Fusion investing: an esoteric approach to portfolio formation

Date
2012-07-03
Authors
Seetharam, Yudhvir
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Abstract
This study contributes to the debate on active and passive portfolio management by providing an alternate means of constructing an active portfolio. This “fusion strategy” has underpinnings in the realm of behavioural finance, namely the value-growth phenomenon and the momentum effect. The fusion strategy developed in this study was compared against two passive benchmarks and four active benchmarks. All returns are calculated net of transaction costs, initially set to 1% per month per share. Statistical testing, done via stochastic dominance, yielded inconclusive results in the majority of cases. The exception however, was that Fund B stochastically dominated the fusion strategy at second order. This implies that a risk-averse investor would prefer to invest in Fund B. By the use of Sharpe and Treynor ratios, the results were also inconclusive. However, the Sortino ratio shows that the fusion strategy outperforms all benchmarks chosen, except Fund A. The performance of the fusion strategy was also not induced by either a sector rotation strategy, the existence of the January effect or by the level of transaction costs.
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Keywords
portfolio management, behavioural finance, Investing
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