Since 2002, S&P Dow Jones Indices has published its SPIVA reports, which compare the performance of actively managed equity funds to their appropriate index benchmarks. It also puts out a pair of scorecards each year that focus on persistence of performance. Here are the latest results.
Quantitative value investors have traditionally relied on price-to-book as the metric to classify stocks. But new research shows that price-to-enterprise value is a more powerful tool to construct portfolios. That research also sheds light on the question of whether the value premium is risk- or behaviorally-based.
Every year, the markets provide us with lessons on prudent investment strategies. Many times, markets offer investors remedial courses, covering lessons it had taught in previous years. That’s why one of my favorite sayings is that there’s nothing new in investing, only investment history you don’t yet know.
Market forecasters know their fallibility, which is why they rarely offer predictions with specific timeframes – it would make it too easy for fact-checkers like me to hold them accountable. When one prominent forecaster – John Mauldin – boldly attached a five-year horizon to his predictions, it gave me an opportunity to look back and do just that.
It has been my tradition to informally rate the investment-related books I read in the past year. I have also included some novels and books of general interest. Here is my list of winners and losers.
Proponents of investing with an ESG mandate often claim that those strategies do not entail a performance sacrifice relative to an appropriate non-ESG benchmark. But new research shows that such claims are problematic.
Factor-driven investing, while highly popular among equity investors, has not been widely adopted in the bond market. But new research shows how to construct highly efficient fixed-income portfolios using factors, as well as the ongoing importance of reducing expenses.
Academic theory predicts that the volatility implied by the VIX index will be greater than the realized volatility. That difference can be thought of as an insurance premium investors are willing to pay because volatility tends to spike when stocks crash, as in the last bear market. New research confirms that investors can profit from this and that such a strategy is uncorrelated with other traditional sources of return.
Factor performance, as conceived by Fama and French and refined by others, is based on adding the returns of a “long” portfolio of securities that most embody the factors to a “short” portfolio that least represent the factors. But it is common practice for mutual funds and ETFs to use only the long portfolio. New research show that this approach does effectively capture the returns of the underlying factors.
Earlier this year, passive management was attacked in two high-profile articles. Those criticisms were proven to be false – and driven by active managers seeking to protect their livelihoods. But that still left the question, which I now examine, of whether flows to passive funds have increased certain risks.
S&P’s SPIVA scorecard provides persuasive evidence of the futility of active management. But its most recent scorecard illustrates something else – why active managers underperform even in the best performing asset class.
A long-sought goal of advisors is a cost-effective way to hedge one’s equity holdings. I previously wrote about why put options fail to achieve this goal. In this article, I consider whether volatility-based products are any better.
An ESG mandate fulfills the noble goal of aligning investors’ portfolios with their personal values and beliefs. But new research affirms what financial theory predicts: Those investors will incur a penalty in terms of risk-adjusted performance.
REIT investors can diversify through a fund or ETF tied to an index, such as the FTSE NAREIT Index. But new research shows that a factor-based approach will have superior risk-adjusted returns.
Do factor premiums survive implementation costs? To answer this question, I’ll examine the returns of live mutual funds to see if they have been successful at capturing the returns of small-cap and value premiums.
Despite its importance, insurance risks are often overlooked. And it is my experience that one of the most overlooked risks is excess personal liability insurance – coverage provided by an umbrella policy.
Is the lack of a size premium due to the performance of small-growth stocks in general? Or is it due to penny stocks, IPOs, stocks in financial distress and lottery-like small-growth stocks? Several recent studies answer those questions.
Capital-gains-aware strategies significantly improve after-tax returns. Moreover, shunning dividends lowers the pretax expected return of commonly used factor strategies and has little impact on after-tax returns.
At the start of 2019, I compiled a list of predictions that so-called “gurus” had made for the upcoming year, along with some items I heard frequently from investors, for a consensus on the year’s “sure things.” It is now time for our third quarter review.
If you take the common 60/40 portfolio, with 60% in stocks and 40% in bonds, you find that approximately 90% of the risk – in terms of volatility – is in the stock portion of the portfolio. Risk parity addresses that incongruity, and uses an approach builds an asset allocation in terms of risk rather than asset classes.
New research on the low-risk anomaly – the fact that less risky stocks have had higher risk-adjusted returns – reveals exactly which types of stocks are likely to perform poorly over time, especially in a bear market. If the funds and ETFs you own lack construction rules to screen out those stocks, you will be exposed to unnecessary risks.
Recent studies show that the returns to equity investors have historically come from a relatively small number of stocks. Investors who fail to adequately diversify increase their chances of failing to own those high-performing stocks, and they are not compensated for the risks they do bear.
Private equity investing has created enormous wealth for those fortunate to be the general partners of a fund. But for regular investors – the limited partners – recent studies show that when properly adjusted for risks PE returns lag those of the less risky public markets. Moreover, there is little evidence that investors can identify, in advance, the very few PE funds that will outperform.
Interest rates are falling and with that comes a series of problems investors must confront. There are the obvious implications, like lower returns from bonds. But the more pernicious harm will come from thee failure to properly adapt financial plans to current market conditions.
How can advisors distinguish between a good outcome that is the result of a poor decision versus one that results from a good decision?
Put options are rightly viewed as the most direct way to protect against losses in equities. But new research shows that they are painfully inefficient and, in the words of the author of that study, provide “pathetic” protection.
Don’t fall for claims by highly respected asset managers that factor-based investing isn’t working. Factor-based strategies have outperformed capitalization-weighted indices over long time horizons.
The performance of U.S. value stocks over the last decade has led many to wonder whether the value premium has been completely eroded. New research from GMO shows that this was due to changes in relative valuations that favored growth over value, but now value stocks are priced attractively.
Each year, high-net-worth families spend huge sums preparing their assets for transition to their heirs. Why do the majority of those plans fail?
Historically, small value stocks have been the best performing equity asset class. But the last 10 years has been a period of dismal performance. With their valuations now at a historically attractive level, small-value stocks are priced to outperform.
When not taking on credit risk in a bond investment, which is better: individual Treasury bonds, FDIC-insured CDs or a mutual fund?
At the start of 2019, I compiled a list of predictions that so-called financial gurus had made for the upcoming year for a consensus on the year’s “sure things.” The turn of the calendar means it is now time for our second quarter review.
Given their low yields, are TIPS are a good investment compared to nominal Treasury bonds?
I’ve been getting lots of questions about the benefits of international diversification. The questions are variations of “Why do I want to own these poorly performing investments that also create currency risk?”
When choosing a factor-based strategy, advisors should carefully scrutinize the fund;s construction rules (e.g., the number of securities held) and implementation strategy (e.g., the frequency of rebalancing and the use of patient, algorithmic trading).
Before you jump on the low-volatility bandwagon, it’s important you understand that the research demonstrates that the performance of the low-volatility factor is actually well explained by exposure to other factors, and it is also highly regime dependent.
I am often asked whether the underperformance of U.S. value stocks over the last decade is a result of overcrowding. We can address that issue by examining the spreads in valuations of growth and value stocks. If overcrowding has occurred, we should see a dramatic narrowing in valuations.
Is the rise of passive investing reducing price-discovery efforts, leading to prices being distorted and capital allocated inefficiently?
I recently provided a baker’s dozen list of my favorite books on behavioral finance. Having just finished reading Daniel Crosby’s The Behavioral Investor, my list of favorites has now expanded to 14.
There’s a cliché that money can’t buy happiness. Is that true? Thanks to research from Nobel Prize-winning economist Daniel Kahneman and Angus Deaton, we can answer the question: It does – to a point.
The CAPE 10 provides us with valuable information (as do other current metrics). However, it’s important that the information be used in the right way, as misusing it can lead to bad outcomes and the failure of plans.
ESG indices provided lower absolute and lower risk-adjusted returns than the broad market index.
Planning for a successful retirement is about much more than just an investment strategy that will provide you with sufficient assets to fund your desired lifestyle. It’s also about planning for a meaningful life in retirement.
While an inverted curve may be a reliable indicator that a recession is likely to begin, on average, within 16 months, it is not an indicator reliable enough to allow you to profitably time stock markets.
Non-fundamental demand shocks caused by naive retail investor fund flows help explain the momentum factor.
A new paper from the Federal Reserve Bank of Boston explores the implications of the active-to-passive shift.
Because so much of long-term returns occur over very brief periods, it’s critical that investors stay disciplined, adhering to their asset allocation plan and not paying attention to the noise of the market.
Research demonstrates that the investment factor has explanatory power for the cross section of stock returns, with high-investment firms tending to underperform low-investment ﬁrms.
As tempting as the proposition might be, there isn’t convincing evidence that a style-timing strategy will be profitable.
I will examine three concerns that are often raised about factor-based investing.