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Balancing Long-Term Wealth Creation & Tracking Error
Delving further into the “Valuation vs. Cheapness” investing concept, we will study the excess returns associated with portfolios constructed on the valuation expertise of Applied Finance. Many equity managers increasingly rely on benchmark tracking error as a primary measure of risk (as a form of self-preservation). We will explore a variety of risk-adjusted metrics that incorporate volatility, tracking error, beta, benchmark underperformance, and multifactor alphas to prescribe an actively-managed investment style that aims to achieve excess long-term wealth creation with improved risk-adjusted characteristics compared to passive alternatives.

• Passive allocations, despite increasing practitioner adoption, deliver negative alpha. Managers that rely on passive allocations have minimal competitive advantage to differentiate themselves from their peers, and continued fee compression will make this business model unsustainable.

• “Valuation/Cheapness Gap” research confirms that portfolios formed on stocks preferred by Applied Finance valuation expertise outperform stocks preferred by price multiples on a systematic basis in portfolio construction and asset pricing models.

• This gap in returns between valuation preference and cheapness preferences is further widened when risk-adjustments are considered. Valuation preference portfolios outperform cheapness preference portfolios, with lower volatility, lower downside tracking error, and lower betas. Portfolios formed on valuation preference deliver sustainable alpha over various market regimes.

• Investment solutions that apply the valuation expertise of Applied Finance can help our partners carve out a unique advantage over their peers.

May 28, 2020 03:00 PM in Central Time (US and Canada)

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