March/April 2002
16. Ar
ge
nt
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
in
Br a
az
C C h il
ol i
um le
G bi
re a
ec
In In e
do di
ne a
Jo sia
rd
K an
M or
al ea
ay
M sia
ex
N ico
i
Pa ger
Ph kis ia
ill ta
ip n
P o in
rt e s
u
Ta ga
Th i w l
ai an
la
Period (in U.S. $)
Ve rTu nd
Em n k
er Z ez e y
gi im ue
ng ba la
M bw
ar e
k
EA ets
F
Mean Return
W EC
or
ld
U
Standard Deviation
.S
Monthly Risk and Return During Entire Time
.
0
5
10
15
20
25
30
17. Percent
-2
0
2
4
6
Arge
ntina
Braz
il
Chile
C o lu
mbia
Gree
ce
In
Indo dia
nesi
a
Jord
an
K or
Ma la e a
ysia
Me x
ico
Nige
r
Paki ia
s
Phill tan
ipine
Port s
ugal
Ta i w
Thai an
land
Tur
Vene key
z
Eme Zimb uela
rgin a
Environments (in U.S. $)
g Ma bwe
rket
s
EAFE
C
Wor
ld
U.S.
Monthly Stock Returns for Emerging Countries
During Expansive and Restrictive U.S. Monetary
Expansive
Restrictive
Return During
Return During
18. Correlations Between Emerging and
Developed Country Markets
Expansive U.S. Restrictive U.S.
Environment Environment
Emerging Market
and EAFEC 0.36 0.26
World 0.42 0.27
U.S. 0.39 0.21
19. Risk and Return For Efficient Portfolios
1.80%
U.S., EAFE and Emerging stocks using
a buy and hold strategy
1.60%
1.40%
U.S. and EAFE stocks using a buy and
Return
1.20% hold strategy
1.00%
0.80%
0.60%
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
Standard deviation
20. Risk and Return for Efficient Portfolios during
Expansive and Restrictive Monetary Periods
U.S., EAFE and Emerging stocks during expansive periods
1.80%
1.60% US and EAFE stocks during expansive periods
1.40%
Return
1.20%
U.S., EAFE and Emerging stocks
1.00% during restrictive periods
0.80% U.S. and EAFE stocks during
restrictive periods
0.60%
3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
Standard deviation
21. Summary
• For entire time period, the addition of emerging
markets to an international portfolio adds 1.5 –
2.0% annually to return for a given amount of
risk.
• Emerging market returns are not as strongly
related to U.S. monetary environments as
developed country markets.
• Most of the diversification benefits from
emerging markets occurs during restrictive U.S.
monetary environments.
– U.S. investors could have added 4.5% a year to their
returns by investing in emerging markets during
restrictive U.S. monetary environments.
22. Research Questions
• Recent research indicates that diversifying
internationally fails at the very time when investors
need it the most.
• During periods of increased volatility (i.e. crash of
October 1987), global stock markets tend to move
together.
• Does foreign real estate provide greater
diversification benefit in times of increased volatility?
• Data from 1986 to 1995 for publicly traded real estate
firms in Canada, France, Great Britain, Hong Kong,
Japan and Singapore.
“Diversification Benefits form Foreign Real Estate Investments” with H. Swint Friday
and
G. Stacy Sirmans, Journal of Real Estate Portfolio Management, 2002
23. Correlation of Assets with U.S. Stocks
1.00
Mean Foreign Stock Correlation Mean Foreign Real Estate Correlation
0.80
0.60
0.40
0.20
0.00
-0.20
5/87
1/88
9/88
1/89
5/89
9/89
1/90
5/90
1/91
9/91
5/92
1/93
9/93
5/94
9/94
1/95
1/87
9/87
5/88
9/90
5/91
1/92
9/92
5/93
1/94
5/95
24. Risk and Return for Efficient Portfolios of
International Assets
3.00%
U.S. stocks, U.S. real estate, foreign
stocks & foreign real estate
2.50%
2.00%
U.S. stocks, U.S. real estate & foreign stocks
Monthly Return
1.50%
1.00%
0.50%
0.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
Monthly Standard Deviation
25. Summary
• Foreign real estate has a lower correlation
with U.S. stocks than do foreign stocks in
98 of the 102 months examined.
• Foreign real estate returns are less
integrated with U.S. stocks during periods
of increased volatility.
• The addition of foreign real estate
improves the mean-variance efficiency of
U.S. stock portfolio.
26. Research Question
• In the U.S., firms that file their accounting statements
late have weaker performance and experience lower
stock returns in the post filing period.
• What is the frequency of late filing in foreign
countries?
• Does late filing abroad signal bad news?
• Do the patterns differ for common and code law
countries?
• Data for 1987 to 1995 for 13 foreign countries.
From “The Timeliness of International Accounting Disclosures,” with Robert E. Miller and
Andrew Szakmary, forthcoming in the International Review of Financial Analysis 2008
27. Days
0
20
40
60
80
100
120
140
160
180
200
Au st
r alia
94
Can
ada
Grea 54
t Brita
i
n 111
Hon
g Ko
ng 121
Irela
nd
118
Mala
ysia
New 122
Zeal
and
Neth 120
erlan
ds 102
Sing
apor
e 104
Au st
ria 186
Belg
iu m
163
Den
mar
k 125
Finla
nd 153
Fran
e c 135
Germ
any
181
Italy
169
Median Number of Days to File
Japa
n 76
Norw
ay 120
Spai
n 154
Sw e
den
Sw it 151
zerla
nd 160
29. Summary
• Code law firms take longer to file their
statements.
• The frequency of late filing is also higher in code
law countries.
• Late filers demonstrate weaker performance in
common law countries than in code law
countries.
• The less timely filing in code law countries may
be associated with the role that banks play in
those countries.
30. Research Question
• Which industries have historically been value or
growth over time? What is the performance of
industries over time?
• Do value stocks outperform growth stocks within
individual industries?
• Do value industries outperform growth
industries?
• Data from 1968 to 1999 for 21 industries.
From “Industry Relationships and Value/Growth Stock Performance” with Gerald R.
Jensen, working paper
31. Mean Price to Book Ratio
0
0.5
1
1.5
2
2.5
Mi ni
ng
Food
A pp
arel
Pri n Pape
tng r
& Pu
b l i sh
i ng
Chem
i cal
Petr
ol eu
m
Con
stru
cti on
Pri m
ary
Meta
Fabr ls
i cate
d Me
tal s
Mac
El ec hi ne
tri ca ry
l Eq
Tran ui pm
sp o r ent
t Eq
ui pm
Mi sc ent
. Ma
nufa
ctur
Othe
r Tra i ng
nspo
rtati
Com on
mun
i cato
ns
Uti l i
Dep ti es
artm
Price to Book Ratios for Industries
ent
Stor
es
Reta
il
Fi na
nci a
l
Serv
i ces
32. Percent
0
5
10
15
20
25
30
35
Mini
ng
Foo
d
App
arel
Pap
Prin
tng e r
& Pu
blish
ing
Che
mica
l
Petr
oleu
m
Con
stru
ction
Prim
ary
Met
Fab als
ricat
ed M
etal
s
Mac
Elec hine
trica ry
l Eq
Tran uipm
spo ent
rt E
quip
me n
Misc
. Ma t
nufa
O th ctur
er T ing
rans
port
atio
Com n
mun
icat
ons
Utili
Dep ties
artm
ent
Stor
es
Ret
ail
Risk and Return for Industries
Fina
ncia
l
Serv
ices
Mean
Return
Standard
Deviation
of Return
33. Risk and Return for Value/Growth
Quartiles Formed Within Industries
30%
25%
20% Mean
Return
Percent
Standard
15%
Deviation of
Return
10%
5%
0%
Value Quartiles 2 3 Growth Quartiles
34. Risk and Return for Value/Growth
Industries
30%
25%
20%
Mean Return
Percent
15%
Standard
Deviation of
10% Return
5%
0%
Value Quartiles 2 3 Growth
Quartiles
35. Annual Percent Returns for Value/Growth
Quartiles Within Value/Growth Industries
Value 2 3 Growth
Industry Industry
Value 20.36 19.04 18.77 19.54
Quartile
2 17.09 14.29 14.59 14.12
3 14.22 13.36 12.25 12.95
Growth 12.47 7.54 7.52 6.11
Quartile
36. Summary
• Value stocks have higher returns and
lower risk than growth stocks when
quartiles are formed within industries.
• Value industries have higher returns and
lower risk than growth industries over
time.
• Value quartiles within value industries
have the highest returns while growth
quartiles within growth industries have the
lowest returns and highest risk.
37. Research Question
• Does the relationship between monetary
conditions and stock returns still exist in U.S. and
global markets?
• Does it vary by the size of the firm?
• Does it vary depending if the firm is a defensive
or cyclical stock?
“Is Fed Policy Still Relevant for Investors?” with Gerald R.
Jensen, Robert R. Johnson, and Jeffrey M. Mercer. Financial
Analysts Journal, January/February 2005
38. U.S. Investment Strategy Performance:
Annualized Mean Return
1963-2001
60%
50%
Restrictive
Periods
40% Expansive
Periods
Percent
30%
20%
10%
0%
Small Small Small Big Big Big
Growth Blend Value Growth Blend Value
40. U.S. Monetary Conditions and International
Stock Returns:
Annualized Mean Return 1973-2001
Restrictive Periods
Expansive Periods
25% 23.16%
22.14%
21.03% 21.53%
20.59% 20.36%
20%
15%
Percent
10%
5%
2.37% 2.06% 2.13%
0.03% 0.09%
0%
Asia
Americas
(ex.U.S.)
United
States
Europe
Developed
(ex.North
America)
World
-1.73%
Markets
-5%
41. Summary
• U.S. Monetary Policy continues to have a
significant relationship with both U.S. and
Global stock returns
• Small stocks are more sensitive to
changes in monetary conditions than
large stocks
• Cyclical stocks are more sensitive to
changes in monetary conditions than
defensive stocks
42. Research Question
• Is the relationship between monetary conditions
and sector stock returns valuable in a rotation
strategy?
• Rotation between cyclical and noncyclical stocks
• Data for 33 years from 1973 to 2005
“Sector Rotation and Monetary Conditions” with Gerald R.
Jensen, Robert R. Johnson, and Jeffrey M. Mercer. Journal of
Investing, forthcoming 2008
Cited on CNBC, in the Wall Street Journal and the Financial
Times
43. Cyclical and Non-cyclical
Stocks
• Cyclical Stocks: Cyclical consumer goods,
Cyclical services, General industrials, Information
technology, Financials, and Basic industries
• Non-cyclical Stocks: Resources, Noncyclical
consumer goods, Noncyclical services and
Utilities
46. Summary
• The sector rotation strategy would have
beat the benchmark by 3.5% a year
• Rebalancing occurs only 14 times
• Defensive stocks perform best during
restrictive periods
• Cyclical stocks perform best during
expansive periods
47. Research Question
• How does an investment in precious metal
commodities compare to that of precious metal
equities?
• Are their performances related to monetary policy
given the Fed’s role in fighting inflation?
• Is this relationship to Fed policy valuable in a
trading strategy?
“Can Precious Metals Make your Portfolio Shine?” with Gerald R.
Jensen, Robert R. Johnson, and Jeffrey M. Mercer. Working
paper
48. Data
• Data for global precious metal equities and
commodities (gold, silver & platinum)
• Data for 34 years from 1973 to 2006
• 14 turning points in monetary policy
49. Risk, Return & Correlations
Precious Precious
Metal Metals
US Equities Equities Commodities
Annualized
Return 10.83% 14.11% 8.33%
Standard
Deviation 15.37% 24.81% 23.11%
Correlation with
U.S. Equities 1.00 0.08 -0.01
50. Returns by Monetary
Environment
Restrictive Period Expansive Period
Asset Class
Return Return
U.S. Equities 3.87% 16.25%
Precious Metals
11.60% 16.41%
Equities
Precious Metal
13.29% 4.56%
Commodities
51. Investment Strategies
• Benchmark is U.S. Equities
• Strategic allocation:
75% to US Equities and 25% to Precious Metals
Equities for entire period.
• Tactical allocation:
Expansive periods: 75% to US Equities and 25%
to Precious Metals Equities
Restrictive periods: 75% to US Equities and 25%
to Gold
53. Summary
• Allocating 25% precious metals equities to
a U.S. equity portfolio increases annual
returns by 1.65% and reduces the
standard deviation by 1.86%
• Portfolio performance is superior when
using PM equities, rather than PM
commodities, over the entire time period
• During Fed tightening, the returns to PM
commodities are significantly higher than
during expansive periods (in contrast to
the returns for U.S. and PM equities)
54. Summary
• The benefits of adding PMs to a portfolio
are small when Fed policy is expansive
• However the benefits are substantial when
monetary policy is restrictive
• Gold provides the best hedge against
restrictive Fed policy
• Using monetary policy shifts to guide a
tactical strategy had slightly higher return
and lower risk than that with a strategic
allocation
