Why Factor Investing Works in Emerging Markets
Research provides evidence supporting the pervasiveness of the size, value and momentum premiums. That should give investors further confidence that the premiums found in these factors in developed markets were not a result of data mining exercises, which, in turn, should offer confidence that an ex-ante premium for these factors exists around the globe.
The Persistence of Active Management Outperformance
If active management persistence is not significantly greater than should be expected at random, investors cannot separate skill-based performance (which might be able to persist) from luck-based performance (which eventually runs out).
The True Signal from Inverted Yield Curves
Investors and advisors have become concerned about the possibility, if not the likelihood, of the Treasury yield curve inverting. The reason for the concern is that the slope of the yield curve historically has been a good recession predictor.
What’s Behind the Failure of Active Funds?
Like clockwork, each year the S&P SPIVA scorecard reports actively managed funds’ persistent failure to outperform appropriate, risk-adjusted benchmarks. The only thing different, it seems, is that each year the active management community contrives yet another explanation for its failure. And each time, those explanations are exposed as lame excuses.
The Problem with Focusing on Expense Ratios
Most investors believe that all passively managed funds in the same asset class are virtual substitutes for one another. The result is that, when choosing a specific fund, their sole focus is on its expense ratio. That is a mistake for a wide variety of reasons. The first is that expense ratios are not a mutual fund’s only expense.
The Long-Term Track Record for Factor Investing
A landmark study looked back at more than 100 years of data and 23 countries to determine if there are reasons to believe the cross-sectional patterns in factor returns will persist, or whether they were just anomalies that tended to disappear after publication.
The Unique Retirement Issues Facing Women
Women face at least 12 unique financial and life challenges related to long-term retirement planning. Addressing them can be overwhelming and uncomfortable. Only by understanding the issues can you develop strategies that will provide the greatest chance of achieving your clients’ goals.
Why Factors Premiums Should Persist
We know the historical evidence shows there are premiums for factors, but how can you be confident that those premiums will persist after research about them is published and everyone knows about them? After all, we are all familiar with the phrase “past performance does not guarantee future results.” Here is my answer.
Wall Street’s Foolish War on Passive Investing
Wall Street has ridiculed passive investing for decades. The reason is obvious: Its profits – and for many firms, their very survival – are at stake. The basic argument is that the popularity of indexing (and the broader category of passive investing) is distorting prices as fewer shares are traded by investors performing the act of “price discovery.” Let’s examine the validity of such claims.
Investing Lessons from a Top Poker Player
As expert poker player Annie Duke explains in her book, Thinking in Bets, one of the more common mistakes amateurs make is the tendency to equate the quality of a decision with the quality of its outcome. Poker players call this trait “resulting.”
In Defense of the Value Premium
Based on the logical, risk-based explanations for the value premium, and the lack of evidence pointing to shrinking valuation spreads, my conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative.
Factor Investing Wins in Emerging Markets
New research shows a majority of active managers outperformed their emerging-market benchmarks, and did so by a wide margin (on average 1.57% annually). But it would be wrong to conclude that active management is the winning strategy in EM.
Is Passive Investing Destroying the Markets?
Passive investing has been ridiculed by Wall Street for decades. The common theme is that indexing has become such a force that the market’s price discovery function is no longer working properly. Given the number of questions I get about this issue, one would think that passive investing is now dominating markets.
How to Diversify Beyond the 60/40 Portfolio
The traditional 60/40 model no longer can be expected to deliver the same type of results. A new model is for investors to move toward more of a risk-parity portfolio, with assets more equally divided among stocks, bonds and these new alternatives.
Creating More Efficient Portfolios & Reducing the Risk of Black Swans
Advisors will learn how using factors and alternative investments that have premiums that are unique and have evidence of persistence, pervasiveness, robustness, implementability, and intuitive risk- or behavioral-based explanations for why we should expect the premiums to persist in the future can lead to the building of more efficient portfolio that also reduce tail risks. You will learn which factors from the over 600 in the literature should be considered and which alternatives out of the many available should be used and why.
The Track Record of Market Pundits
At the start of 2017, I compiled a list of predictions that market gurus had made for the upcoming year, along with some items I heard frequently from investors, for a sort of consensus on the year’s “sure things.” As is my practice, I will give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.
The Relationship between Economic Growth and Stock Returns
Economic theory posits that investors require high expected returns when cyclical consumption is low in economic contractions and low expected returns when cyclical consumption is high in economic expansions. New research is consistent with that theory.
How Advisors Should Address the Hidden Risks Facing Older Clients
Diminished cognitive skills, often the result of Alzheimer’s disease, are the greatest threat to the financial stability of your older clients, particularly those over age 65. A new book directed to advisors provides the tools to identify and overcome those threats.
The Four Horsemen of the Retirement Apocalypse
In biblical tradition, the four horsemen of the apocalypse are a quartet of immensely powerful entities personifying the four prime concepts – war, famine, pestilence and death – that drive the apocalypse. For today’s investors, the equivalent is historically high equity valuations, historically low bond yields, increasing longevity and, as a result, the increasing need for what can be very expensive long-term care.
Slaughtering the High-Dividend Sacred Cow
At least for tax-advantaged investors, dividends are irrelevant: They are neither good nor bad in terms of forward-looking return expectations. Therefore, while there is no reason to exclude dividend-paying stocks, focusing solely on them leads to less diversified (less efficient) portfolios.
The Role of REITs in a Diversified Portfolio
REITs are vulnerable to an increase in interest rates or an economic contraction. If you have been thinking of increasing your allocation to REITs to generate more cash flow, this new research – and current valuations – should serve as a cautionary warning.
Seven Reasons Why Advisors Should Use Bond Ladders
I often hear criticisms about the use of bond ladders. Whenever the criticism comes from professional advisors, however, I’ve noticed it generally involves firms that use only bond mutual funds or ETFs instead of individual, tailored bond portfolios, whether in the form of a bond ladder or not. Unfortunately, much – if not all – of this criticism is based on falsehoods and the conflicts that can arise when advisors employ only mutual funds and ETFs.
What Drives Municipal Bond Yields?
What explains the fact that municipal bond yields are only slightly lower than equivalent Treasury bonds, giving muni investors a much higher taxable-equivalent yield? The answer lies in their liquidity, which is good news, especially for buy-and-hold investors of individual bonds.
Estate Planning Includes Preparing Your Heirs
Each year Americans spend huge sums preparing to transition their assets to their heirs, engaging high-powered estate and tax planners who set up complex vehicles like family limited partnerships, life insurance, charitable remainder, charitable lead and various other kinds of trusts. Yet, despite the best efforts of top-notch professionals, the majority of plans fail. Why?
The Price Clients Pay for SRI/ESG Investing
Socially responsible investing (SRI) has captured nearly a quarter of U.S.-based assets. New evidence from one of the world’s largest sovereign wealth funds shows that those investors are sacrificing significant performance. Indeed, they are giving up more than 1% a year – effectively doubling the typical 1% AUM advisory fee.
Were Fama and French Right about Value and Size? An Ex-Post Test
Fama and French’s 1992 seminal research, which identified the value and size factors, was met with skepticism. Even the authors questioned the underlying economic rationale for their findings. With a quarter century of data, let’s look back and see if the skepticism was justified. Have value and small-cap outperformed?
Is a Total Market Fund the Most Diversified Portfolio?
Diversification has been called the only free lunch in investing. Many investors consider total-market funds, such as Vanguard’s Total Stock Market Index Fund (VTSMX), to be not only the most efficient (based on modern financial theory and, specifically, the efficient markets hypothesis) but also the most diversified. Leaving aside the question of whether Vanguard’s fund is the most efficient portfolio, let’s evaluate whether it’s the most diversified.
New Evidence that Challenges Active Management
The evidence is overwhelming that past performance is a poor predictor of active managers’ performance. Studies have found that, beyond a year or two, there is little evidence of performance persistence. A newly published academic study reveals why it’s so hard for active managers to persistently beat a benchmark.
Should You Buy High-Growth Dividend Funds?
Previously, I analyzed the performance of some of the leading and largest actively managed mutual funds that focus on high-dividend strategies. Today, I’ll examine the strategy of investing in companies that have shown persistent growth in dividends.
Have Low-Vol Strategies been “Overgrazed”?
While it is not yet resolved whether the low-volatility and low-beta anomalies can be fully explained by exposures to other well-known factors, their popularity certainly has changed the valuation metrics of low-volatility stocks. At the very least, this should raise a flag of caution for investors who have been enticed by the historical data.