Recent Research: Highlights from March 2011
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“Capturing Alpha in the Alpha Capture System: Do Trade Ideas Generate Alpha?” The Journal of Investing (Spring 2011). Jean W. Thomas.
In the wake of recent failures of such factors as price momentum and estimate revision to generate excess returns to traditional and quantitative strategies, this study explores the potential for using Trade Ideas as a new source of alpha in long-only and hedge strategies.
“Growth-Based Franchise Opportunities: Lessons from the GEICO Acquisition.” The Journal of Private Equity (Spring 2011). Joseph Calandro, Jr.
Private equity acquirers often purchase underperforming businesses and then cut costs and otherwise turn those businesses around for later sale. This approach has worked incredibly well, so much so that it has attracted a great deal of competition thereby making similar deals increasingly scarce. A potentially lucrative alternative to such deals are growth-based franchise opportunities. A “franchise” is Graham and Dodd nomenclature for a firm operating with a sustainable competitive advantage. A growth-based franchise opportunity arises when a franchise has unrecognized growth potential and thus can be purchased at a reasonable “margin of safety,” or discount from estimated value. The classic example of such an opportunity is Warren Buffett’s 1995 GEICO acquisition. This article presents an approach for identifying, evaluating, and tracking the value realization of growth-based franchise deals in the context of the GEICO case. The approach integrates strategic, financial, and performance management concepts in a way that, it is hoped, will prove useful to future acquirers and researchers alike.
“Mutual Funds: Advertising, Behavioral Models, and Investor Choice.” The Journal of Index Investing (Spring 2011). John A. Haslem.
This article examines theories of advertising and investor behavior that apply to mutual fund advertising and investor choices. Mutual fund advertising and its effect on investor fund choice is assessed in the context of the role of advertising, advertising as persuasion, investor choice, investor revealed preferences, affect as persuasion, and human behavior. Among the findings is that highly educated and wealthy mutual fund investors as well as more financially savvy investors tend to make poorer fund choices.