Nomura Securities International Inc, New York

Global Quantitative Research

Nomura Securities International, Inc. U.S. Quantitative Research

Quantitative Equity Strategies and Signals

6 October 2010

Joseph Mezrich . Nomura Securities International, Inc.

Please read the analyst certifications and important disclosures on pp. 23-25. gl

U.S. Quantitative Research

Factor failure momentum, earnings quality, value and the regime change of 2000

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

U.S. Quantitative Research

A regime shift in market risk of B/P over the last decade?

Rank Correlation between B/P and risk measures

0.6 0.5
Rank Corr relation with B B/P

0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 0.4 -0.5
1983 1985 1986

Estimate dispersion Beta

1987 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 2002 2003 2005 2006 2007 2008 2010

Note: Shows history of rank correlation between B/P and risk factors (estimate dispersion and beta). Universe is Russell 1000. Period of analysis is from November 1983 through May 2010. Source: Nomura Securities International Inc., Compustat, I/B/E/S, Russell, and IDC.

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

U.S. Quantitative Research

High quality stocks used to have low beta beta, but not now
Rank correlation between accruals and beta
0.3
1 0 0 9 0

0.2
8 0 7 0

Rank Correlatio on

0.1

R FD Reg
0

6 0

5 0

4 0

-0.1
3 0 2 0

-0.2

Recession

1 0

-0.3
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: Shows the rank correlation between accruals and beta in the Russell 1000 universe. Period of analysis is from Nov 1983 through May 2010. Source: Nomura Securities International Inc., Compustat, IDC, Russell, NBER.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

U.S. Quantitative Research

Is it all a beta bet?

A Long-short Are L h hedge h d funds f d simply i l a beta b bet? b ?
Cumulat tive return of Hedge Fund Strategy (%)
10 8 6 4 10 2 5 0 -2 0 -5

Hedge Fund Strategy Long/Short Equity (LHS) Factor return to Beta (RHS)

30

Cumulative fa actor return to Beta (% %)

25 20 15

Feb 8
-4
Sep-09 Feb-10 Aug-09 Nov-09 Dec-09 Oct-09 Jan-10

Apr 23
Mar-10 Apr-10

Jun 10
-10
May-10

Have systematic sources of return converged to a beta bet?

3
Z-score of cumulative e factor return (%)

2 1 0 -1 -2 -3 -4 -5 -6
Sep-09

Beta B/P Small cap Momentum

Feb 8
Dec-09 Feb-10 Aug-09 Oct-09 Nov-09 Jan-10

Apr 23
Mar-10 Apr-10

Jun 10
May-10

Note: Top chart shows cumulative performance of Dow Jones Hedge Fund Strategy Long/Short US Equity (ticker: DJHFELSU) overlaid with cumulative factor performance to beta (decile spread) in the Russell 1000. Bottom chart shows normalized cumulative performances of decile spread based on beta beta, B/P B/P, small cap and one-year momentum and beta in the Russell 1000, where cumulative factor returns are normalized based on the period since 1 Mar 2010. Period of analysis is from 31 Aug 2009 through 16 June 2010. Transaction costs are not considered. Source: Nomura Securities International Inc., I/B/E/S, Russell, Compustat, IDC, Dow Jones, Bloomberg.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 5

U.S. Quantitative Research

Clustering of factors much has changed

January 1980 May 2010 March 2010 May 2010

Note: We applied hierarchical cluster analysis to monthly factor returns in the Russell 1000 from January 1980 through May 2010 in the left side chart and daily factor returns from March 2010 through May 2010 in the right side chart. A close pair of clusters is grouped based on distance between clusters, which is defined as the average Euclidean distance for every pair in each cluster (average linkage method). Monthly and daily factor returns are based on decile spreads. Transaction costs are not considered. Source: Nomura Securities International Inc., I/B/E/S, Russell, Compustat, IDC.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 6

Earn nings

U.S. Quantitative Research

The correlation conundrum: a sector problem and macro solution

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

U.S. Quantitative Research

Sector-neutral correlation of stocks, a product of sector correlation

Average correlation of stocks within sectors
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Average correlation of sectors

0.8 0.7 0.6 0.5 04 0.4 0.3 0.2 0.1 0

Average g correlation of stocks within sectors

0.8 0.7 0.6 0.5 0.4 03 0.3 0.2 0.1 0

Average g correlation of sectors

Note: Shows the average of within-sector within sector stock correlations (top panel) and the average correlation among 10 GICS sectors (middle panel). Bottom panel is the overlay of the top and middle panels. The correlations are calculated using trailing 21-day daily return data. Universe is Russell 1000. Period of analysis is from January 1984 through July 2010. Source: Nomura Securities International, Inc., I/B/E/S, Russell, Compustat, IDC.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 8

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Quantitative Research

Correlation another look, , another worry y

2.0 70

Weight of 1st principal component (right axis)

1.5 60 50 1.0 40 0.5 30 00 0.0 20 -0.5 10

Weigh ht of 1st principal comp ponent (%)

Aver rage Factor IC (x 10-2)

Average factor IC (left axis)

-1.0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 00 200 200 01 200 02 200 03 200 04 200 05 200 06 200 07 200 08 200 09

Notes: Dark blue line shows three-year average of factor IC (information coefficient) based on common 22 representative factors (see factors listed below). Light blue line shows weight of the first principal component in the factor-return variance in time series. The principal component analysis is based on rolling three-year performances of 22 representative factors in the Russell 1000. Period of analysis is from December 1985 through July 2010. Source: Nomura Securities International Inc., Compustat, I/B/E/S, IDC, Russell.
Factor 1 Mon. Price Momentum (Low - High) 1 Year Dividend Grow th 1 Year Price Momentum 5 Year EPS Grow th Accruals (Low - High) Analyst Coverage (Low - High) B/P Beta Capex / Sales (Low - High) Debt / Equity (Low - High) Default Risk (Safe - Risky) Dividend Yield E/P EBITDA/EV Estimate Dispersion (Low - High) Market Cap (Small - Large) PEG (Low - High) Predicted E/P Predicted LT Grow th ROE Share Buyback Up to Dow n Revisions Definition Stock return in local currency - cap w eighted return of country in local currency 1-yr dividends per share grow th 12-month stock return in local currency - 1-month stock return in local currency 5-yr earnings per share grow th Total net operating accruals deflated by Total Asset IBES FY estimates/log (market cap in USD) Book/Total Market Cap 60 month beta to Regional Index Capital expenditures/Net sales Total debt/common equity Merton type default probability Total Dividends/Total Market Cap Net Income/Total Market Cap Earnings Before Interest, Taxes and Depreciation/(Market Cap + LT Debt + Current Debt + Prefered Stock + Minority Interest - Cash and Equivalents) Std deviation of IBES FY1 estimates/ Mean of IBES FY1estimates Market Cap (USD) (Net Income/Total Market Cap) * IBES median LT grow th rate estimate FY w eighted sum of FY1,FY2,FY3 IBES median estimate/price IBES long term grow th mean estimate (Net Income before Prefered Dividends - Prefered Dividend Reqirement) / Average Common Equity 12-Month Change in Share Outstandings (IBES FY1 up estimates - IBES FY1 dow n estimates)/IBES FY1 estimates

Note: 1 Financial companies are excluded from the universe. Source: Nomura Securities International, Inc.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 9

U.S. Quantitative Research

Cumulative returns of the commodity equity factor and the GSCI index the factor tracks

250%

GSCI-LS
200%

GSCI
Cumulative Retu urn
150%

100%

50%

0%

-50%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Note: Shows cumulative returns to S&P GSCI Index (ticker: SPGSCI) and to commodity equity factor (GSCI-LS) constructed as follows: Russell 1000 stocks are ranked according to sensitivity of stock return to commodity index change, and factor returns are generated by calculating the subsequent performance of an equal-weighted portfolio that is long the highest decile and short the lowest decile. Factor returns do not include transaction costs costs. Period of analysis is from February 1992 through July 2010 2010. Source: Nomura Securities International, Inc., I/B/E/S, Russell, Compustat, IDC.

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

2010

10

U.S. Quantitative Research

Correlation between sectors and commodity equity factor

0.6 0.5 04 0.4
Correlation
Energy

0.3
Utilities

0.2 0.1

Materials Technology Telecom Industrials

0.0 -0.1 -0.2

Healthcare Consumer-Disc. Financials Consumer-Staples

Note: Shows time-series correlation of commodity equity factor return with returns of 10 GICS sectors. Universe is Russell 1000. Period of analysis is from February 1988 through July 2010. Source: Nomura Securities International, Inc., I/B/E/S, Russell, Compustat, IDC.

Correlations among commodity equity factor, market indices GICS sectors, indices, sectors and quantitative factors
GSCI-LS GSCI-LS GSCI MSCI-EM SP500 Sectors Quant Factors 1 GSCI 0.50 1 1988 - 2010 MSCI-EM SP500 0.19 0.01 0.23 0.09 1 0 66 0.66 1 Sectors Quant Factors 0.14 0.12 0.12 0.09 0 48 0.48 0 28 0.28 0.73 0.31 1 0.46 1

Note: Shows time-series correlations of returns of the proposed GSCI equity factor (GSCI-LS), S&P GSCI Index (ticker: SPGSCI), MSCI Emerging Market Index (ticker: MXEF), S&P500 index, 10 GICS sectors, and 22 quantitative factors (see Appendix N of US Quant Monthly for factor definitions) definitions). These correlations with sectors and quantitative factors are calculated as the average of correlations with each sector (factor). Universe is Russell 1000. Period of analysis is from February 1988 through July 2010. Source: Nomura Securities International, Inc., I/B/E/S, Russell, Compustat, IDC, Dow Jones, Bloomberg.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 11

U.S. Quantitative Research

S t representation Sector t ti on long l and d short h t sides id of f most t recent commodity equity factor portfolio
50% Energy

Long

Short

Perc centage of total num mber of stocks

40% Consumer-Staples 30% Healthcare

20%

Consumer-Disc. Financials Materials Industrials U ili i Utilities

10% Technology Telecom 0%

Note: Universe is Russell 1000. Shows composition (at the sector level) of the commodity equity factor portfolio constructed for August 2010. Y-axis shows the percentage of number of stocks in long and short sides of the portfolio. Source: Nomura Securities International, Inc., I/B/E/S, Russell, Compustat, IDC, Dow Jones, Bloomberg.

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

12

U.S. Quantitative Research

Volatility & factor diversity

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

13

U.S. Quantitative Research

Watch the bouncing vol the hard landing continues

80% 75% 70% 65% 60% 55%

One Month Vol

Implied V Volatility

50% 45% 40% 35% 30% 25% 20% 15% 10% 5%

One Year Vol

Jul-07 Jul-08 Jul-09 Jan-08 Jan-09 May-08 May-09 Jan-10 May-10 Nov-07 Sep-07 Nov-08 Sep-08 Nov-09 Sep-09 Jul-10 Sep-10 Mar-08 Mar-09 Mar-10

N Notes: Sh Shows one-year option-implied i i li d volatilities l ili i f for S&P 500 00 (bl (blue li line) ) and d one-month h option-implied i i li d volatilities for S&P500 (VIX, green line). Last data as of 24 September 2010. Source: Nomura Securities International Inc., OptionMetrics

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

14

U.S. Quantitative Research

Crises and the mean reversion of volatility

80%

Credit Crisis 2002, Accounting Scandals

70%

LTCM
60%

9/11

Asian Crisis Iraq War Begins - vol slide begins Quant Crisis

Implied Vo olatility

50%

40%

30%

20%

10%

One Month vol (Green Line)

Jul-96 Jul-98 Jul-00 Nov-95 Nov-97 Nov-99 Mar-97 Mar-99 Mar-01

One Year vol (Blue Line)

Jul-02 Jul-04 Jul-06 Jul-08 Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Mar-03 Mar-05 Mar-07 Mar-09 Jul-10

0%

Notes: Shows one-year option-implied volatilities for S&P500 (blue line) and one-month option-implied volatilities for S&P500 (VIX, green line). Last data as of 24 September 2010. Source: Nomura Securities International Inc., OptionMetrics.

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

15

U.S. Quantitative Research

Volatility term structure, one-year one year minus one-month one month S&P500 option-implied volatility
10% 5% 0%
fear hope

-5% -10% -15% -20% -25% -30% -35%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Notes: Shows one-year option-implied volatilities for S&P500 minus one-month option-implied volatilities for S&P500 (VIX). Last data as of 24 September 2010. Source: Nomura Securities International Inc., OptionMetrics.

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

2010

16

U.S. Quantitative Research

VIX since 22 March through 13 August

50 May 20, 46% 45 40 35 30 25 20 15 10 M 7, May 7 41% June 7, 37% June 30, 35%

VI IX(%)

July 16, 26%

April 15, 16%

May 27, 30% May 12, 26% June 18, 24% July 12, 24%

22-Mar

29-Mar

10-May

18-May

25-May

11-Jun

18-Jun

28-Jun

3-Jun

15-Jul

22-Jul

30-Jul

7-Jul

15-Apr

22-Apr

Note: Shows VIX index from 22 March 2010 to 13 August 2010. Source: Nomura Securities International Inc. and Bloomberg.

30-Apr

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

9-Aug

7-Apr

17

U.S. Quantitative Research

Russell 1000 factor return ranks: April p July y 2010

Rank corrlations Factor Apr 1 Apr 15 Apr 16 - May 10 - May 13 - May 21 - May 28 May 7 May 12 May 20 May 27 Jun 7 -0.77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 Beta 1 Year Price Mom entum Default Risk 1 Mon. Price Reversal EPS Variability Estim ate Dispersion Debt/Equity B/P (ex goodw ill) Dividend Payout Ratio Predicted 1-Year EPS Grow th B/P a et Cap (S (Sm a all - Large) a ge) Market Up to Dow n Revisions EBITDA/Price Sales Variability Op Inc. Variability Sales/Price Gross Margin Operating Leverage Dividend Yield EBITDA/EV Predicted LT Grow th 1 Year Dividend Grow th R&D/Sales Cash Flow /EV EBIT/Price Earnings Quality (Accruals) Asset Turnover Sales/Em ployee EBIT/EV Inventory Turnover Capex/Assets CapEx/Sales Sales Grow th ROIC x B/P Cash/Assets 5 Year EPS Grow th ROIC EBIT/WCPPE PEG Stable Grow th Predicted E/P E/P Dividend Yield + Share Buy Backs PEGY ROA Analyst Coverage 1 Year EPS Grow th Share Buybacks ROE 5 Year Dividend Grow th R&D/EV 1 6 4 44 3 5 14 15 19 20 11 2 23 28 16 21 17 33 26 35 42 25 32 10 29 39 7 31 36 51 8 13 12 37 45 22 30 47 52 24 40 38 49 46 27 48 18 34 41 50 43 9 49 48 52 17 51 32 28 22 9 50 38 45 42 12 39 46 34 30 16 2 13 47 24 31 25 3 35 19 14 6 27 36 37 21 15 43 26 4 1 40 18 33 10 7 41 5 44 23 8 11 20 29 -0.74 2 1 3 49 4 7 18 11 19 10 20 5 8 31 12 6 24 28 21 47 43 14 32 13 27 40 9 26 29 46 17 22 25 33 42 15 35 45 38 36 41 51 52 37 39 44 23 30 34 48 50 16 -0.87 51 52 47 5 50 49 46 41 35 48 38 44 45 18 43 39 36 26 34 11 9 42 15 40 8 6 33 20 28 10 37 30 32 19 12 27 23 17 3 25 16 2 24 4 31 14 21 29 7 13 1 22 -0.84 3 1 8 51 6 5 13 14 7 9 20 15 11 18 10 21 22 16 28 42 25 4 44 17 30 43 23 33 12 32 2 27 29 38 31 26 34 35 45 50 49 48 24 36 37 40 47 19 39 41 52 46 -0.57 Ranks 52 50 51 49 46 48 31 28 47 44 30 43 41 25 29 40 39 9 36 17 21 37 27 42 32 7 35 33 15 10 34 26 19 5 2 38 12 16 11 20 14 22 1 3 18 8 23 24 13 4 6 45 Jun 8 Jun 18 -0.58 1 4 2 3 6 11 16 5 9 13 12 10 7 20 36 15 32 24 26 14 29 23 28 30 45 39 21 48 8 31 38 19 18 25 35 46 17 37 52 49 27 33 34 44 50 40 41 43 51 42 47 22 Jun 19 - Jul 1 - Jul Jul 13 Jun 30 12 Jul 16 -0.58 52 45 51 43 48 50 36 27 17 42 29 38 44 28 31 47 39 8 24 1 26 33 25 34 30 11 37 22 16 21 49 46 41 12 18 32 20 7 2 19 6 23 13 3 14 9 35 4 5 10 15 40 -0.44 2 24 3 8 12 15 29 7 39 27 13 44 52 25 42 6 37 20 19 46 14 38 43 10 17 5 36 45 18 9 35 23 22 48 32 11 40 21 41 28 50 16 30 47 26 31 4 34 51 33 49 1 -0.40 48 46 47 36 50 44 16 51 30 25 52 34 49 39 23 40 32 17 41 5 26 28 29 42 19 8 37 11 43 10 45 13 31 27 20 15 14 7 18 33 3 22 12 6 24 4 38 35 2 9 1 21 Jul 17 Jul 30 -0.62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52

Note: Universe is Russell 1000. Factor return is defined as decile spread based on each factor (rebalanced monthly). Yellow and blue highlights indicate top and bottom 10 ranked strategies, respectively. Factor returns do not include transaction costs. See Appendix O of US quant monthly for factor definitions. Source: Nomura Securities International Inc., Compustat, I/B/E/S, Russell, and IDC.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 18

U.S. Quantitative Research

The failure of Churchills maxim: factors now fade faster

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

19

U.S. Quantitative Research

Factors now fade faster

Factor Momentum Strategy ( Non-sector neutral )
300 250 250

One-year momentum ( left axis )

Recession

200

Cumulative return (% )

200 150 150 100 50 0

Five-year momentum ( right axis )

100

50

200 Recession

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Factor Momentum Strategy ( Sector neutral )

One-year momentum ( left axis )

200

Cumulative re eturn (%)

150 150 100

Five-year momentum ( right axis )

100

50

50

Note: Universe is Russell 1000. Top chart shows cumulative excess returns to owning the best 10 of 52 factors (see Appendix A of US quant monthly) based on past one-year and five-year factor performances g the best 10 under non-sector-neutral conditions. Bottom chart shows cumulative excess returns to owning of 52 factors (see Appendix A of US quant monthly) based on past one-year and five-year factor performances under sector neutrality. Baskets are rebalanced every month. Period of analysis is from Jan 1984 through Aug 2010. Transaction costs are not considered. Source: Nomura Securities International Inc., Compustat, I/B/E/S, IDC, Russell, NBER.
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com 20

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Quantitative Research

Persistence of short alpha was lost around 2002

Long-Alpha Momentum Strategy based on one-year performance
180 160

Non-sector neutral
Recession

Cumulative long-alpha ( (%)

140 120 100 80 60 40 20 0

Sector neutral

180 160 Recession

Cumulative sho ort-alpha (%)

140 120 100 80 60 40 20 0

Note: Universe is Russell 1000. Top chart shows cumulative excess returns to owning the 10 best long-side baskets among 52 factors (see Appendix A of US quant monthly) based on past one-year long alpha under sector-neutral and non-sector-neutral conditions. Bottom chart shows cumulative excess returns to shorting the 10 best short-side baskets among same 52 factors based on past one-year short alpha under sectorneutral and non-sector-neutral conditions. Baskets are rebalanced every month. Period of analysis is from Jan 1980 through Aug 2010. Transaction costs are not considered. Source: Nomura Securities International Inc., Compustat, I/B/E/S, IDC, Russell, NBER.

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Short-Alpha Momentum Strategy based on one-year performance Non-sector neutral

Sector neutral

21

U.S. Quantitative Research

Long-alpha persistence has required speed since 2007

Long-Alpha Momentum Strategy in Value universe (Sector neutral)
90 80
Cumulative long-alpha (%)

Recession

One-year momentum ( left axis )

90 80 70 60

70 60 50 40 30 20 10 0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Five-year momentum ( right axis )

50 40 30 20 10 0

Long-Alpha Momentum Strategy in Growth universe (Sector neutral)

100 90 80
Cumulative lon ng-alpha (%)

120

Recession

One-year momentum ( left axis )

100 80

70 60 50 40 30 20 10 0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Five-year Five year momentum ( right axis )

60 40 20 0

Note: Top chart shows cumulative excess returns to owning the 10 best long-side baskets among 52 factors (see Appendix A of US quant monthly) based on past one-year and five-year long alpha under sectorneutral conditions in the Russell 1000 Value universe. Bottom chart shows cumulative excess returns to owning the 10 best long-side baskets among same 52 factors based on past one-year and five-year long alpha under sector-neutral conditions in the Russell 1000 Growth universe. Baskets are rebalanced every month. Period of analysis is from Jan 1984 through Aug 2010. Transaction costs are not considered. Source: Nomura Securities International Inc., Compustat, I/B/E/S, IDC, Russell, NBER.

Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

22

U.S. Quantitative Research

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23

U.S. Quantitative Research

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Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

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Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

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Joseph Mezrich, 212.667.9316, jmezrich@us.nomura.com

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