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Internship at Trustus Capital Management

Date:10 December 2019
Author:dr. Auke Plantinga

Trustus Capital Management has an internship available for a student in the Field of Finance or EORAS for doing an empirical research into the effectiveness of their investment strategy, which is based on selecting high dividend paying firms and equal weighting. You can select one of the two project proposals presented below (in Dutch). If you want to apply for this internship, please send me an email at a.plantinga with your resume as an attachment.

Trustus Capital Management

TRUSTUS Capital Management (TCM) is a Dutch investment management company established in 1978. TCM manages the assets of private clients, institutions and a number of investment funds.

When the current management team joined the firm in 2001, the investment focus started to include Emerging Markets. In 2008 the first investments were made in several Frontier Markets. Core competence is the high dividend strategy which is the red line that runs through all our funds and individual mandates.

At the moment TCM offers four high dividend equity funds in the Frontier and Emerging Market universe: TCM Global Frontier High Dividend Equity, TCM Global Emerging High Dividend Equity, TCM Vietnam High Dividend Equity and TCM Africa High Dividend Equity. TCM acts as managing director and manager of these open-end funds. Most funds are listed on Euronext.

We are currently looking for a student (master) who is willing to participate in one of our research projects. A short description is given below. 

Project 1: Higher Dividend is Higher Earnings Growth = Higher Return

Because dividends reduce the funds available for investment, many market observers and investors associate high dividend (payout) with weak future earnings growth. Tests using aggregate market data, however, provided evidence that contradicts that view. Because aggregate results may not apply at the company level, we want to conducted a company-by-company analysis of the relationship between payout and future earnings growth. The tests could show that high-dividend-payout companies tend to experience strong, not weak, future earnings growth.

Market observers and investors often view low dividend payout as a precursor of high future earnings growth. The rationale is that companies pay fewer dividends or retain more earnings when growth opportunities are high. Low payout, in this view, indicates strong future earnings growth. Considerable theoretical and empirical work supports this belief.

Others, however, have found in examining the aggregate U.S. equity market that future earnings growth is associated with high rather than low dividend payout, a result that contrasts sharply with conventional wisdom. Although these results for the aggregate market have important implications with respect to the valuation of the overall markets, whether the aggregate-level results pertain also to individual companies has not been determined.

Research Project

We would like to test the Higher Dividend is Higher Earnings Growth-thesis for Emerging and Frontier Markets. Using company-level data, we would like to examine the one-, three-, and five-year future earnings growth as a function of dividend payout.

In existing tests on the Developed Markets, the control variables were company size, return on assets, financial leverage, earnings yield, past earnings growth, and growth in total assets. Previous tests on Developed Markets also show that the coefficients on payout are all positive and highly significant, which indicates that companies with high current dividend payouts tend to have high future earnings growth.

Thinking about robustness; controls for the potential effects of survivor bias, potential nonlinearity in the relationship between payout and future earnings growth, alternative measures of earnings, small companies, regulated industries, specific time periods, industry membership, and share repurchases should be considered.

If there is or isn’t a positive relationship between current payout and future earnings growth in Emerging and Frontier Markets, how could this be explained?


Project 2: Does an Equal Weighted Portfolio Outperform Value en Price Weighted Portfolios in Emerging Markets?

There is some evidence that an equal weighted stock portfolio may be superior to the common capitalization weighted portfolios. A capitalization weighted index simply weights each stock in the index in proportion to the total market value of its outstanding shares. Many of the popular ETFs track market cap indexes, such as the S&P 500 or the MSCI World Index.

On the other hand, an equal weighted portfolio invests an equal amount of cash in all the stocks in the portfolio, and then rebalances the portfolio frequently. This is an extreme form of diversification. There is some evidence that this strategy captures many of the smart beta effects that are now being looked for by investors. For example, an equal weight strategy will clearly invest more in small cap stocks compared to a cap-weighted index. Small capitalization stocks have been suggested as one of the factors in smart beta strategies. Is the equal weighted portfolio a “dumb” smart beta strategy?

 Research Project

We want to compare the performance of equal-, value-, and price-weighted portfolios of stocks in the Emerging Markets the last two decades.

We want to know whether an equal-weighted portfolio with periodic rebalancing outperforms the value- and price-weighted portfolios in terms of total mean return, four factor alpha and Sharpe ratio in Emerging Markets. And also does the equal-weighted portfolio have a greater portfolio risk?

Does the higher systematic return of the equal-weighted portfolio arises from its higher exposure to the size, and value factors.

Is a higher alpha of the equal-weighted portfolio dependend only on the monthly rebalancing (reverse to the mean) and not on the choice of initial weights?

About the author

dr. Auke Plantinga
dr. Auke Plantinga
dr. Auke Plantinga, Director CIBIF