PT  - JOURNAL ARTICLE
AU  - Justin Lallemand
AU  - Jack Strauss
TI  - Can We Count on Accounting Fundamentals for Industry Portfolio Allocation?
AID  - 10.3905/jpm.2016.42.4.070
DP  - 2016 May 31
TA  - The Journal of Portfolio Management
PG  - 70--87
VI  - 42
IP  - 4
4099  - https://pm-research.com/content/42/4/70.short
4100  - https://pm-research.com/content/42/4/70.full
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