Where Has All the Alpha Gone?
Active managers persistently lag the returns of benchmarks and index funds that track them, with the excuses for underperformance recycled every year. We are going to discuss a book, The Incredible Shrinking Alpha, which is the antidote for the active managers’ siren song. It will reinforce your commitment to indexing or systematic investing, while increasing your knowledge. Larry Swedroe, my guest today, and Andrew Berkin, are co-authors of The Incredible Shrinking Alpha, the second edition of which has just been released.
Factor-Based Investing Beats Active Management for Bonds
Factor-driven investing, while highly popular among equity investors, has not been as widely adopted in the bond market. But research shows that a factor-based approach to bond investing is superior to attempting to identify top-performing active bond managers.
The Best and the Brightest Fail at Investment Management
Non-profit endowments, particularly those of elite academic institutions, have failed to deliver investment outperformance. Those colleges and universities have significantly underperformed a passive benchmark on an absolute and risk-adjusted basis.
Addressing the Failure of the Value Factor
One explanation for the underperformance of the value factor has been that the growing importance of intangibles, and the failure of the accounting system to record their value on financial statements, renders value measures anchored to current financial statements, such as book value, useless. New research shows how to address this failure.
The Enduring Futility of the Endowment Model
Investors have no chance of adding alpha by pursuing an “endowment” model. New research shows that even the most sophisticated institutions do worse when they increase exposure to alternative asset classes, and that investors would be better served with a passive, 60/40 allocation.
Actively Managed Funds Underperform on a Risk-Adjusted Basis
Large-scale studies have shown that actively managed funds underperform their passive benchmarks on an absolute basis. New research shows that this is also true on a risk-adjusted basis – and this is true across asset classes and sub-classes.
The Price Your Clients Will Pay for Investing in the Wrong Value Fund
The recent poor performance of value funds has led some investors to illogically shift to products with less exposure to the value factor. The evidence that the value factor has worked over long periods of time means you want more exposure to it, not less.
How ESG Makes Companies Better
New research shows that companies that adhere to positive ESG principles have lower costs of capital, higher valuations, are less vulnerable to systemic risks and are more profitable. But beware; those higher valuations translate to lower expected returns for investors.
Fact and Fiction about Low-Risk Investing
One of the most popular and successful strategies over the last decade has been low-risk (i.e., low-beta or low-volatility) investing. New research shows that those strategies have persisted even after the publication of the research documenting their existence, and that they can be pursued in low-cost, low-turnover portfolios.
The Forgotten History of Value Investing
Given the dramatic underperformance of value stocks since 2017, it’s understandable that many are abandoning the strategy, believing that the premium has vanished. But, studious observers of market history know that value faced similar death sentences previously, only to undergo a rapid reincarnation and deliver spectacular returns.
A Lost Decade for the Fama-French Factors
The poor performance of the Fama-French factors over the last decade has led many to question the existence of the premiums. But new research shows that those 10 years were not unique, and that factor-based investing have prevailed following periods of underperformance.
Spending Policy in a Muted-Return Environment
With lower expected returns on the horizon, endowment managers are questioning whether standard annual spending rates will be sustainable and whether certain spending formulas are better suited for the muted environment investors face.
How Negative Interest Rates Pervert Investment Decisions
Of all the disruption inflicted on the capital markets, negative interest rates cause the most head scratching. Why would anyone invest with the certainty of a loss? New research explains the perverse behavior induced by negative rates – and offers a stern warning for investors.
Advisors are Using Inefficient Model Portfolios
Despite the important role financial advisors play in the design of client portfolios, we know very little about how those portfolios are constructed. New research shows, however, that the model portfolios used by advisors suffer from a number of structural inefficiencies.
Actively Managed Funds Fail When Needed the Most
Advisors had little use for actively managed funds over the recent bull market; index funds did exceptionally well. But just when those actively managed funds were most needed – over the recent market downturn – they failed to protect investors.
Are the Market Aftershocks We Just Saw Normal?
The unexpectedly large number of swings that follow a shock are generally just noise – the interaction of panicked sellers and greedy speculators trying to find the bottom – but should be expected, as aftershocks tend to cluster following a shock.
A Comparison of Passively Managed, Small-Value Funds
Small-value investors can choose between index funds and passively managed, structured products. While index funds have lower costs, they don’t offer the same degree of exposure to the small-cap and value factors. Here is how that difference has played out in three prominent funds over the last eight years.
Do Insiders Exploit Anomalies?
There are predictable patterns in security returns that conflict with market efficiency. If there are behavioral explanations, these are called anomalies. A new study looks at whether “insiders” exploit those anomalies – and whether investors can benefit from observing insider trading patterns.
What to Do When a Strategy Performs Poorly
In recent years, U.S. stocks have far outperformed international stocks, and growth stocks have far outperformed value stocks. That has led many to question the benefits of diversification and ask what they should do when an investment strategy performs poorly. This podcast will answer that question.
When Are ESG/SRI Strategies Likely to Outperform?
Over the past decade, and particularly over the last several years, there has been a dramatic increase in ESG investing strategies. That has coincided with robust economic and market performance in the U.S. New research examines whether strong ESG returns are likely to be tied to a strong economy and market.
New Research on the Value Premium
New research confirms that stocks with high projected earnings growth underperform those with low projections. This anomaly is due to underlying behavioral biases that also explain why value has underperformed growth over the last decade – and why value is poised for a reversal.
December 2019 SPIVA Persistence Scorecard
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.
The Enterprise Multiple and Expected Returns
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.
Investment Lessons from 2019
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.
Accountability Proves the Incompetence of Market Forecasters
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.
Does ESG/SRI Investing Reduce Stock Prices and Investment Returns?
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.
New Research on Factor Investing in the Bond Market
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.
Should You “Sell” Volatility?
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.
Do Long-Only Portfolios Effectively Capture Factor Returns?
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.
Is the Shift to Passive Investing Increasing Risks?
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.
Are VIX ETPs Effective at Protecting Downside Risk?
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.
Evaluating the Performance of ESG Funds
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.