Stocks

AgPa #20: Performance of ESG Exclusions

The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway’s Oil Fund (2022)
Erika Berle, Wanwei (Angela) He, Bernt Arne Ødegaard
SSRN Working Paper, URL

This week’s AGNOSTIC Paper examines the ESG exclusions of a popular investor: the Norwegian sovereign wealth fund, also known as the “oil fund”. Between 2005 and 2021, the fund excluded 189 companies that engage in different types of “bad” practices or products. These exclusions are interesting because they reveal insights about the impact of ESG for a large real-world institutional investor…

  • ESG-excluded stocks generated up to 6.85% alpha per year
  • There seems to be a return premium on “bad” stocks

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AgPa #18: ESG Confusion (1/2)

ESG Rating Disagreement and Stock Returns (2021)
Rajna Gibson Brandon, Philipp Krueger, Peter Steffen Schmidt
Financial Analysts Journal 77(4), 104-127, URL/SSRN

This week’s AGNOSTIC Paper is about a quite controversial topic: Environmental, Social, and Governance a.k.a. ESG. ESG refers to the idea that investors should consider those dimensions in their decisions and thereby contribute to a more sustainable economy. But as this week’s paper shows, there is little agreement on what ESG actually is…

  • ESG ratings disagree: the average correlation is just 0.45
  • There is less ESG disagreement for larger, more profitable firms with credit ratings
  • Investors demanded a risk premium for ESG uncertainty

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AgPa #15: Concentrated Stock Markets (6/7)

Extreme Stock Market Performers, Part I: Expect Some Drawdowns (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The sixth of seven AGNOSTIC Papers on the extreme concentration in stock markets. This one shows that even for the top wealth-creators, the road to success has been anything but smooth…

  • Even the best companies during their best decades had substantial drawdowns
  • Today’s drawdowns of tomorrow’s winners are even worse

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AgPa #14: Concentrated Stock Markets (5/7)

Extreme Stock Market Performers, Part IV: Can Observable Characteristics Forecast Outcomes (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The fifth of seven AGNOSTIC Papers on the extreme concentration in stock markets. This one will finally examine how to identify the few big winners ex-ante (at least it will try). Future winners have some distinct fundamental characteristics today. That said, the picture remains noisy and it’s very difficult to find them systematically…

  • Future top-performers tend to be younger, produce higher drawdowns, and spend more on R&D
  • Future wealth-creators tend to be older, more levered, and pay higher dividends
  • Identifying big winners remains challenging

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AgPa #13: Concentrated Stock Markets (4/7)

Extreme Stock Market Performers, Part III: What are their Observable Characteristics? (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The fourth of seven AGNOSTIC Papers about the extreme concentration in stock markets. This one goes one step further and examines the fundamental characteristics of big winners ex-post. The main insight is quite intuitive: outstanding stock performance usually comes with outstanding fundamental performance of the underlying company…

  • Big winners grow faster, are more profitable, and have smaller drawdowns
  • Observable fundamentals still explain relatively little

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AgPa #12: Concentrated Stock Markets (3/7)

Extreme Stock Market Performers, Part II: Do Technology Stocks Dominate? (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The third of seven AGNOSTIC Papers about the extreme concentration within stock markets. This one examines the industry composition of the most and least successful companies between 1950 and 2019 in the US. Unfortunately, just looking at industries is not really helpful to identify the few big winners…

  • The Tech-Industry is not as dominant as it seems at first glance
  • There is (unfortunately) not “the one” industry to look at

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AgPa #11: Concentrated Stock Markets (2/7)

Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks (2021)
Hendrik Bessembinder, Ta-Feng Chen, Goeun Choi, K.C. John Wei
SSRN Working Paper, URL

The second of seven AGNOSTIC Papers about the extreme concentration within stock markets. This one goes beyond the US and examines global stock markets between 1990 and 2020. The pattern of extreme concentration is very similar for 41 countries beside the US and in some cases even stronger.

  • Longer investment-horizons lead to extremer return distributions – also outside the US
  • Just 2.4% of all companies created the entire net wealth in global stock markets
  • All stock markets are concentrated but there are regional differences

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AgPa #10: Concentrated Stock Markets (1/7)

Do stocks outperform Treasury bills? (2018)
Hendrik Bessembinder
Journal of Financial Economics 129(3), 440-457, URL

I try to be careful with superlatives, but I think that this week’s AGNOSTIC Paper(s) are a must-read for everyone seriously interested in stock markets.

A few very successful companies drive the entire US market while the majority of stocks underperform even risk-free treasuries. Moreover, the most frequent lifetime return for U.S. companies is -100%. Those brutal empirical facts have strong implications for investors.


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AgPa #9: The Age of Intangible Assets

Equity Investing in the Age of Intangibles (2021)
Amitabh Dugar & Jacob Pozharny
Financial Analysts Journal, 77(2), 21-42, URL

Given the exceptional decade for technology companies, I am late to the party with this one. This week’s AGNOSTIC Paper examines the role of intangible assets for equity investors.

The issue is at the heart of fundamental analysis and also relevant for systematic investors. The authors present several interesting results for a global sample of thousands of companies between 1994 and 2018.

  • A measure for intangible-intensity of industries
  • Book values became less relevant for intangible-intense industries but still remain important

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AgPa #6: Predicting Returns with (Alternative) Consumer Data

Predicting Performance Using Consumer Big Data (2022)
Kenneth Froot, Namho Kang, Gideon Ozik, Ronnie Sadka
The Journal of Portfolio Management 48(3), 47-61, URL

This week’s AGNOSTIC Paper is again more related to my other content. The authors use proxies for in-store activity, brand awareness, and web traffic to predict fundamentals and returns of consumer-oriented companies.

I like the paper because it examines alternative data and is published in a peer-reviewed journal. Other studies on the topic are often just white papers of data providers. So it is nice to have a more scientific analysis.

  • Alternative consumer-data predicts firm fundamentals
  • Trading on alternative consumer-data generated monthly alphas of up to 1.9%

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