RT Journal Article
SR Electronic
T1 Can We Count on Accounting Fundamentals for Industry Portfolio Allocation?
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 70
OP 87
DO 10.3905/jpm.2016.42.4.070
VO 42
IS 4
A1 Justin Lallemand
A1 Jack Strauss
YR 2016
UL https://pm-research.com/content/42/4/70.abstract
AB The authors examine out-of-sample industry excess return predictability and portfolio allocation using forecasting combination methods of industry-level and aggregate accruals, book-to-market, earnings, investments, and gross profits. Out-of-sample combination forecasts generate significant industry return predictability. Substantial increases in Sharpe ratios and utility gains demonstrate that predictability is not driven primarily by higher risk. Real-time portfolio allocation strategies rotate into long positions in industries with high expected returns and short industries with low expected returns. Over the past thirty years, outof-sample combination forecasts of accounting variables have generated value-weighted industry portfolio payoffs five times greater than a buy-and-hold benchmark. The constructed portfolios consistently beat a buy-and-hold benchmark portfolio two-to-one while generating alphas that exceed 10%.TOPICS: Portfolio theory, derivatives