Notebook - Chicago Global


The Asset-Pricing Implications of Government Economic Policy Uncertainty

Uncertainty about the future undoubtedly impacts market participant behavior and thus could influence how assets are priced. Government policy makers not only affect the policies themselves, but also the uncertainty regarding future monetary, fiscal, and regulatory policies collectively referred to as Economic Policy Uncertainty (EPU). Because government economic policies have wide-ranging impacts on firms in all sectors, this type of uncertainty is a type of non-diversifiable (also known as systematic) risk.


In traditional financial economic theory, investors are compensated for bearing systematic market risk with higher expected returns. In other words, investors have a higher demand for assets that hedge against downturn in adverse changes to the overall market, thereby raising prices of these assets and lowering expected returns. Pástor and Veronesi (2013), both professors of finance at the Chicago Booth School of Business, suggest that economic policy uncertainty raises the equity risk premium and is a variable that affects the future investment opportunities. This implies that changes in EPU, like volatility, carries a negative price of risk. In other words, investors are willing to pay (by tolerating lower returns) on portfolios which hedge such risks.

Research Setting

To study whether such an empirical pattern exists, Brogaard and Detzel (2015) provide empirical evidence that economic policy uncertainty impacts equity returns through a time-series as well as cross-sectional analyses. Prior to this research, most extant studies relied on event studies around a particular policy change or an election; it has the advantage of being well documented with a timeline but does not provide a holistic view of EPU as a risk premium. Broggard and Detzel use a news-based measure of policy uncertainty extracted from influential news outlets (Baker et al. (2016)), a measure that allows for a continuous tracking of policy risk. This EPU index is computed by taking the weighted average of three measures of EPU which comprises a news-based measure (given the largest weight), expiring tax provisions, and forecaster disagreement about government purchases and inflation.

They found the estimated relation between economic policy uncertainty and returns for two, three, and six months in the future to be positive and statistically significant, meaning that EPU positively predicts expected excess returns and does in fact raise the equity risk premium. For quarterly returns, a one-standard deviation increase in EPU raises the expected excess quarterly returns by 6.12% annualized. These time series analyses contain a variety of time-series forecasting regressions, regressing market log excess returns (for different time periods) against EPU while controlling for variables such as monthly historical volatility, monthly implied volatility, 10-year treasury yield and several other macroeconomic variables to emphasize the incremental statistical power from EPU. The results suggest that compared to existing measures of uncertainty, EPU is different and carries additional information not contained in measures like the VIX, the forward looking 90-day volatility of the S&P 500 index which is also referred to the “fear index” and used to proxy for the general uncertainty within the market.

The paper also found that EPU affected cross-sectional returns of stocks, even when accounting for standard Fama-French and liquidity exposures. Portfolios positively correlated with EPU rise in value with EPU rises. Therefore, investors will be willing to pay a higher price (and tolerate lower returns) for portfolios that are more positively correlated with EPU. The paper shows that within the Fama-French 25 independently sorted size and momentum, shorting the portfolio with the highest exposure to EPU and going long the one with the lowest exposure to EPU delivers an average of 5.53% annual alpha relative to standard risk factors.

What does that mean for investors?

Following periods of higher economic policy uncertainty, equity market returns tend to generate higher returns. Investors who can tolerate such risks will tend to be rewarded for staying in the market during periods of heightened economic policy risks. In addition, portfolios that serve to hedge these risks tend to have lower returns. Although not every risk is compensated for with more average returns, economic policy uncertainty appears to be a relevant priced risk factor.

Investors should be mindful of the levels of economic policy uncertainty risks they are willing to tolerate. Portfolios that tend to lose value with EPU rises tend to have higher average returns on average for bearing the EPU risk. However, an optimal investment portfolio should be tailored to the risk tolerance of the investors rather than simply aiming to maximize returns at any costs. One way to manage EPU risk is to blend the portfolio exposure to other imperfectly correlated sources of returns, allowing diversification across return drivers to reduce the overall portfolio risk to help investors remain patient and disciplined even during times when economic policy uncertainty is high.

To see how the Chicago Global’s portfolio performs during periods of higher economic policy uncertainty and how the EPU risk exposures compares with the global market benchmark, login to read our research note.


Baker, Scott R, Nicholas Bloom, and Steven J Davis. 2016. “Measuring Economic Policy Uncertainty.” The Quarterly Journal of Economics 131 (4): 1593–1636. doi:10.1093/qje/qjw024.Advance.

Brogaard, Jonathan, and Andrew Detzel. 2015. “Policy Uncertainty The Asset-Pricing Implications of Government Economic Policy Uncertainty.” Management Science 61 (1): 3–18.

Pástor, Luboš, and Pietro Veronesi. 2013. “Political Uncertainty and Risk Premia.” Journal of Financial Economics 110 (3): 520–45. doi:10.1016/j.jfineco.2013.08.007.


In this thought-provoking article, Chicago Global’s advisor Larry Siegel and Paul Kaplan of Morningstar discuss the hazards of extrapolating data from the best performing stock markets over the past 120 years, an era marked by unprecedented wealth generation. Investors risk forming overly optimistic beliefs based on the performance of markets that survived and thrived during this period. Bias arises when failed investments go unobserved or are ignored. Larry and Paul show that equity markets fared best in countries with stable governments, expansive immigration policies and resilient economies.

A key take-away is that survivorship bias, along with behavioral biases — including familiarity, trend-chasing and disposition effect biases — lulls investors into believing that whatever had been profitable in past will continue. Investors must resist the impulse to chase recent performance and hold concentrated static portfolio, as these strategies are prone underperformance. A regularly rebalanced portfolio broadly diversified across assets and geographies is a more effective investment strategy over the long-term.

Accounting For Survivorship


On August 28 2020, the Chicago Booth Alumni Club of Singapore, Hong Kong and Zurich hosted a joint webinar inviting alumnus: Ivan Chelebiev (’16), Christina Lee (’13), and Oliver Banz (Moderator, ’05) to discuss the impacts of recent events on Global markets and trends in Wealth Management.

Click for a pdf version of the summary

Recent Trends in the Region

Christina (Hong Kong): The recent unrest in Hong Kong resulted in a large outflow of assets from ultra-high net worth individuals (UHNW) and family offices. Their new destinations being:

  1. Singapore; due to its proximity, similar time zone, and low language barrier
  2. UK; due to the pound weakening, low real estate price, and its ties to Hong Kong
  3. US; because it has not signed a tax data sharing treaty with China. This implies that US wealth managers do not have to disclose information about their clients.

Ivan (Singapore): Singapore is building a fund management destination to rival the Cayman Islands. Currently, a Cayman domicile is the gold standard for hedge funds due to its tax advantages and proximity to the US. However, Singapore has put up a whole-of-government effort to establish a new hotspot for managers by matching the tax advantages and subsidizing the entire value chain. Since it is a government initiative, although speed might not be the project’s biggest strength, the scope certainly is.

New Trends and Regulations in Asia

Christina: In Hong Kong, we are seeing a rapid increase in the number of family offices and trusts being set up by UHNW individuals due to the changes in regulations, increasing sophistication of investors, and a shift in preference toward more flexible services by the younger generation within UHNW families. Furthermore, seasoned bankers are leaving bulge bracket banks to launch their own advisory practices backed by these family offices.

China has recently imposed new anti-tax evasion regulations and adopted the Common Reporting Standard, a deal to share account information between OECD countries (except US). As a result, there is an increase in administrative tasks that wealth managers need to perform, from performing extensive background checks, to filing additional paperwork. This increases the operating cost of running a wealth management business for Asian clients.

Global markets in the age of Covid-19

Ivan: We are facing a strange, liquidity-driven rally, and it’s moving at “warp speed.”
However, fundamentals always dominate in the end. And this time around the fundamentals are VERY VERY weak.

The Covid-19 recession is unprecedented in every metric: its cause (virus), its depth (worst in 100 years), its duration (shortest in 100 years), the size and scope of stimulus (earliest, broadest, largest policy response in history), it’s market impact (fastest-ever drawdown and retracement), it’s ramifications (social, economic, and geopolitical fallout will be with us for the next five years).

Clearly, Covid-19 is not a civilization-ending event. The best minds in world are racing to solve it. They are backed by unlimited resources. Most likely this is the last pandemic in our lifetimes. We’ll adapt the way we work and live, just like we made many changes after 9/11 and the GFC. And we’ll have incredible leaps in technology to contain future viruses. 

On the other hand, reversing globalization is NOT a zero sum game but something far worse. Nations will strive to become less dependent on one another, especially for food and medical supplies. This will have strategic implications. Nations will have less of a stake in each other’s wellbeing. They will focus on dividing the pie rather than working together to enlarge the pie for all. It will be a less prosperous world, and a more troubled one. 

Christina: The market crisis generated mostly excitement among my clients. SARS has taught Chinese investors to see systemic shocks as buying opportunities rather than disasters.

So, what should we do with our money?

Ivan: Historically, the standard allocation framework mixed public and private equity, hedge funds, real estate, and bonds. A large emphasis on bonds made sense as a natural hedge for economic weakness. It was a boring but effective strategy, and it worked while  interest rates marched lower over the last 40 years. However, with rates at 0% for the foreseeable future bonds offer only downside. Furthermore, managers have pushed their mandates to survive in a narrow, tech-driven market. Portfolios that look diversified on paper are mostly relying on growth. There is no ballast in a zero interest rate world.

Against this backdrop, it is critical to diversify across every dimension of risk, and rebalance regularly. Diversification can come in many ways. For personal investors, this might mean selling the large tech stocks that have dominated the market in recent times and buying value stocks. For larger investors, this entails analyzing managers by looking at their actual holdings, rather than assuming labels and categories reflect their true risk exposures.

Additionally, the recent surge in commodities such as gold and silver appears to be driven by pandemic-induced fears about debt, inflation, and geopolitics. Each of those can be hedged directly rather than by buying gold. Gold’s value and its defensive properties are highly speculative and don’t merit a large allocation.

*This is only a brief summary of the webinar. To learn more, please visit:

**This document has been provided solely for information purposes and does not constitute an offer or solicitation of an offer or any advice
or recommendation to purchase any securities or other financial instruments


Investor Behavior

“Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing” is the prominent disclaimer in every advertisement of mutual funds that we come across. While this disclaimer is true, are mutual fund investments only subject to market risks? Over the past 5 years, the S&P 500 has returned 12% per year but the average equity investor has only earned 8% per year (DALBAR 2020). If markets were the only risk factor, then why is the gap between market return and investor return so large?

Return Chasing Behavior

Investor behavior plays a large role in investment performance. Particularly, investors’ propensity to chase returns by jumping from one fund to another based on historical returns. Investors tend to buy funds after a period of good performance and sell funds after a period of poor performance (“buy high, sell low” phenomenon). The underlying assumption made by investors is that past performance can help in predicting future performance. However, is this a good assumption for mutual funds?

Persistence in Mutual Fund Performance: Indian Context

If mutual fund returns were persistent, we could conclude that past performance of mutual funds tells us something about future performance. A recent study conducted by shows that there is no persistence in mutual fund returns in India.

The study ranked all the mutual funds into deciles (10 equal sized bins) based on 1 year past performance. The returns of these funds were then observed 1 year into the future. The results are as follows:

  • Only 13% of the best performing funds (top decile) still remain best performers after a year
  • 52% of the best performing funds give above average returns after a year (coin toss, isn’t it?)
  • 19% of the best performing funds become the worst performing funds (bottom decile) after a year

This exercise was repeated with a 3 year and 5 year look back period. The results were as robust.

Selecting mutual funds based on past performance might seem intuitive but the data is clear that there is no persistence in performance. The Indian mutual fund industry isn’t an outlier. There have been numerous studies on this topic globally and the conclusion is the same in (almost) every country*. The popular disclaimer “Past performance doesn’t guarantee future returns” holds true and should be taken seriously.

Link to the video –

Persistence of mutual funds in other countries: 

*American Context: Carhart M, March 1997, ’On Persistence in Mutual Fund Performance’, The Journal of Finance, Vol. 52, No. 1, pp. 57-82

*British Context: Cuthbertson K, Nitzsche D & O’Sullivan K, September 2008, ’UK mutual fund performance: Skill or luck?’, Journal of Empirical Finance, Vol. 15, pp. 613-634

*Chinese Context: Dutta A, Zhao Y, Yi R & Su R, July 2012, ’Persistence in Mutual Fund Returns: Evidence from China’, International Journal of Business and Social Science, Vol. 3, No. 13

*Danish Context: Christensen M, March 2005, ’Danish Mutual Fund Performance – Selectivity, Market Timing and Persistence’, Finance Research Group, Working Paper No. F-2005-1

*Greek Context: Babalos V, Caporale G, Kostakis A & Philippas N, 2008, ’Testing for Persistence in Mutual Fund Performance and the Ex Post Verification Problem: Evidence From the Greek Market’, European Journal of Finance, Vol. 14, pp. 735-753



The following is an excerpt from the foreword written by our very own Chicago Global Board of Advisors member Larry Siegel for a new monograph titled “Popularity: A Bridge Between Classical and Behavioral Finance” by Roger Ibbotson, Thomas Idzorek, Paul Kaplan, and James Xiong.

Why does value investing work? Why do other factor strategies work? For that matter, why does any active strategy — meaning, any strategy other than cap-weighted indexing — “work” in the sense of having a reasonable chance of beating the cap-weighted index other than by random variation?

The Classical Answer

The answer could arise in classical finance, or behavioral finance, or both. Classic finance posits that all investors are rational and fully informed. This starting point seems to lead to a recommendation to index all assets, but that is not necessarily where it leads.

While most of classical finance focuses only on risk and expected return, investors differ in their tastes and preferences, and assets differ in their characteristics other than risk and expected return. These observations, which form the basis for the current monograph, are the essence of an article that predates this monograph, written way back in 1984, by Roger Ibbotson, Jeffrey Diermeier (of Brinson Partners, and now the Diermeier Family Foundation), and me.

The article, entitled “The Demand for Capital Market Returns: A New Equilibrium Theory,” incorporates investor preferences, sometimes called clientele effects, into an equilibrium framework conforming to neoclassical economics and classical finance. This framework asserts that economic agents are rational utility maximizers. Classical finance does not say what information agents should not look at, as long as they behave rationally.

For example, one investor could be strongly averse to illiquidity while another is not, or one investor may pay taxes at a different rate than another. Everybody’s different. Moreover, we differ in more than just risk aversion, so we’re motivated to hold substantively different portfolios, not just index funds levered up or down to the desired risk level. I’ll revisit these ideas in greater detail later, where I indicate how our 1984 effort links with the current monograph.

But that observation alone doesn’t mean you can beat the market. Now let’s add in the fact that some of the investor groups that like or dislike an attribute common to a group of assets are numerous and control a lot of money. If a large, well-funded group of people avoids (or pays less for) an asset because it has an attribute they don’t like, the asset might be attractively priced from the viewpoint of an investor who doesn’t care about the attribute. An active manager might buy that asset.

A portfolio of assets accumulated according to this rule should beat the market (on average over time). This clientele effect is consistent with both classical finance, broadly understood, and the possibility of adding alpha.

The Behavioural Answer

Active investment strategies could also work for behavioural reasons, in the sense of allowing for the possibility (I’d call it a fact) that not all investor preferences are rational or well informed. Researchers have accumulated a great deal of evidence that investors are not fully rational and are far from fully informed. They do all kinds of crazy stuff. It seems like it ought to be profitable to take advantage of that fact.

Reducing the Complexity of the Market

Whichever story you subscribe to, classical or behavioral — and both could apply — the market is very complex, containing far more securities than it is practical to analyze individually. To reduce the units of analysis to a manageable number, researchers and investment managers have compressed securities and their attributes into factors, such as value, momentum, liquidity, profitability, and so forth. This technique is well known and I don’t need to describe it here.

But the number of factors observable in the markets is still vast, far more so than logic suggests should exist. So it would be a valuable contribution to identify a common theme that links the factors in a way that makes economic sense, consistent with the clientele-driven equilibrium described in the 1984 paper. That is one of the aspirations of the new Research Monograph by my former business associates and friends, Roger Ibbotson and Paul Kaplan, and their current colleagues, Thomas Idzorek and James Xiong. Hereafter IKIX.

The phenomenon that IKIX have identified as explaining a great deal about the cross section of equity returns is popularity or, to stand the question on its head and ask what explains excess returns, unpopularity. Specifically, any characteristic that drives away investors — for whatever reason — and causes the demand curve for an investment to shift to the left (meaning less demand) is a characteristic you should seek out. Popularity is not, itself, a factor. It is a framework for understanding and predicting factors.

How Popularity and Other Factors Set Prices

This monograph incorporates the popularity framework into an equilibrium setting, meaning that the quantity of each asset supplied equals the quantity demanded and all assets are voluntarily held by somebody. Such an equilibrium can apply under the assumptions of either classical or behavioral finance.

As long as aggregate preferences are relatively stable over time, they will play a role in setting asset prices. The preferences can be rational (classical) or irrational (behavioral) or any combination. The investors with weaker aversion to generally disliked characteristics will load up on the less popular stocks, which will have higher expected returns. Those with stronger aversion to those characteristics will willingly accept lower expected returns. Since the equilibrium includes all preferences, the popularity framework provides a “bridge” between classical and behavioral finance.

Conclusion: It’s Hard to Beat the Market, but Not Impossible

Investing in stocks or other assets that other people don’t want has a long and rich history, proceeding from Graham and Dodd [1934] through Warren Buffett and many scholars, active managers, hedge fund entrepreneurs, and private equity managers. They all take advantage of some aspect of the popularity hypothesis set forth in this monograph.

Yet investing in unpopular assets is hard. First, they’re typically unpopular for a reason. Mounting losses instead of bountiful profits, declining market share or a shrinking market for one’s product, an unusual loading of debt, and other characteristics that drive investors away are often indicators of continued poor performance rather than of what one value manager optimistically calls “troubles that are temporary.” This is the value trap, the pitfall that awaits investors who too blindly follow an unpopularity formula.

There’s another reason that investing in unpopular assets is hard: active managers, including those believing themselves to be contrarian, engage in herd behavior. Their quantitative screens all tend to identify the same stocks. If managers focusing on unpopular assets have already formed a cluster of demand for an asset — even if that cluster represents a minority opinion — that asset may no longer be attractively priced.

Following the above to its logical conclusion, the well-known fallacy of aggregation comes into play: any strategy or factor that is widely enough used will fail. It is easy to imagine so much money flooding into an unpopularity strategy that there are no longer any unpopular assets. If that were to come to pass, the whole world would become a gigantic closet index fund. We financial economists really do lose sleep over thoughts like that.

Despite these concerns, the market has rewarded value investing and other strategies, such as those advocated in this book, that rely on buying what other investors are avoiding. Value, for example, has won over very long periods of time (back to 1927, say Fama and French) and by an economically significant margin. But this has not been the case recently, when a small number of very large and fast-growing companies have beaten almost everything else. Like all other trends in investing, that one will surely turn sooner or later.

The investment principles outlined in the foreword and monograph are consistent with the Chicago Global approach to investing, highlighting long-term staying power and outperformance and avoiding short-term fads. The full monograph is available for free through the CFA website.



Congratulations to one of Chicago Global’s Board of Advisors – Professor Samuel Hartzmark for winning the 2019 Exeter Prize for the best paper published in the previous calendar year in a peer-reviewed journal in the fields of Experimental Economics, Behavioural Economics and Decision Theory.

Sam and Kelly Shue (Yale) are winning the award for their paper titled “A Tough Act to Follow: Contrast Effects in Financial Markets” which documents that investors appear to compare a firm’s performance with the performance of a firm immediately preceding its own announcement, creating predictable returns.

From the announcement email, “The contrast effect has previously been shown to be a psychological bias that inversely distorts humans’ perception of information… individuals perceive signals as higher or lower than their true values, depending on what the recently observed signal was – even if that “benchmark” signal is actually irrelevant for the present evaluation.

While this bias has been demonstrated primarily in controlled laboratory environments, evidence from the field is more limited but available for individual decision making contexts of, for example, speed dating and consumer housing and commuting choices.

Hartzmark and Shue’s paper goes substantially further by providing evidence for the existence of contrast effects in the presence of typically disciplining arbitrage opportunities and expertise; that is, in sophisticated markets with professionals who make repeated investment decisions. Hartzmark and Shue show that contrast effects to preceding earnings’ announcements of oftentimes even irrelevant firms distort equilibrium prices and capital allocation.

Furthermore, they find that this costly mispricing effect reverses within approximately 50 trading days. Finally, the authors argue convincingly that this contrast effect likely biases perceptions of news rather than expectations. Together, Hartzmark and Shue’s paper demonstrates to us that markets may not be as efficient as economists typically assume:  Prices react not only to the absolute content of information but are also prone to perceptional errors stemming from relative comparisons.”



From a research summary in the June 2019 issue of the NBER Digest (PDF embedded below) written by Steve Maas at the National Bureau of Economic Research. Our annotations are in bold.

Drawing on newspaper stories about stock market volatility, Scott R. BakerNicholas BloomSteven J. Davis (the William H Abbot Professor of International Business and Economics at the University of Chicago Booth School of Business), and Kyle J. Kost examine the importance of various types of news in contributing to swings in equity prices.

The researchers create an Equity Market Volatility (EMV) tracker that links articles about economic, political, and national security developments to the VIX index, a measure of expected stock market volatility based on option prices. In Policy News and Stock Market Volatility (NBER Working Paper No. 25720 – PDF Embedded below), they report that movements in their EMV tracker closely mirror the ups and downs in the realized and option-implied volatility of the S&P 500 between January 1985 and October 2018.

The EMV tracker is constructed by searching articles published in 11 major U.S. newspapers, including The New York Times, the Los Angeles TimesThe Dallas Morning News, and The Wall Street Journal.

The researchers classified the EMV articles into about 30 categories of factors that influence volatility. These included 10 related to general economic factors, such as macroeconomic news, labor disputes, and financial crises. The rest related to political or policy factors such as taxes, government spending, and monetary policy. Each category is associated with a set of search terms. In most cases, journalists who authored the articles tied instability to factors in multiple categories.

News about the macroeconomic outlook appears in 72 percent of the articles that enter into the EMV tracker. This category covers reports about GDP, inflation, housing starts, jobs, and other indicators of the broad economic outlook. That compares with 44 percent of EMV articles in the “commodity market” category, citing terms such as wheat, steel, and oil pipeline. Journalists attributed volatility to news about interest rates in 31 percent of the articles; national security matters were cited in just 13 percent of the articles.

The share of news stories about market volatility that fell into each category fluctuated over time. For example, the period since the 2016 election has seen a sharp increase in trade policy concerns as an apparent source of market volatility.

The researchers created not just an overall EMV tracker, but several category-based versions as well. The EMV tracker for macroeconomic news jumped in response to the October 1987 market crash, the Russian financial crisis, and the 2008–09 global financial crisis. In contrast, it registered little reaction to the Enron and WorldCom scandals. The “financial crisis” EMV tracker has registered consistently higher volatility in the years since the 2008-09 meltdown, but it also reacted strongly to earlier crises such as those involving the Mexican peso in 1994 and the Russian and Asian financial crises in 1997-98. An EMV tracker for petroleum markets, using such search terms as oil, Alaska pipeline, and Keystone pipeline, mirrors most movements in oil-price volatility but missed badly during times of economic crisis like the 1987 stock market crash and the 2008-09 global financial crisis.

News about policy matters is an important and growing contributor to volatility. The researchers find that 35 percent of EMV articles refer to fiscal policy, mostly taxes, 30 percent discuss monetary policy, 25 percent refer to one or more forms of regulation, and 13 percent mention national security. They find “an upward drift over time” in the share of articles about market volatility that discuss policy matters, with a peak contribution of policy matters in 2017-18.



From a research summary in the June 2019 issue of the NBER Digest (see embedded PDF below) written by Linda Gorman at the National Bureau of Economic Research. Our annotations are in bold.

Investors increase the share of equities in their portfolios by about 0.7 percentage points when the return that they expect to earn on stocks rises by 1 percentage point.

Textbooks in economics and finance often caution investors against trying to “time the market,” but survey evidence suggests that there is substantial variation over time in the return investors expect to earn by holding corporate stocks. How does such variation in expected returns translate into portfolio choices? In Five Facts about Beliefs and Portfolios (NBER Working Paper No. 25744 – PDF embedded below), Stefano Giglio (formerly at the University of Chicago Booth School of Business)Matteo MaggioriJohannes Stroebel, and Stephen Utkus use an online survey of Vanguard customers’ beliefs about future stock returns, GDP growth, and bond returns to compare investors’ expectations with their subsequent behavior.

Randomly chosen Vanguard customers participated in online survey waves from February 2017 through August 2018. There were about 2,000 survey responses per wave. If a customer responded in a wave, he was contacted again in subsequent waves. About 35 percent of the responses came from investors who responded to only one survey. Over 25 percent of respondents participated in at least four survey waves.

Compared to a nationally representative set of investors, survey participants tended to be older — the average age was 58.7 — and richer. Respondents had an average of $467,000 invested with Vanguard. The average expected one-year market return among survey participants was 5.23 percent.

The survey data show that there is a positive relationship between an investor’s expectation of the return in the next year on a stock portfolio and that investor’s portfolio composition, but that the share of the portfolio allocated to equities is relatively less sensitive to changes in expected return compared with predictions from frictionless benchmark macrofinance models. On average, an investor expecting a 1 percentage point increase in returns over the next year increases portfolio equity holdings by about 0.7 percentage points.

While this sensitivity of portfolios to beliefs is lower than in frictionless models, there is substantial heterogeneity in that sensitivity across investors lines up with different frictions investors face. Portfolios in tax-advantaged accounts were more sensitive to changes in investors’ expectations than portfolios subject to capital gains taxes, especially if holdings were above $100,000. Portfolios in institutionally managed defined-contribution plans were about half as sensitive to changes in expectations as portfolios in individually managed plans. Investors who paid more attention to their accounts, investors who traded more frequently, and investors who were more confident in their beliefs, all had portfolios that were more strongly aligned with their expected stock returns.

There are large persistent differences across individuals in the expected stock returns. Individual fixed effects account for more than half of the variation in expectations: beliefs of optimists and pessimists are both far apart and persistent. These expectations are not well predicted by observable characteristics such as gender, age, wealth, or geographic location.

The survey asked about expectations that range beyond stock returns, and individual expectations tend to be correlated across responses. Beliefs about GDP growth and short- and long-run stock expectations are positively correlated. Those who think a stock market disaster is more likely also expect lower future cash flows and lower future returns. The empirical results imply that investors disagree about the very-long-term evolution of the market price, and that this disagreement plays an important role in determining investor beliefs. They also suggest that survey data can reveal beliefs relevant for actual investor behavior, and therefore emphasize the potential for survey data to inform macro finance theories.



This piece collects tributes reflecting on Jack Bogle’s contribution to the financial services industry over his long and illustrious career. As the world markets fluctuate and fund managers fight to gather assets, it is worth reflecting on the state of the fund management industry now, which was largely disrupted by Jack Bogle.

Excerpts and quotes are from (1) Rob Arnott from Research Affiliates, (2) Ted Aronson from AJO, (3) Cliff Asness from AQR, (4) Tamar Frankel from Boston Univeristy, (5) Robert Huebscher from Adviser Perspectives, (6) Burton Malkiel from Princeton University, (7) Don Phillips from Morningstar, and finally (8) our very own Larry Siegle from the Chicago Global Advisory Board and CFA research institute.

Originally from an Adviser Perspectives piece (see attached PDF below) on January 30, 2019 collated by Ted Aronson, Larry Siegel, and Robert Huebscher.

Has anyone in the past century disrupted the world of investing (and perhaps finance more broadly) more than Jack Bogle? I think not. Sure, Bill Sharpe, Harry Markowitz, John Burr Williams, Warren Buffett and his mentor Ben Graham, have all had lasting impact. But, Jack begat the retail index fund industry, asset management through a mutual company owned by its customers, fee wars (he was hardly the first to play that game, but he played it with gusto), and the list goes on. Even though he was a vocal critic of ETFs, and of our own idea of the Fundamental Index, neither would likely exist today without the astonishing prior successes of cap-weighted indexing.

He was inspiration for my decision to launch Research Affiliates; a few months before launching the company, I had dinner with him to pick his brain. He started the Vanguard Group at age 46; I started Research Affiliates at age 47. He urged me to proceed, with the counsel: “Until you try it, you cannot know how much fun you’ll have!” Sure, we differed on smart beta and fundamental indexing. But, it was always with mutual fondness and respect. He was a curmudgeon and an occasional scold, whom we could all love for his pithy insights and for his demand that we all look to “do the right thing.” He truly put clients first. Obviously, he became rich. But, he did well by doing good – far too rare in the world of finance. His customers benefited from his efforts scores of times more than he did. He was one of my heroes. I will miss him very much.

From Rob Arnott, chairman, Research Affiliates, Newport Beach, CA

I was a FOJ – friend of Jack! – for well over 40 years. I adored the man – his wit, charm, intelligence, energy, drive, generosity (time and treasure), books and articles. Jack will be remembered for the above, for decades to come. But what will be remembered for the rest of time is what he did for global securities markets. Jack democratized capital market returns

Ted Aronson, founder and CEO, AJO, Philadelphia, PA

Though we knew it was imminent, the day we lost Jack, nevertheless, still felt shocking. While perhaps unlikely, given our age and investing style differences (everyone knows an indexer and a quant active manager can’t be friends, right?) we had become quite close over the years. He was such a force for good, and had such vitality, it’s difficult to imagine the world without him. He was one of the last heroes and one of the last old school gentlemen. And up to the very last he was working! He was writing his business memoir (and a history of Vanguard) and commenting widely and, of course, honestly and bravely, on the burning investing issues of the day. Put simply, no single person has ever done more for investors while asking less for himself. Nobody comes within a mile. We won’t see his like again.

Cliff Asness, founder and CEO, AQR Capital Management, Greenwich, CT, reprinted from Barron’s with permission from the author.

Jack Bogle sought to charge lower investment advisory and trading fees and yet raise the overall income for the advisory and management institution. How did he do that? (i) He reduced the problems of brokers commitment and sales-talk by paying brokers salaries. (ii) He in fact vested the ownership of the adviser in the investors. He created a large group of cooperative actors. (iii) Thus, he changed both structure, allocation of costs and culture of Vanguard.

To do that he had to fight for legal change and ensure an internal unique culture. Not surprisingly he attracted cost-sensitive long term investors. Jack Bogle was a unique consistent realistic dreamer for decades.

He left a legacy demonstrating that one could (i) reduce costs for investors (ii) attract personnel that cooperated among themselves and sought to serve the investors (iii) create a trustworthy fiduciary service operation and (iv) not only grow, but become an enormous, rich, and creative organization and a model for all to follow.

Jack Bogle was a fiduciary. It is not surprising that he was an adviser to the Fiduciary Institute. He will continue to live with us and guide us.

Tamar Frankel, professor of law emeritus, Boston University, Boston, MA

I had the privilege of reading the other tributes that appear here before I wrote mine. I will not repeat what others have said so eloquently, except to say that I agree with every word that was written.

I will comment on one aspect of Jack’s career that, perhaps, has not been sufficiently highlighted. He continued to make valuable contributions and to be intellectually engaged, well after he left his day-to-day position at Vanguard. Indeed, judging from Jason Zweig’s tribute, he was at his desk until shortly before his death. It is rare to find someone with the intellectual stamina and drive to pursue their profession so late in life. But working on behalf of investors was his passion, he wasn’t willing to give it up.

His achievements truly spanned his lifetime and for that he should be a role model for all of us.

Robert Huebscher, founder and CEO, Advisor Perspectives, Lexington, MA

Jack Bogle was a loyal Princeton graduate, who supported his University with both financial and intellectual contributions. Others will surely comment about these many contributions. The one I know best concerns his founding support of the Pace Center for Civic Engagement. Jack saw the Center as the embodiment of his moral conviction, that the purpose of life was to help make life better for others rather than to seek personal gain for oneself. The now-long-established success of the Pace Center, together with the new program of Bogle Fellows in Civic Service (established by Jack’s son and daughter-in-law in his honor), means that Jack’s commitment to service is well known in the Princeton community. What may be less known is how his undergraduate experience shaped his entire business career. The way I like to tell the story to Princeton audiences is as follows. Some time ago – at a sister institution in New Haven, Connecticut – an undergraduate economics concentrator named Fred Smith wrote a thesis about the way packages were being delivered in the United States. Smith argued that the U.S. Postal Service was run inefficiently and that a competing private delivery service was badly needed. The thesis was given a grade of C and was described as being totally impractical. Smith then went on to found Federal Express, on the basis recommended in the thesis.

At Princeton, a young economics student named Jack Bogle wrote his thesis on the mutual fund industry. He described the distribution system as antiquated and the fees that were being charged to ordinary investors as unconscionably excessive. He documented that the net returns being earned by investors were wholly inadequate and suggested that a new kind of mutual fund company was badly needed. I could not find the grade Jack Bogle received, but it must have been a superior one since he graduated with high honors, and the senior thesis represented at least half of his final standing in the department.

Jack went on to establish the Vanguard Group, along the lines outlined in that prescient senior thesis. Vanguard today is a $5 trillion enterprise and the most consumer-friendly financial institution in the world. Because of Jack’s vision and moral commitments, Vanguard investors have saved billions of dollars in fees and have been able to achieve better financial security and a more comfortable retirement. Warren Buffett has rightly described Jack Bogle as the best friend the ordinary investor has ever had.

Burton Malkiel, professor emeritus, Princeton University, Princeton, NJ

A call from Jack Bogle became a rite of spring for me. Each April, he would call in advance of the Investment Company Institute’s annual General Membership Meeting to graciously ask if I could join him for dinner in Washington. “I need someone to talk to at these ICI functions,” Jack would lament. “Everyone over 50 years old averts their eyes when they see me coming at the ICI,” said Jack, noting that many senior executives would avoid him. “On the other hand, everyone under 35 comes up and wants to shake my hand, saying that I inspired them to get into the fund business!” Now Jack may have exaggerated the neglect of the older generation, but he certainly didn’t overstate the admiration of the younger ones. He was a beacon for many of us in the industry and a reason that we took pride in being a part of it.

One ICI meeting in particular stands out for me. It was the 50th anniversary of the meeting and the ICI held a special dinner, to which Jack and I were both invited. As I listened to industry leaders praise their many accomplishments, it occurred to me that when the ICI celebrated its 100th anniversary, all of the celebrated people in that room would be long forgotten, save one –Jack Bogle. His achievements so tower over those of his peers that he truly was in another league. While other industry leaders fought over near-term market share, he secured a place in history and created the only organization represented in that room that one could say with great confidence would stand the test of time and still exist in its current form 50 years from now

Jack was a man for the ages. Investors for generations to come will benefit from his life’s work.

Don Phillips, managing director, Morningstar, Chicago, IL

Much has been said about Jack being a great innovator and a hell of a nice guy. I agree with all of it. I’d like to emphasize a different aspect of his accomplishment.

Economic progress is not just new gadgets and rising wages; it’s the declining cost of necessities. Jack is the most recent of a long line of entrepreneurs who’ve made consumers better off through radical decreases in the cost of basic goods and services. This line includes Thomas Edison, whose inventions cut the cost of lighting by an order of magnitude; Henry Ford, who did the same with transportation; Sears and Roebuck; and Sam Walton. Jack Bogle was the kindest and most gentlemanly of this revolutionary bunch.

Jack’s innovation not only dramatically cut costs but increased the quality of the product. As Bill Sharpe pointed out, active management, relative to a fairly constructed benchmark, is a zero-sum game before costs and a negative-sum game after costs. If you can’t reliably beat the market, an investment product that simply holds the market is a better product than a randomly chosen one that tries to beat it.

Jack intuited the difficulty of beating the market and wrote about it in his senior thesis at Princeton, two decades before Sharpe’s CAPM and market model. But it was Sharpe who created the formal framework that would allow index funds to be born, flourish, and later grow to be a dominant force in investment management. With Sharpe’s work in place, all that remained was for an entrepreneur to implement it. Both the Wells Fargo team and Jack deserve credit for successfully commercializing portfolio theory.

However, Jack also democratized it, bringing its benefits to every saver who wanted them, and for that he stands out as the foremost investment executive of our time.

Larry Siegel, author and director of research for the CFA Institute, Chicago, IL



As life expectancy increases around the world, investors may soon realize that with longer life also comes a longer liability. Retirement occurs well beyond the “age of 65” as countries around the world increase the retirement ages and eligibility for governmental retirement assistance programs. 2017 Nobel Prizer winner and University of Chicago Booth School of Business Professor Richard Thaler puts it succinctly, “You have to worry about getting unlucky and living to 100.”

For investors, increasing lifespans also means that standard rules of thumb for consumption and investments like the “5% withdrawal rule” or the 60-40 portfolio may not apply as equity risk premia around the world adjust to a global changing demographic. Research conducted at Northwestern finds that 75% of those with 401(k) plans may not be enough to sustain an investor’s current living standard, with a 2017 survey finding that 63% of baby boomers fear running out of money in retirement more than death itself.

In a paperwith Thomas Totten, our advisory boad member Laurence Siegel considers expanding the traditional portfolio with a lifetime income guarantee. They write, “

“Why is it so difficult to save for retirement in such a way that the retiree feels financially secure for the rest of his life? Why is so much effort spent on investment optimization, withdrawal rates, and other strategies designed to increase the likelihood of having enough money in retirement without actually guaranteeing it? The reason is that longevity risk, the risk of outliving one’s money, is the chief risk faced by retirees and it cannot be hedged through conventional investing. Life can be very long (we don’t know in advance how long), the amount of money needed in a long retirement can be huge, and most people don’t have it.

The only way to hedge longevity risk is with some kind of guarantee of lifetime income. Such a guarantee can come from a defined benefit (DB) pension plan, a commercial annuity, or some other source. Guaranteed lifetime income products take advantage of the insurance principle, the idea that (in the present case) those who die young help to pay for those who live a long time. But DB plans are on the ropes, and annuities have never caught on.”

Combining a retirement portfolio with a mix of annuities and equity exposure from the beginning portion of the life cycle before retirement reduces the risk of running out of resources while guaranteeing a minimum sustainable living standard after retirement.

As a secondary consideration, for legacy planning, investing in long term securities that grow with the economy help future generations hedge against rising prices, productivity, and changing economic landscapes.