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Death Taxes and Short-Term Underperformance GE Funds 2011.pdfOur mission: the Brandes Institute investigates potential opportunities arising from the influence of behavioral and structural factors on global investing. Research Projects: The Role of Expectations in Value and Glamour Stock Returns (June 2011) When value and glamour stocks missed earnings expectation targets, what happened to their stock prices over the following year? Prices of value stocks increased when earnings expectations were beat and missed and even when business fundamentals deteriorated. Glamour stocks behaved more predictably, with prices rising and falling after beats and misses, respectively. In this report, the Brandes Institute investigates the role that expectations played in investors assessment of value and glamour stocks to better understand the sequence of events that allowed value stocks to deliver superior long-term returns. The evidence suggests an undercurrent of behavioral error, counters assertions published by select scholars, and provides fresh evidence explaining why value investing historically has been a successful long-term strategy. This is a preprint of an article whose final and definitive form has been published in The Journal of Behavioral Finance [2011] [copyright Taylor & Francis]; The Journal of Behavioral Finance is available online at www.informaworld.com Equity Dispersion: Value Stocks Yet to be Rewarded (January 2011) The correlation of returns for various equity asset classes has been high. In addition, the range or "dispersion" of returns across asset classes and across sectors within those asset classes has been low. These factors have made it difficult for active managers to outperform. But dispersion of valuations remains relatively wide by historical standards, creating a fertile environment for value-based stock pickers. When return dispersion broadens or returns to more normal levels, these undervalued securities may outperform the broader market. Recent Articles: Death, Taxes, and Short-Term Underperformance: Global Equity Mutual Funds (October 2011) In our original Death, Taxes, and Short-Term Underperformance studies, we examined the shortterm underperformance of U.S., non-U.S., and global mutual funds. Our research found that investors in equity mutual funds should expect periods of underperformance both versus the benchmark and relative to peers. Our studies also indicated that even longer periods of underperformance, up to three years, had relatively little impact on some of the better funds ability to generate long-term success. In this handout we revisit and update our previous study on short-term underperformance of global equity mutual funds. Broad is the New Narrow: How Passive Investing Creates Concentrated Portfolios (April 2011) Passive investing, particularly in emerging markets, has become an increasingly popular means of quick, diversified exposure to a particular segment of the markets. Defensive investors, as Benjamin Graham noted, would be best served owning a diversified list of leading companies. Yet its the presumption of diversification that can lead investors astray. Many passive investments are, in fact, extremely concentrated owing to the disproportionate size of its largest holdings and blindly weighting by market capitalization. With emerging markets now the largest region of the equity markets by number of investable securities, they offer opportunities for investors willing and able to invest actively outside of the largest securities.

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