FactSet's Taking Risk blog

Wall Street Journal’s “Europe's Best” 2012: Selective calls secure success

FactSet Research Systems Inc. — 2013-05-21T16:54:51Z

The Wall Street Journal Europe’s “Europe’s Best” survey produced a list of the top 3 performing analysts in 21 separate industries during 2012 based on their stock recommendations. Analysts' skill in picking stocks was measured using recommendation-performance scores calculated by FactSet Research Systems on the basis of the estimated total return.

In general, the winning analysts in this year’s survey:

Issued fewer Buy and Sell ratings as a percentage of their total ratings than non-winning analysts, but were more accurate in these selective calls than the non-winning analysts
Made ratings changes more frequently than non-winning analysts
Covered a smaller number of stocks within their industry than non-winning analysts

To read an analysis of the results launch our Market Insight report at www.factset.com/marketinsight.

To learn more about FactSet's partnership with the Wall Street Journal, visit www.factset.com/wsj.

Breadth of Apple's institutional ownership grows, depth shrinks

FactSet Research Systems Inc. — 2013-05-21T12:00:24Z

Apple Inc. experienced its second-consecutive 4% decline in the holding value of institutional owners at the end of Q1. However, the company actually showed a net increase of thirty-four additional institutional shareholders. This increase in the breadth of Apple’s institutional ownership, coupled with a correspondent decline in the number of institutions claiming shares in Microsoft Corp., has resulted in Apple becoming the most widely held institutional holding.

However, Apple has experienced outflows from its core group of shareholders. As a result of continuous sales from Capital Group of Cos. entities and other significant shareholders of Apple, the percentage of ownership of the stock’s ten largest shareholders from Q1 2012 has steadily fallen from 25% to 19%. Other large shareholders to cash out of Apple have included Fidelity Management & Research Co. and T. Rowe Price & Associates, Inc. In fact, T. Rowe Price & Associates was the largest seller of Apple over the quarter, while Putnam Investment Management LLC was the largest buyer. Putnam now owns 0.6% of Apple shares.

Glencore Xstrata PLC, on the other hand, received the largest percentage increase in institutional ownership under certain conditions (see criteria on page 4). The Swiss-headquartered commodity producer experienced a 26% increase in institutional ownership in Q1. The largest contributor to this trend was State Street Global Advisors Ltd., which purchased nearly $500 million in shares over the quarter. Glencore’s shares have had an up-and-down year (the stock was up nearly 12% by mid-January, but has fallen to a year-to-date loss of 4.6%), as the company hit delays with its proposed merger with Xstrata PLC. Xstrata shareholders approved the Merger in late November 2012, but the deal wasn’t completed until May 2nd.

During Q1 2013, large money managers were bearish on the U.S. and Germany, and bullish on Spain and India. On the sector-level, the top ten country aggregates were only bullish in the Health Care sector and, for the second consecutive quarter, were most bearish in both the Information Technology and Financials sectors.

Read more about the ownership trends of global institutions including an overview of holdings by country and sector in this quarter's edition of FactSet Institutional Ownership Quartlerly. Visit www.factset.com/institutional_ownership to launch the latest report.

Is the S&P 500 overvalued?

FactSet Research Systems Inc. — 2013-05-18T12:00:25Z

The forward 12-month P/E ratio for the S&P 500 now stands at 14.4, based on yesterday’s closing price (1650.47) and forward 12-month EPS estimate ($114.94). This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than three years (April 2010). Given the high values driving the P in the P/E ratio, how does this 14.4 P/E ratio compare to historical averages? Is the index now overvalued? On the one hand, the index is now trading above both the 5-year (12.9) and 10-year average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.5), and is not close to the peak P/E ratio of 25 recorded in the late 1990’s and early 2000’s.

Of the 463 S&P 500 companies that have reported earnings to date for the quarter, 70% have reported earnings above estimates. This percentage is in-line with the average of 70% recorded over the past four quarters. However, only 47% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. If 47% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The blended earnings growth rate for Q1 2013 is 3.2% this week, unchanged from last week’s growth rate of 3.2%. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date, led by the Financials and Telecom Services sectors.

The index is reporting earnings growth for Q1 (3.2%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. Nine of the ten sectors are reporting an earnings increase for the quarter, led by the Financials, Utilities, and Telecom Services sectors. On the other hand, the Information Technology sector is the only sector reporting an earnings decline for the quarter. The blended revenue growth rate for the index for Q1 is -0.3%, down from an estimate of 0.4% at the end of the quarter. However, only two sectors are reporting an earnings decrease for the quarter: Energy and Materials.

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 75 companies have issued negative EPS guidance for Q2 2013, while 19 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth rate for Q2 2013 has dropped to 1.4% today from an expectation of 4.4% on March 31.

The peak weeks of the Q1 2013 earnings season are now finished. During the upcoming week, the last two Dow 30 components (Home Depot and Hewlett-Packard) and 25 S&P 500 companies are scheduled to report earnings for Q1 2013 during the week.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.

Funds increase bet in consumer discretionary, Google present in majority of funds

FactSet Research Systems Inc. — 2013-05-18T12:02:35Z

The 50 largest hedge funds increased their equity exposure by over 5% in Q1 2013. This quarter, Boeing Co. was the favorite allocation of the funds. The stock experienced $1.6 billion in inflows, which amounted to nearly 250% of its Q4 value in the funds’ aggregate portfolio. Boeing’s shares are up 28.2% year-to-date (“YTD”), compared to 15.7% for the S&P 500. However, the largest dollar-value increase in equity exposure arose from the January IPO of Norwegian Cruise Line Holdings Ltd, which was backed in part by Apollo Global Management LP. It’s also interesting to note that, though the funds sold some exposure in Google Inc. (Cl A), the technology company was present of the majority (62%) of the fifty hedge funds’ portfolios. This distinction was previously held by Apple. Two quarters ago, Apple was held by just as widely as Google, and it was the largest equity holding of nearly one-fourth of the funds. However, by Q1 2013, Apple was held by only 40% of the funds, with only four carrying it as the top stock holding.

While the top 50 hedge fund managers largely increased their exposure to equities, the funds also made significant reductions to their stakes in two successful stocks in 2013: News Corp. (Cl A) and American International Group Inc. The funds reduced their holding in News Corp by 20.3%, and the stock represented the largest individual equity sale in three of the fifty hedge funds. In addition, the funds reduced their exposure to AIG by 16.2%. With these sales, fund investors seem to be predicting a slowdown or reversal for these two issues, as AIG and News Corp. have had very similar YTD returns as Boeing in 2013: 27.2% and 28.8%, respectively.

At the country-level, the top 50 hedge funds continued their home country bias by adding primarily to U.S. equities (90% of the top 50 funds are domiciled in the U.S.). Stocks domiciled in Australia, on the other hand, received the largest decline in country exposure. This was primarily due to sales of Aurizon Holdings Ltd., a local freight transportation and infrastructure company.

Read more about the ownership trends of hedge funds in this quarter's edition of FactSet Hedge Fund Ownership Quarterly. Visit www.factset.com/hedgefund_ownership to launch the latest report.

Twitter Content Now Available in News and Company News Displays

FactSet Research Systems Inc. — 2013-05-16T12:00:23Z

You can now access Twitter content for more than 130 companies in FactSet’s News (@N) and Company News (@CN) displays. FactSet’s News display lets you view real-time, scrolling financial news headlines for the current day, a specific company, and for a portfolio of companies. In addition, you can search through archived documents for news stories with a specific date, source or text. The Company News display lets you view real-time, scrolling financial news headlines for a single company with up to two years of history.

Tweets are integrated directly into the News displays as part of FactSet’s Company Web Releases & News wire (CRN). This means you can instantly access tweets in search results, real-time scrolling news, and alerts.

Wall Street Journal’s “Asia’s Best” 2012: Selective buys & sells secure success

FactSet Research Systems Inc. — 2013-05-14T12:00:37Z

The Wall Street Journal Asia’s “Asia’s Best” survey produced a list of the top 3 performing analysts in 21separate industries during 2012 based on their stock recommendations.

In general, the winning analysts in this year’s survey:

Issued fewer Buy and Sell ratings as a percentage of their total ratings than non-winning analysts, but were more accurate in these selective calls
Increased their bearish calls ahead of a market downturn in March
Made ratings changes more frequently than non-winning analysts
Covered a smaller number of stocks within their industry than non-winning analysts

To read an analysis of the results launch our Market Insight report at http://www.factset.com/marketinsight.

To learn more about FactSet's partnership with the Wall Street Journal, visit http://www.factset.com/wsj.

Where does the price of the S&P 500 go from here? Industry analysts and strategists disagree.

FactSet Research Systems Inc. — 2013-05-11T12:00:30Z

During the past week (May 8), the value of the S&P 500 index closed at an all-time high of 1632.69. Given this record-level price, do analysts believe the index will continue to increase in price over the next twelve months? For industry analysts, the answer is yes. However, for market strategists, the answer is no.

Industry analysts in aggregate predict the S&P 500 will see a 5.6% increase in price in over the next twelve months. This percentage is based on the difference between the bottom-up target price and the closing price for the index on May 8. Aggregating the mean target price estimates (based on company-level estimates submitted by industry analysts) for all 500 companies in the index, the bottom up target price for the S&P 500 was 1724.42 on May 8, which was 5.6% above the closing price of 1632.69.

Market strategists, on the other hand, predict the S&P 500 will see a 3.3% decrease in price on average over the next twelve months. This percentage is based on the difference between the top down mean target price and the closing price for the index on May 8. Taking the average of the eight index-level
target price estimates submitted to FactSet by market strategists, the top-down mean target price for the S&P 500 was 1579.28 on May 8, which was 3.3% below the closing price of 1632.69.

Who will prove to be correct? It is interesting to note that one year ago, the industry analysts were much more accurate in their projections for the closing price at the end of April 2013 than the market strategists. At the end of April 2012, the bottom-up target price (based on company-level estimates submitted by industry analysts) was 1567.34, while the top down mean target price (based on index-level estimates submitted by market strategists) was 1418.33. Compared to the closing price of the S&P 500 at the end of April 2013 of 1597.57, the industry analysts underestimated the price of the index by just 1.9%, while the market strategists underestimated the price of the index by 11.2%.

Of the 451 S&P 500 companies that have reported earnings to date for the quarter, 70% have reported earnings above estimates. This percentage is in-line with the average of 70% recorded over the past four quarters. However, only 48% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. If 48% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The index is reporting earnings growth for Q1 (3.2%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. Nine of the ten sectors are reporting an earnings increase for the quarter, led by the Financials, Utilities, and Telecom Services sectors. On the other hand, the Information Technology sector is the only sector reporting an earnings decline for the quarter. The blended revenue growth rate for the index for Q1 is -0.2%, down from an estimate of 0.4% at the end of the quarter. However, only two sectors are reporting an earnings decrease for the quarter: Energy and Materials.

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 69 companies have issued negative EPS guidance for Q2 2013, while 18 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth rate for Q2 2013 has dropped to 1.6% today from an expectation of 4.5% on March 31.

The peak weeks of the Q1 2013 earnings season are now finished. During the upcoming week, two Dow 30 components (Wal-Mart Stores and Cisco Systems) and eleven S&P 500 companies are scheduled to report earnings for Q1 2013 during the week.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.

Review the operating results of U.S. companies in the consumer sectors

FactSet Research Systems Inc. — 2013-05-11T12:03:07Z

The FactSet Research Desk is proud to introduce the first edition of FactSet Industry Insight: Consumer, our quarterly update on the operating results of U.S. companies within the FactSet Aggregates consumer sectors.

In each edition you’ll find:

Examinations of historical and projected revenue and same store sale trends at the sector-, industry-, and company-level
Aggregations of analyst expectations for related industry metrics, such as new home sales, airline passenger revenues, and revenues per available hotel room
Analysis of relevant economic and sentiment indicators

For Q1 2013, retail sales are slow, but analysts are expecting a recovery. On a quarterly basis, “blended” retail sales growth in the index is 1.1% for Q1, which is down from the estimate of 2.3% at the start of the quarter and from 5.5% growth achieved in Q4 2012. However, sales are expected to recover going forward, and analysts expect growth in the Retail Trade sector to rise to 3.8% for Q2 2013 and continue to improve to 5.7% in Q1 2014. These trends are also reflected in the same store sales (“SSS”) metric. Analysts expect year-over-year growth of 1.1% for Q1 2013, but that is down from 1.6% at the start of the quarter and from 1.9% in Q4 2012. However, analysts also predict a recovery in Q2 (+2.4%) that will build continuously throughout the year.

Note that “Blended” growth rates divide the current quarter’s results by those from the year-ago period. If a company has not yet reported in the current quarter, estimated company results are used in the numerator.

On a trailing twelve-month (“TTM”) basis, year-over-year growth of sales peaked at 7.0% in Q4 2011 but has steadily fallen since then. This trend is reflected in retail sales data from the Census Bureau. March retail sales (ex-autos) increased by the smallest year-over-year rate (+1.7%) since November 2009. The metric reached an eleven-and-a half-year peak of 9.7% in July 2011 but has steadily fallen since then.

All of the data used to compile Industry Insight: Consumer is available in the FactSet workstation. Visit www.factset.com/industry_consumer to access the latest edition.

Can Europe’s leaders cook up the right recipe for growth?

FactSet Research Systems Inc. — 2013-05-10T12:00:30Z

In the face of continued weak economic data out of the Eurozone, last week the European Central Bank (ECB) announced its first interest rate cuts in nearly a year. The interest rate on main refinancing operations was cut by 25 basis points to 0.50%, and the rate on the marginal lending facility was cut by 50 basis points to 1.00%. The bank even left the possibility of further rate cuts open as it continue to monitor developments in the region.

At the May 2 ECB press conference announcing the rate changes, ECB President Mario Draghi referred to the continued contraction in GDP growth in the region, as well as weak labor market conditions and economic sentiment. He also stressed that individual countries need to continue on the path of instituting structural reforms, saying, “In order to bring debt ratios back on a downward path, euro area countries should not unravel their efforts to reduce government budget deficits and continue, where needed, to take legislative action or otherwise promptly implement structural reforms, in such a way as to mutually reinforce fiscal sustainability and economic growth potential.”¹

This message may have been targeted at his home country of Italy, where months of political stalemate both leading up to and following the country’s recent elections have put fiscal austerity at the center of parliamentary discussions. The third largest economy in the Eurozone, Italy’s GDP has been declining for the past year and a half and the unemployment rate stands at 11.5%. Meanwhile, the country is running the second highest debt to GDP ratio in the Eurozone (after Greece) at 127%. At the center of the current national discourse is the difficulty of achieving economic growth while pursuing budget austerity and reducing the country’s high debt burden.

FactSet clients: launch this chart

This week, after getting a vote of confidence from Italy’s parliament, new Prime Minister Enrico Letta embarked on a tour of Europe’s major capitals (Berlin, Paris, and Brussels) to meet with the region’s key political leaders. His intention is to convince European leaders to ease up on demands for harsh austerity measures imposed by the European Commission that Italy feels are crippling the economy and its ability to grow. The argument is that Italy has stuck to its commitments so far, with the budget deficit currently at just 3.0% of GDP, having fallen from a peak of 5.4% in 2009, but continued strict budget austerity will inhibit the economy’s recovery.

FactSet clients: launch this chart

The IMF is forecasting that Italy’s GDP will contract by 1.5% in 2013, followed by a modest expansion of 0.5% in 2014. Unfortunately, the road back to economic recovery is expected to be a long one for Italy, and it remains to be seen whether the European Commission will ease up on austerity measures for Italy and other struggling Eurozone countries.

FactSet clients: launch this chart

¹ ECB: Introductory statement to the press conference. May 2, 2013. http://www.ecb.int/press/pressconf/2013/html/is130502.en.html

Responsible-Investor.com and MSCI Roundtable Report 2013

FactSet Research Systems Inc. — 2013-05-10T12:02:59Z

Responsible-Investor.com and MSCI cooperated on a Roundtable Report on 'ESG Risks and Financial Implications - Sustainability Themes: how and when they become financially material to institutional investors?’. The Report explores where and how ESG risk can have significant and pressing financial consequences for institutional investors. Topics include: the financial risk dimension of ESG, the state and applicability of ESG research, the evolution of ESG regulation, and more.

The presentations and discussion, which took place in New York in late 2012, brought together a panel of noted thinkers, practitioners, and academics in sustainable finance for their thoughts based broadly around a series of topical ESG themes in institutional investment.

Read the RI/MSCI Roundtable 2013 Report
Join MSCI ESG Research's Global Network

MSCI ESG data is available on FactSet. Contact your FactSet sales representative or email sales@factset.com for more details.

Operating Metrics model now available in Quick Report

FactSet Research Systems Inc. — 2013-05-09T12:00:30Z

Last week, BP (BP-GB), Statoil (STL-NO), and Chesapeake Energy (CHK-US) all reported Q1 2013 earnings.

FactSet’s Quick Report offers extensive tools for report building at the company and index level in the Microsoft Excel platform. Quick Report contains models, predefined reports and custom reports which can be mixed into Excel files for you to build a report matching your specific needs. To dive deeper into each company's earnings, FactSet now offers a new operating metrics model that includes industry metrics and macro-level industry drivers. In the Quick Reports library, the model is called "Operating Metrics." The model will also include a link to the Operating Metrics report available in the workstation.

For Oil & Gas companies, you can see a company's historical natural gas production per day figures alongside estimates for exploration expenses. Reports are also available for the following industries: Airlines, Retail, Metals & Mining, and Pharmaceuticals & Biotech.

Despite high negative EPS guidance, estimate cuts for Q2 on pace with recent averages

FactSet Research Systems Inc. — 2013-05-04T12:00:32Z

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 63 S&P 500 companies have issued negative EPS guidance for Q2 2013, while 17 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the index's estimated earnings growth for Q2 2013 has dropped to 1.9% today from an expectation of 4.5% on March 31. However, the percentage (-2.5%) decline in the bottom-up EPS estimate during the first month of the quarter was in-line with the recent one-year (-2.3%) and five-year (-2.8%) averages.

Of the 404 S&P 500 companies that have reported earnings to date for the quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 47% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. If 47% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.

For the first quarter overall, the blended earnings growth rate is 3.2% this week, above last week’s growth rate of 2.0%. Upside earnings surprises reported by companies in the Financials sector (including AIG, Prudential, and MetLife) were mainly responsible for the improvement in the growth rate during the past week. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date as well, led by the Financials and Telecom Services sectors.

The index is now reporting earnings growth for Q1 (3.2%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. Nine of the ten sectors are reporting an earnings increase for the quarter, led by the Financials and Utilities sectors. On the other hand, the Information Technology sector is the only sector reporting an earnings decline for the quarter. The blended revenue growth rate for the index for Q1 is -0.1%, down from an estimate of 0.4% at the end of the quarter. However, only two sectors are reporting an earnings decrease for the quarter: Energy and Materials.

The peak weeks of the Q1 2013 earnings season are now finished. During the upcoming week, one Dow component (Walt Disney) and 47 S&P 500 companies are scheduled to report earnings for Q1 2013 during the week.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.

Looking for the status of a company's pension plan? View the Pension Summary tile in Company Guide

FactSet Research Systems Inc. — 2013-05-08T18:40:25Z

The Pension Summary tile now available in Company Guide allows you to immediately recognize the pension funded status for over 11,500 companies globally. Using this report you can also:

+ Track future liabilities against the fair value of pension plan assets to easily tell the shortfall or surplus of a company’s pension fund.

+ View a graphical representation of historical data that allows you to quickly compare funded ratios (%).

+ Audit data and use source document linking to reconcile values back to the original filing for increased transparency.

The Pension Summary tile is available in the “Other” category in the Company Guide Tile Library.

Top-line shortfalls vs. analyst estimates drive S&P 500 Q1 revenue growth lower

FactSet Research Systems Inc. — 2013-04-27T12:00:27Z

Of the 271 S&P 500 companies that have reported earnings to date for the quarter, 73% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 44% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters. If 44% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%. As a result, the revenue growth rate for the quarter has continued to decline over the past month, while the earnings growth has rebounded to the levels expected at the start of the quarter (December 31).

For the first quarter overall, the blended earnings growth rate is 2.1% this week, above last week’s growth rate of 0.3%. Upside earnings surprises reported by companies across multiple sectors were responsible for the improvement in the growth rate during the past week. All ten sectors saw an improvement in earnings growth during the week. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date as well, led by the Telecom Services sector.

The index is now reporting earnings growth in Q1 (2.1%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. Eight of the ten sectors are reporting an earnings increase for the quarter, led by the Utilities, Financials, and Telecom Services sectors. On the other hand, the Information Technology sector is reporting the lowest earnings growth. The blended revenue growth rate for the index for Q1 is -0.6%, down from an estimate of 0.4% at the end of the quarter.

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 48 companies have issued negative EPS guidance for Q2 2013, while 11 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth for Q2 2013 has dropped to 2.4% today from an expectation of 4.5% on March 31.

The upcoming week marks the final peak week of the Q1 2013 earnings season, as two Dow components and 137 S&P 500 companies are scheduled to report earnings for Q1 2013 during the week.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.

Activists continue to target larger companies

FactSet Research Systems Inc. — 2013-04-26T12:00:33Z

With news this week that prominent activists Trian Fund Management, L.P. has taken stakes in Mondelez International, Inc. and PepsiCo, Inc. and ValueAct Capital Management LP's purchase of $2 billion in Microsoft Corporation stock, we look at the increasing trend of activists setting their sights on larger targets.

As of April 22, almost 30% of the companies targeted in a financial or board seat activist campaign this year had a market capitalization over $1 billion at the time the campaign was announced. This is the highest proportion of campaigns involving companies of this size in the eight years we have been tracking this information on FactSet SharkWatch. Among the noteworthy campaigns against large companies announced in 2013 are Greenlight Capital Inc.'s request that Apple, Inc. return cash to shareholders via the issuance of a new perpetual preferred stock, Elliott Management Corporation's proxy fight for five seats on Hess Corporation's board of directors, and Carl Icahn's proposed leveraged recap or possible competing bid against Dell Inc.'s buyout. Conditions also appear favorable for this trend to continue.

The Wall Street Journal recently reported, citing HFR Inc. data, that assets under management in activist funds have risen to more than $65 billion at the end of 2012 and that activist funds have outperformed HFR's weighted composite index for all hedge funds for the past four years - a fact that should continue to make activism an attractive asset class. Many commentators have also noted an increased willingness by mainstream mutual funds and other institutional investors to side with activists which is absolutely essential to effect changes with a small ownership stake as is often the case when targeting larger companies. Additionally, as companies continue to shed takeover defenses, a trend most pronounced with large cap companies, more tools are potentially available to activists. De-staggered boards, the lack of poison pill limits, the ability to take action by written consent or call special meetings, and the lack of supermajority or cause requirements to remove directors, can loom large in an activist campaign.

Avoiding the void: Controlling for liquidity risk in equity markets

FactSet Research Systems Inc. — 2013-04-25T12:00:32Z

While preparing for an upcoming event which focuses on Smart Beta as an alternative way of investing, I came across an interesting Edhec publication¹. This article provides a comprehensive overview of the pros and cons of these so-called Smart Beta indices, and it caught my attention because of the operational risks that it mentions. The article highlights that Minimum Variance strategies promise a better Sharpe ratio by lowering absolute risk; however, these strategies introduce another type of risk: liquidity risk.

With this knowledge, is it possible to construct a Minimum Variance portfolio that controls for this type of risk? How will the impact compare to the original portfolio?

The Model

The first obstacle was to determine how to model this risk. The easiest way to deal with liquidity issues is to simply avoid holding illiquid stocks. Generally, studies on liquidity use measures such bid ask spreads, trading volume, and days to liquidate. [Note: this blog is not concerned with identifying the perfect measure of, or forecast for, illiquidity]. Rather than looking at the impact of trading low liquidity, I wanted to see if it can be avoided altogether. Therefore, I used a simple measure, like trading volume, conservatively as a coarse filter which allowed me to refrain from making assumptions on the size and concentration of the portfolio.

I calculated the 22-day average daily volume in U.S. dollars and standardized this to quintiles. A stock in the first quintile is considered liquid and a stock in the fifth quintile is illiquid. The chart below highlights the weighted average liquidity score of a Minimum Variance Strategy against a market cap weighted index.

Chart: Weighted Average Liquidity Quintile Score

This chart shows that the Minimum Variance strategy scored consistently higher than the index. When I constructed the Minimum Variance strategy I used a very straightforward approach to avoid the interaction of constraints cluttering our view. I used the MSCI AC Asia Pacific as the trade universe and optimized on a quarterly basis to minimize absolute risk on FactSet.

Next I used the simple model as a constraint and eliminated the stocks that are in quintile five. I also added another constraint that excluded stocks in quintile four.

Chart: Cumulative Performance Holding Constraint

This chart shows that liquidity does have an effect on overall performance. Avoiding stocks that score a five improves performance and avoiding stocks in the fourth quintile weakens performance. Although the decline in performance seems quite significant, we should keep in mind that while building this extreme case we stripped out 40% of the investible universe.

Holding vs. Trading Constraint

While the strategies above highlight the possibilities of avoiding illiquid stocks, they do not take into account the stocks that become less liquid over time. Our original constraint would not allow these positions in my portfolio and rather than avoid trading illiquid stocks, we would be forced to sell them.

To counter this, I ran the strategies with a trading rather than holding constraint. This means I could not buy or sell illiquid stocks, but can keep them in the portfolio when they become less liquid over time.

Chart: Cumulative Performance Trading Constraint

This chart highlights that when we don't trade illiquid stocks, we track the original base case closer. This comes at a slightly higher liquidity score, but we still see an improved liquidity quintile score which is shown in the chart below.

Chart: Liquidity Score Trading Constraint

Gatekeeper/Keymaster Concept

To recognize the inherent risk that is introduced while verifying the results with the same measure used to generate the model, I wanted to confirm that illiquid stocks with the bid ask spread (as a percentage of the average price) and days to liquidate measures are being avoided.

Chart: Bid Ask Spread Trading Constraint

The chart indicates an improvement to the average bid/ask spread and a significant reduction in the spikes we observed in the original Minimum Variance Strategy.

Chart: Days to Liquidate Trading Constraint

In terms of days to liquidate, this chart shows there is an improvement especially in the case where I avoided stocks from both quintile four and five. However, there are still a number of peaks, specifically in March 2012 and March 2013. The underlying data indicates that the spikes are driven by one or two large illiquid positions. Even though this might not be much of a concern since we don’t trade these illiquid stocks, in reality it’s quite common to set a maximum asset weight constraint which should avoid these and other concentration issues.

Although I'm not trying to identify the impact of trading illiquid stocks, I examined the impact on portfolio turnover. I observed that the holdings constraint increases portfolio turnover compared to the base case, whereas the trading constraint on the other hand improves turnover.

Chart: Turnover different Strategies

Other Applications

This method is not limited to Minimum Variance strategies and can be applied to other areas. For replication strategies, such as ETFs, this can be an interesting way to mitigate some of the liquidity risks when incurring in or outflows, which tend to coincide with times of low liquidity.

For example, I applied the holdings constraint to a strategy that replicates the original market cap weighted index. Looking at the initial results we see that not holding illiquid stocks doesn’t have a large effect on the capability to track the index.

Chart: Cumulative Performance Replication Strategy

Conclusions

Can you avoid the void? Unless you have the perfect forecast of liquidity, you cannot completely avoid the tilt to lower liquidity that Minimum Variance strategies exhibit. However, you can reduce exposure by filtering the investible universe to liquid stocks only. This way, you can track the original strategy reasonably, and the optimist might even read potential upside in the results. A second way to avoid liquidity issues is by not trading illiquid names. In that case you can track the base case closely and lower turnover. Finally, the concept does not only lend itself to Minimum Variance but could be applied to other replication strategies as well.

¹Smart Beta 2.0, Noël Amenc, Felix Goltz, Lionel Martellini, http://www.edhec-risk.com/edhec_publications/all_publications

Utilize FactSet’s Comparison report to view the performance of a company’s suppliers, competitors, or partners

FactSet Research Systems Inc. — 2013-05-08T18:41:41Z

On 23-Apr-2013, Apple reported earnings. One of the reasons behind Apple's recent decline is disappointing Q1 revenue guidance and weak Q4 preliminary revenue announced on 16-Apr-2013 from one of its major suppliers, Cirrus Logic. Cirrus's audio chips are used in Apple's iPhones and iPads.

Using FactSet's Comparison (@CCF) report, you can view a company's suppliers, competitors, or partners. Sorting by the metric "one week price change," last week Cirrus was the worst performer of all of Apple's suppliers.

Apple: Biggest Contributor to Earnings Decline for S&P 500 Technology Sector for Q1

FactSet Research Systems Inc. — 2013-04-23T12:00:32Z

Of the 102 companies that have reported earnings to date for the quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 45% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters. If 45% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.

Apple will be a focus company for the market this week, as the company is scheduled to report earnings results for the first quarter. As a result of an estimated year-over-year decrease in EPS and Apple’s earnings weight in the index, the company is projected to be the largest contributor to the year-over-year decline in earnings for the Information Technology sector in the first quarter. If Apple is excluded, the earnings growth for the sector improves to 0.2% from -4.0%.

For the first quarter overall, the blended earnings growth rate is 0.1% this week, above last week’s growth rate of -0.5%. Upside earnings surprises reported by companies in the Financials and Information Technology sectors were mainly responsible for the improvement in the growth rate during the past week. On March 31, the Q1 earnings growth rate for the index was -0.7%. Six of the ten sectors have witnessed an increase in earnings growth rates since that date, led by the Financials and Telecom Services sectors.

The index is now expected to report earnings growth in Q1 (0.1%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. Four of the ten sectors are projected to report an earnings decrease for the quarter, led by the Information Technology (-4.0%) and Energy (-4.0%) sectors. On the other hand, the Utilities (7.7%) and Financials (7.1%) sectors are predicted to see the highest earnings growth. The blended revenue growth rate for the index for Q1 is -0.2%, down from an estimate of 0.4% at the end of the quarter.

This week marks the start of the second peak week of the Q1 2013 earnings season, as 10 Dow components and 181 S&P 500 companies are scheduled to report earnings for Q1 2013 during the week.

Read more about the earnings trends of the S&P 500 in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.

View the Redesigned and Enhanced Interactive Charting

FactSet Research Systems Inc. — 2013-04-18T12:00:29Z

The new version of Interactive Charting has a simplified interface and many enhancements to increase the user friendliness of the charting application.

Enhanced features include:

+ Access charts, plot options, drawing tools, and chart labels using the four new sections created to the left of the chart.

+ Improved handling of identifiers, with a single identifier input box and a Graph All Identifiers check box.

+ Easily select Index/Relative functionality at the plot level under the Plot Options section or add/delete/change a plot’s series.

+ Quickly draw tools that “snap” to the closest data point, making it easy to line up the tool with points on the chart.

+ Create and organize chart lists with the new Chart List Editor under the Charts section.

+ Enhanced printing and export options displayed in one dialog box under Tools > Print/Export.

+ Add and modify end of line lables and series' statistical information under the Chart Labels section.

You must be on version 2012.5 and higher to take advantage of these new features.

Wall Street Journal Best on the Street 2012: Selective buys & sells secure succes

FactSet Research Systems Inc. — 2013-04-17T12:00:31Z

The Wall Street Journal’s “Best on the Street” survey produced a list of the top 3 performing analysts in 44 separate industries during 2012 based on their stock recommendations. Analysts' skill in picking stocks was measured using recommendation-performance scores calculated by FactSet Research Systems on the basis of the estimated total return.

In general, the winning analysts in this year’s survey:

Issued fewer Buy and Sell ratings as a percentage of their total ratings than non-winning analysts, but were more accurate in these selective calls than the non-winning analysts
Made ratings changes more frequently than non-winning analysts
Covered a smaller number of stocks within their industry than non-winning analysts

To read an analysis of the results launch our Market Insight report at http://www.factset.com/marketinsight.

To learn more about FactSet's partnership with the Wall Street Journal, visit http://www.factset.com/wsj.