Bild zeigt religösen Palast mit zahlreichen Heiligenfiguren als Illustration für factor problems

Factor problems: Researchpost #87


Supermarket plastic risks: Under Wraps: What Europe’s supermarkets aren’t telling us about plastic by Changing Markets Foundation as of May 23rd, 2022: “… we have discovered microplastics deep in the lungs of living people, in the tissue of patients undergoing surgery and in people’s blood. We learnt that the chemicals found in everyday plastics are eating away at human fertility such that they may make unassisted reproduction impossible by 2040. … this first-ever analysis of the role that European supermarkets play in addressing the plastic pollution crisis …. reveals that some of the biggest retail chains in Europe are only paying lip service to the problem, while behind the scenes they are trying to delay action and distract consumers and policymakers over their role in the plastic crisis. …. they are focusing on recyclability as their main strategy to deal with the plastic crisis instead of prioritising waste prevention and reuse systems … Only very few companies make serious efforts to reduce their plastic and other single-use packaging and move towards more environmentally friendly business models that prominently feature reuse systems” (p. 5).

Water risks: High and dry – How water issues are stranding assets – A report commissioned by the Swiss Federal Office for the Environment (FOEN) by planet tracker and CDP as of May 26th, 2022: “Water risk factors are already stranding assets throughout the coal, electric utilities, metals & mining, and oil & gas sectors. … The exposure of the financial sector to water-stranded assets is real and often involves a tail of potential knock-on events … Financial institutions must move now to engage, identify, assess, manage, and disclose water risks across portfolios and loan books to avoid the worst consequences of the water crisis and contribute to actively inhibiting it” (p. 3).

Social Aspects

Children change politics: The Power of Youth: Political Impacts of the “Fridays for Future” Movement by Marc Fabel, Matthias Flückiger, Markus Ludwig, Helmut Rainer, Maria Waldinger, and Sebastian Wichert as of May 11th, 2022 (#13): “Focusing on the FFF protest movement in Germany, we show that youths‘ engagement in demand of climate action has a robust effect on political outcomes. We estimate that a one standard-deviation increase in local protest activity increases the vote share of the Green Party by 8 percent …. the increased support for the Greens feeds itself entirely on voters with children of FFF-relevant ages. … Green Party candidates react to strong protest activity in their constituency by increasing their climate-related social media presence … local newspapers report more on climate change when FFF engagement in their area of circulation is high. … support of Germany’s far-right party, the AfD, dropped substantially in counties where protest activity was high. … To the contrary, we provide evidence that the FFF movement has caused some voters, those whose political preferences are orthogonal to political agenda of the Greens, to change their vote decision so as to prevent the Greens from gaining political power and exerting influence on policy” (p. 22/23).

Rich people are different: The personality traits of self-made and inherited millionaires by Marius Leckelt, Johannes König, David Richter, Mitja D. Back, and Carsten Schröder as of April 1st, 2022: “… we have shown that the rich differ from the rest of the population not only with respect to their wealth but also with respect to their personality traits. The prototypical personality profile of the rich is marked by higher Risk tolerance, Openness, Extraversion, and Conscientiousness, and lower Neuroticism. … self-made millionaires most closely tracked the personality profile of the rich, and the more they did, the richer they were“ (p. 10).

Web-transparency: The Promise of a Better Internet: What Is Web 3.0 and What Are We Building by Alex Murray, Dennie Kim and Jordan Combs as of May 11th, 2022 (#199): “Web 3.0 is built on blockchain technology, allows for increased peer-to-peer interactions without intermediaries, enables individuals and businesses access to networks of users with much lower cost, and stands as a rebuke to large companies’ centralized control of services and information. … Web 3.0 … may fundamentally alter the structure of industries and the ways in which people interface online. Next, we describe ongoing efforts to build Web 3.0, providing an overview of four important components: cryptocurrencies and decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and metaverses. We then highlight successful use cases, emerging trends, and key challenges that innovators are apt to face as Web 3.0 services and applications gain widespread adoption. Finally, we address actions that organizations and managers can take to prepare for the changes to come” (abstract).

Responsible Investment

Many ESG indices: Sustainability Equity Indexes by Meketa Investment Group as of April 2022: “The widening range of sustainability index families present new possibilities for passive equity investing and for benchmarking active equity portfolios. Going forward, we anticipate both continued refinement of existing sustainability index approaches and the introduction of new indices. … Consideration of any specific sustainability index … should include a careful review of the primary investment goals of the index; analysis of how the index construction is expected to effect risk, return, diversification, shareholder voting and engagement, and ESG exposure on the issues of concern; and index license fees” (p. 18). May comment: I suggest concentration instead of diversification see Nachhaltiges Investieren: Konzentrieren statt diversifizieren? (

Significant Greenwashing: Defining Greenwashing by Ariadna Dumitrescu, Javier Gil-Bazo, and Feng Zhou as of May 16th, 2022 (#82): “… we quantify the prevalence of greenwashing in the US mutual fund industry and conclude that only 1 in 4 funds that claim to invest according to ESG considerations fail to honor this promise to their investors. Greenwashers are more frequently found in larger and older fund families. Importantly, while asset management companies that have signed the UNPRI pledge do not seem to invest more according to those principles than non-signatories, they are less likely to offer funds that falsely claim to be ESG. …. Morningstar … does not detect funds that are greenwashers according to our definition. … institutional investors seem to be able to distinguish between greenwashers and true ESG funds” (p. 22). My comment: See EU Klimaindizes und ESG Indexverordnung: Offizielles Greenwashing? – Responsible Investments (Blog) (

ESG disclosure focus: Institutional Investors and ESG Preferences by Florencio Lopez de Silanes, Joseph A. McCahery, and  Paul C. Pudschedl as of May 7th, 2022 (#383): “… institutional investors have a strong preference for investing in firms with strong ESG rankings relative to other financial metrics and proxies for financial performance. The findings also show that when it comes to the size of the ownership stake the relationship with ESG quality is negative. … We also find that institutional investors have a preference for ESG disclosure over actual ESG quality of portfolio companies. Blockholders on the other hand, appear much less interested in ESG than institutional investors generally. … we find that governance factors trump social and environmental factors in determining institutional investor interest. Again, company disclosure of governance criteria appears more important than actual governance quality rankings. … We find weak but statistically significant evidence to support the view that ESG is related to decreased risk. … We also show that the correlation between decreased risk and better governance ratings is stronger than for the social and environmental dimensions of ESG” (p. 26).

Lower ESG financing cost: ESG Investing in Emerging Markets: Betting on Firm Fundamentals or Riding Investor Preferences? by  Adrien Alvero and Wang Renxuan as of May 31st, 2022 (#24): “…We find a statistically significant ESG premium over the period 2018–2022 … All else being equal, a bond issued by the best ESG company has an average spread approximately 90 bp lower than the worst ESG-rated issuer. … Following the opening of the Chinese onshore capital market, a company with the highest possible ESG score would have seen its cost of borrowing decrease by 48 bp more than a company with the worst ESG score. Overall, both results support the hypothesis that firms with a high ESG score benefit from a lower cost of borrowing because of investors’ non-pecuniary preferences” (p. 35/36).

More (social) SDG focus: ESG Global Study 2022 by the Capital Group as of May 10th, 2022: “Nearly two-thirds prefer active funds to integrate ESG. …. Almost a third say the ability to report on specific SDGs is one of the most important elements of fund sustainability reporting — nearly double last year’s percentage. And half say the ability to offer the full spectrum of SDG themes is important when selecting funds. …. more are now investing in ESG with the specific and sole remit of generating alpha. Furthermore, investors largely agree that investment returns and sustainable impact go hand in hand. …. Difficulties with the quality and accessibility of data and inconsistent ratings are hampering the ability of investors to adopt, incorporate and implement ESG. … the more investors know about ESG, the more they realise what they don’t know and the more help they need” (p. 4). My comment see Neues SDG Sozialportfolio und noch strengere ESG Anforderungen – Responsible Investments (Blog) (

Bad UN PRI cover? Responsible Hedge Funds by Hao Liang, Lin Sun, and Melvyn Teo as of May 2nd, 2022 (#1238): “Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. … we … show that the ESG exposure and relative performance of signatory funds improve post reforms” (abstract) “… low-ESG (UN PRI) signatories … are more likely to trigger regulatory, investment, and severe violations, and more likely to display suspicious patterns in reported fund returns that are potential indicators of fraud … for mutual funds with poor incentive alignment, we still find that those managed by signatories (and by low-ESG signatories, especially) underperform” (p. 30/31).

Traditional Investment: Factor problems

Imperfect mutual fund selectors: Performance and Asset Size in the European Mutual Fund Market by Javier Vidal-Garcia and Marta Vidal as of May 18th, 2022 (#25): “… we examine the European mutual fund market for the 1990-2021 period …In the demand function, past returns and volatility are important indicators for the investor that select funds taking also into account the commissions applied. On the other hand, we identify the variables that determine the return obtained by European mutual funds. The persistence of results, the positive relationship between profitability and risk, the existence of a negative size effect together with the ineffective management of mutual funds due to the weight of commissions are some of the derived conclusions” (abstract).

Alpha misguidance factor problems: What you see may not be what you get: Return horizon and investment alpha by Hendrik Bessembinder, Michael J. Cooper, and Feng Zhang as of May 5ht, 2022 (#80): “… find that among those mutual funds with positive alphas estimated from monthly returns, nearly a third have negative alphas estimates when returns are measured at the ten-year horizon. Among funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over half have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon (e.g. monthly) returns can be uninformative or misleading regarding fund performance for investors with longer horizons” (abstract).

Equity premium puzzle factor problems: Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2022 Edition by Aswath Damodaran as of April 15th, 2022 (#5418): “The equity risk premium is the price of risk in equity markets, and it is not just a key input in estimating costs of equity and capital in both corporate finance and valuation, but it is also a key metric in assessing the overall market. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. … In the standard approach to estimating the equity risk premium, historical returns are used, with the difference in annual returns on stocks versus bonds, over a long period, comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets … We close the paper by examining why different approaches yield different values for the equity risk premium” (abstract).

Forecast fiction factor problems: Equity Premium Forecasts Tend to Perform Worse Against a Buy-and-Hold Benchmark by Gunter Löffler as of May 19th, 2022 (#12): “I examined two highly cited papers that were published after 2008. The results suggest that the benchmark favored in the literature, which is based on the historical mean computed with the data used for the prediction model, is not particularly stringent. When the buy-and-hold strategy is used as a benchmark, utility and Sharpe ratio gains drop by sizeable amounts, and the statistical significance of the performance advantages disappears. … Researchers usually do not test whether economic gains from following a forecast are statistically significantly different from zero. As it turns out, even gains that appear large may not withstand tests that have been suggested in the literature” (p. 14/15).

Frustrating factor problems: A Comprehensive Look at the Empirical Performance of Equity Premium Prediction II by Amit Goyal, Ivo Welch, and Athanasse Zafirov as of Dec. 7th, 2021 (#1488): “Our paper reexamines whether 29 variables from 26 papers published after Goyal and Welch (2008), as well as the original 17 variables, were useful in predicting the equity premium in-sample and out-of-sample. … Overall, the predictive performance remains disappointing” (abstract). … “it still seems underwhelming that only a handful of variables—even with reuse of the original identifying data—succeeded. These were, after all, variables from high-quality papers important enough to have been published in the top academic journals—with manuscript rejection rates has high as 18-19 in 20 papers. … For every predictive variable stumbled upon and published by a lucky researcher, there are probably hundreds that failed and were never published. … academic research gives the wrong impression, i.e., that it is possible or even easy to predict the stock market … Authors that write more mundane papers, which fail to show remarkable powers, are likely not to be published and thus disappear from the academic rat-race. … we do not believe that we know what variables should help us today to predict the equity premium forward-looking for 2022” (p. 31/32). My comment see Faktorallokation ist konzeptionell und operationell schwierig, Faktoranalysen sind aber wichtig – Responsible Investments (Blog) (

Skew matters factor problems: Conditional Skewness in Asset Pricing: 25 Years of Out-of-Sample Evidence by Campbell R. Harvey and Akhtar Siddique as of May 16th, 2022 (#200): “Twenty-five years ago, we proposed an empirical asset pricing model that added coskewness as a risk measure. Our results presented in Harvey and Siddique (2000) suggested that the risk premium was greater than 3% on an annualized basis. … In the out-of-sample period, the premium is estimated to be smaller, but is consistent across subperiod and is always positive. … it is very challenging to measure higher moments such as skewness. … Unfortunately, after 25 years and many successful replications, too many students of finance are only exposed to the mean-variance frontier” (S. 6/7).

Tolerant or lazy institutional investors? Forbearance in Institutional Investment Management: Evidence from Survey Data by Amit Goyal, Ramon Tol and Sunil Wahal as of May 10th, 2022 (#141): “We survey 218 institutional investors from 22 countries representing over $4.1 trillion in AUM … 68%, 65%, and 42% of respondents report average holding periods of longer than 5 years for public equity, fixed income and hedge funds, respectively. Asset managers are terminated for a variety of reasons, … But poor performance is by far the dominant cause. There is also surprising tolerance for underperformance: 66%, 56%, and 50% of respondents report a willingness to tolerate underperformance for 3 years or longer in public equity, fixed income, and hedge funds, respectively. … Contrary to popular narratives, North American institutions are unexpectedly patient relative to their counterparts from Europe and the rest of the world” (abstract).

Alternative Investments and Fintechs

Infrastructure investment segments: Infrastructure Strategy 2022 – A Pivot to the Digital Frontier by Frederic Blanc-Brude, Wilhelm Schmundt et al. from Boston Consulting Group and EDHEC as of March 23rd, 2022: “2022, global assets under management for infrastructure investments will reach a record high of $950 billion. … Over the past two decades, pension funds and insurance companies, boutique specialist managers and larger multi-asset managers have all entered the infrastructure asset class with different priorities and focus …. Based on an analysis of 379 infrastructure investors in EDHECinfra’s database, we compare the styles and risk-adjusted performance of 16 peer groups of infrastructure investors and provide a ranking based on their risk-adjusted returns in 2021. In the second part of the report, we look at what infrastructure investors say they will focus on in the next three to five years and whether they expect their investment strategies to differ or remain the same. Apart from the significantly increasing importance of operational value creation, our recently conducted survey shows a clear preference for a move toward more digital infrastructure investments …” (p. 4). My comment see Neues ESG-Portfolio aus weltweiten Kern-Infrastrukturaktien ist attraktiv – Responsible Investments (Blog) (

Fintech for the rich? FinTech and Robo-Advising: The Transformational Role of AI in Personal Finance by Francesco D’Acunto and Alberto G. Rossi as of May 10th, 2022 (#79): “We .. focus on four transformational innovations by analyzing their pioneering commercial implementations in the US and abroad—innovations that empower retail investors with the ability to perform highly-technical investment strategies, to engage in complex tax-saving operations (tax-loss harvesting), to easily access the wisdom of the crowd based on the real-time analysis of big data, and to disintermediate financial services and level the playing field between ordinary households and expert financial intermediaries (peer-to-peer lending)” (abstract). “… we are still lacking a comprehensive analysis of whether FinTech and robo-advising applications indeed have the potential for reducing increasing wealth inequalities in the US and abroad by allowing non-expert consumers to make better-informed decisions or whether instead access to such technologies is higher for those who lie at the top of the income and wealth distribution” (p. 24).

Positive PFOF: Studie zur Ausführungsqualität an ausgewählten deutschen Handelsplattformen by BAFIN as of May 16th, 2022: „Die vorliegende Studie bewertet die Ausführungsqualität an ausgewählten deutschen Handelsplätzen, die Payment for Order Flow anbieten … zu Geschäften in allen deutschen Aktien …. Insbesondere bei Transaktionsvolumina bis 2.000 EUR in DAX-Aktien und bis 500 EUR in Nicht-DAX-Aktien erzielen Privatkunden an PFOF-Märkten bessere Gesamtergebnisse als an den gegenübergestellten Referenzmärkten. Zum Vergleich: Die mittlere Transaktionsgröße (Median) von neobroker-Kunden beträgt laut den der BaFin vorliegenden Transaktionsdaten beim Handel in DAX-Aktien ca. 350 EUR und beim Handel in Nicht-DAX-Aktien etwa 250 EUR“ (p. 16/17).