have gained increased attention from both academics and practitioners in recent decades. Between 2014 and 2018, growth in smart beta ETFs averaged almost 30 percent annually. These strategies are based on the concept of “factor” investing, which has existed for decades. Now, however, ETF providers use the term smart beta to indicate various factor-based strategies. The empirical evidence on smart beta performance is generally positive, but it does have its detractors. The empirical analysis in this chapter indicates that, in recent years, smart beta strategies outperform alpha-seeking strategies on both absolute and risk-adjusted-performance measures, but not passive capitalization- or equal-weighted indices.
Chapter 18 Activist and Impact Investing (Michael Sinodinos, Andrew Siwo, and Andrew C. Spieler) This chapter examines activist investing and impact investing. Activist investing is when an investor seeks to make changes to corporate strategies or policies by owning shares of a public company. Activists can be wealthy individuals, pension funds, hedge funds, or even gadflies. Activists may engage management privately, submit proposals via the proxy statement, engage in proxy fights, or seek board representation. Recent trends include increased hedge fund activism and coordinated efforts. Impact investing is when an investor seeks to make investments that have the objective of obtaining a social or environmental benefit alongside a financial return. The integration of environmental, social, and governance (ESG) factors into investing is an approach that has captured the attention of institutional investors globally and brings nonfinancial factors, such as diversity, carbon emissions, and board structure, to the fore.
Chapter 19 Socially Responsible Investing (Randolph D. Nordby) Earning money while doing good for society is the typical goal for socially responsible investing (SRI). However, does achieving this goal require compromising financial returns? Can investors achieve their financial goals while still being true to their values and principles? SRI has become part of mainstream investing and is being integrated into the investment decision-making process at many firms. Yet, no single agreed-upon definition of SRI – or even a consensus on what constitutes best practices for using these factors to make informed investment decisions – exists. This chapter discusses the evolution of SRI investing into today's more traditional environmental, social, and governance (ESG) investing. It also explores the best practices being promoted by top global associations of investment professionals using ESG factors for equity valuation. From a practitioner's perspective, a critical challenge of using ESG data for asset valuation is properly integrating these nonstandardized factors into an asset's valuation process. This area has attracted much attention, but little clarity. Thus, this chapter focuses on providing both a better understanding of the multiple methods of SRI investing and an overview of the best practices for integrating ESG metrics into the equity valuation process.
Chapter 20 Pooled Investment Vehicles (Joseph McBride, Michael Pain, and Andrew C. Spieler) This chapter discusses the four major pooled investment vehicles (PIVs) that dominate the market today: open-end mutual funds (MFs), closed-end mutual funds (CEFs), exchange-traded funds (ETFs), and unit investment trusts (UITs). It also discusses the overall structure and related benefits, drawbacks, and risks of each structure. Additional discussion focuses on the creation and redemption process, net asset value (NAV), premium/discount, tradability, liquidity attributes, tax efficiency, and leverage, as well as indirect and direct costs. The chapter also provides a brief history and general trends involving PIVs and the need to follow a disciplined investment process when evaluating these types of investments.
Part Four: Special Equity Topics
Part Four of the book contains four chapters (Chapters 21–24) that examine special equity topics. These issues include investing in private equity, investing in emerging markets, disclosure regulations in emerging economies, and equity crowdfunding investments.
Chapter 21 Investing in Private Equity (Gaurav Gupta, Tianqi Jiang, and Zhao Wang) Private equity (PE) is an alternative asset class in which a direct investment exists in the equity of a private or a public company. Equities and bonds are traditionally traded in the secondary markets, whereas private equity is a private dealing between an investor or PE fund manager and the issuer company. The term private in PE signifies that the deal occurs in private rather than in public. The risk–reward profile of PE investments tends to be higher than for some other asset classes, resulting in potentially higher rewards. This chapter provides an overview of PE investments dealing with venture capital (VC) and buyouts as well as private investment in public entity (PIPE). It also discusses the long-term investment horizon, illiquidity, capital commitment, capital commitment period, capital call, portfolio diversification, performance, and risk factors involving PE investments.
Chapter 22 Investing in Emerging Markets (Xiaohau Diao, Shantanu Dutta, and Peng Cheng Zhu) Emerging markets offer expanded investment opportunities for global investors. Although emerging market returns are becoming more correlated with developed market returns, reducing the attractiveness of the diversification rationale, emerging markets are still distinct enough to appeal to global investors. Emerging markets offer higher return potential. However, to realize better returns and manage associated risks, investors need to have coordinated investment strategies. They also need to understand various factors associated with capital flows to emerging markets, market characteristics, political dynamics, and valuation challenges. Further, investors should pay close attention to legal protection, asset valuation techniques, corporate governance, and the regulatory environment that may substantially affect investment returns. The goal of this chapter is to examine issues related to capital market integration in an emerging market setup and to discuss various institutional strategies for making better investment decisions.
Chapter 23 Disclosure Regulations in Emerging Economies and Their Impact on Equity Markets (Xiaohau Diao, Shantanu Dutta, and Peng Cheng Zhu) Corporate disclosure and financial reporting convey valuable information to shareholders and market participants. Although financial reporting is routinely done, mostly in a regular interval, according to regulatory requirements, corporate disclosures could be voluntary or mandatory depending on the nature of the information. This chapter focuses on emerging markets corporate disclosure-related regulations such as environmental and corporate social responsibility (CSR) disclosure, private meeting disclosure, and insider trading-related disclosure that attract interest among regulators, practitioners, and academics. The empirical evidence shows that implementing these regulations is not particularly effective. In many instances, authorities fail to identify or take adequate actions against violators. However, the regulatory bodies appear to have become more careful in recent years, which is likely to enhance the effectiveness of these disclosure regulations.
Chapter 24 Equity Crowdfunding Investments (Dianna Preece) This chapter examines equity crowdfunding, which was an innovation introduced in the Jumpstart Our Business Startups (JOBS) Act of 2012 that many expected to be a boon for startups. Signed into law with bipartisan support, the JOBS Act intended to enable Americans to invest in new companies and their founders. However, the Securities and Exchange Commission (SEC) took years to create regulations to govern equity crowdfunding. After being launched in May 2016, equity crowdfunding has grown more slowly than expected. Early-stage investments are risky, and many nonaccredited investors may lack the sophistication to assess risks. JOBS 3.0 is expected to fix any existing problems but has yet to pass the U.S. Senate. Despite these roadblocks, equity crowdfunding is on the rise in both the United States and abroad, though investors are, so far, less plentiful than expected. Research on U.S. equity crowdfunding risks and returns is scant.
SUMMARY AND CONCLUSIONS
Equity securities are an important component in the portfolios of both individual and institutional investors. Including an equity component has several benefits, including portfolio diversification and potentially
