SANTA CRUZ, Calif - Consultant John J. Regan and Professor Russ Wermers hope to sweep away the work of others in style attribution analysis in a quest to identify when domestic equity styles are about to come into or go out of favor.
Their complex research project also seeks to tell what causes styles to rotate into and out of favor; and to foretell shifts in momentum of sectors in the market, what causes shifts and which sectors will shift.
Their research is examining the domestic equity portfolios of more than 200 managers, looking at every stock they held in quarterly periods for the last 10 years.
"We may even look at the portfolios on a monthly basis," said Mr. Regan, who last year left Morgan Stanley Dean Witter & Co., where he was a senior consultant, to start Performance Research and Design Inc., Santa Cruz, a firm that does traditional consulting for pension fund clients, research in the public equities market, and research and product development in alternative investments.
"That's a lot of securities," acknowledged Mr. Regan, who is president of PRD.
He expects the research to be completed sometime around September.
He hopes the results of the study "would suggest a way for pension sponsors to rotate into and out of styles as they come into or out of favor."
But he doesn't mean market timing, because the strategy would not move into or out of equities, or even sector timing. "We are not attempting to time the market ... or to time when the next sector rotates," he said. "We are actually tracking the rotation of sectors, as evidence shows they are rotating."
It might take six months of evidence to confirm the trend and trigger a tilt in style allocation, he added. And then the strategy won't move completely into and out of styles, but only tilt the equity allocation toward favorable styles.
"Through a combination of careful analysis and some tilting," he said, large plan sponsors that now have allocations in five or six equity styles can increase returns 200 to 300 basis points a year above their historical returns.
If promising, the results could lead pension funds to restructure their portfolios to take advantage of the findings, Mr. Regan said. Pension plan sponsors would skew their domestic equity allocations to favor certain managers and styles with more confidence than they do now, he added.
Mr. Regan has enlisted Mr. Wermers, professor of finance at the Robert H. Smith School of Business, University of Maryland, College Park, to do the study. PRD is financing the work. The portfolio data for the study are coming from managers, pension plans and other sources, Mr. Regan said.
The study is beginning with data from 1991, the start of what Mr. Regan said is the second 10-year cycle of a nearly 20-year bull run in the stock market, beginning in 1982.
"We are attempting to do a complete market cycle," he said. "The theoretical beginning of this cycle was in 1991, and we are coming to the theoretical end of this market cycle with the current drawdown in the market."
Among the factors they are examining is how market cycles rotate, favoring at times growth or value, small- or large-cap stocks.
Also, it will seek to explain the causes of momentum by particular market sectors, such as the high-tech boom in 1999 and early 2000.
"Through every phase of the market, there are sectors that exhibit momentum," Mr. Regan said. "Even at the conclusion of a market cycle, there are segments that outperform.
"What causes the market to have this internal volatility, where one segment is going up while the others are going down? Do money managers starting or accelerating their concentrations in different segments of the market create their own momentum environment?"
These are some of the questions the study will research, he said, "to identify the implications and causes of momentum."
"The implication of the study isn't to lead to a wholesale dismissal of managers," he said. Giving an example, he said, "If we evolve into a small-cap market, you wouldn't hire all small-cap managers and eliminate all large-cap managers."
Instead, "you would move to a Russell 3000 benchmark from an S&P 500 to lower your average capitalization."