Education Ben Felix: Five Factor Investing

That’s a significant percentage so although there is a 70% chance lump sum is the best option, you might get a better SANF following some of the options in the above article

 

Contrary view on factor investing (particularly the value premium and trusting the company supplied inputs to the formula approach) from Ashley Owen.
Inevitable Inflation, Debt Bubbles, Equity Reporting Season, and More!

From 38mins

 

Interesting that he mentions DFA as an example citing long term value underperformance “20-30 years” however both DFA Australian and Global Value funds have outperformed their cap weight benchmarks since inception (1999). The not trusting company supplied financials thing is a red herring ; given that the super sleuths underperform in aggregate. The value measure just needs to be relative.

It’s expected that Ashley Owen aka Ormond will be talking his book however, he runs a tactical asset allocation model (aka secret sauce) for Stanford Brown. Interestingly he uses a CPI + benchmark for his funds.

FWIW I am a believer in value / size / low reinvestment, ie. DFA screens, but not enough to ever move away from cap weight for majority of investments.

 

@The Falcon Is that because of behavioural reasons as in using this factor could underperform for an extended period causing you to question if it will continue to outperform?

From what I have read and heard on Podcasts etc from all the US guys value factor has outperformed but only over the very long term so need to be very patient and sit through extended periods of underperformance like uncle Warren?

 

Can’t be sure that what worked in the past will work again. Prepared to make a small tilt but not bet the farm.

 

Yes I did consider this and it seems logical. Would be interested to know if there's evidence to support. If there's a paper been published, Felix would know about it

I hadn't picked up on the CPI+ benchmark - that's extremely useful context in which to receive his input and explains a lot. He's targeting wealth preservation for his clients....

 

This is what popped into my mind when they keep mentioning the small cap value performance (and other factors).

They say that value has underperformed growth in the last 12(?) years. How many years does it have to underperform for the entire data set to show that there is no historical performance advantage in small cap value?

With every year of underperformance that goes by, surely that dilutes the historical advantage of that factor eventually to the point of no advantage and then disadvantage?

 

@Hockey Monkey I've listened to the latest rationale reminder podcast with Paul Merriman which led me to re-read his lastest 4 fund portfolio. I note you don't have the large value tilt in your portfolio. I assume you've focused on small value with an expectation of greatest return. Is there any other reason you don't have large value tilt?

Would you ever consider using an automated investment platform like pearler for your US ETFs?

 

I understand the value and profitability factors have been the strongest with small stocks. If we were in the US, I’d probably go all in with Dimensional or Avantis funds. Eg AVUS and AVDE in addition to my existing AVEM/AVUS/AVDV holdings.

For Aussies and Canadians it is a trade off with tax efficiency, costs etc.

We also don’t have easy access to target date funds that Paul Merriman now recommends.

Pearler haven’t announced their US pricing and available stocks yet. Stake seems to be a popular alternative but don’t yet have AVUV/AVDV available and FX of 0.7% is way more than the 0.002% with Interactive Brokers that I currently use so I’m happy to live with the manual trading. This time of year late night works best.

 

Ok so mostly about lack of implementation options?

 

Yes along with the tracking error against the market factor. You would need to have strong conviction to stick with the strategy this past decade

 

An older video from 2015 but might be of interest to some.
Dimensional's David Booth Interviews Eugene Fama

 

Can you beat the market if you buy factor based funds; Larry Swedroe says it's possible in his book " Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today"

 

@Hockey Monkey - Would like to hear your experience so far in factor investing ? Hows the performance so far compared simple and plain index funds tracking US market like IVV or VTS?

 

SCV has had a terrible time the past 10 years. Part of investing in factors is with standing long periods of underperformance.

Suggest comparing AVUV and VTI in USD over whatever time period you wish. Past year AVUV has returned 24% vs 10% for VTI.

 

Can listen to hml_compounder explain it here:

12. Value Investing with HmL Compounder

 

Hi @ChrisP73

Just having a quick deconstruct of the JP Morgan Data.



If we assume a starting point of Average P/E for the above 10 year returns and break those returns into multiple expansion and remaining return we get the following:

Blue bar is Multiple expansion.
Orange Bar is remaining return component.
Red line is calculated 10yr future return allowing for same underlying characteristic return but 'pricing multiple' to return to 20yr Average.



Historically multiple expansion contributes 2 parts of f...all to 30+ year returns as pricing multiples tend to revert rather than escalate to the moon, so the red bars give some meaningful insight to future expectations of relative (not absolute) performance between the characteristics

If multiples stay at their elevated levels rather than mean revert then future expectation would be the orange bar.

Expecting replication of the past 10-year contribution from the blue bars for many of the characteristics would be a heroic (not backed by history) assumption.

 

If only there was an easy and reliable way to implement small cap value in Oz...

 

I like it @dunno. A value tilt across the entire market and/or a specific small value tilt.

hey @blob2004 just a note to point out that the specific dataset reported by JPM and used above is US markets.