Sven

AgPa #35: Rethinking Active Management

Measuring skill in the mutual fund industry (2015)
Jonathan B. Berk, Jules H. van Binsbergen
Journal of Financial Economics 118(1), 1-20, URL/SSRN

From several of my earlier articles you may (correctly!) gained the impression that I am somewhat skeptical about the value-add of most (not all!) active fund managers. However, an excellent episode of the Rational Reminder Podcast featuring Jonathan Berk and Jules van Binsbergen convinced me of another perspective. This week’s AGNOSTIC Paper summarizes their work…

  • Alpha and outperformance alone do not measure skill
  • The average active manager added value – $3.2M per year
  • Investors identify and reward value-adding active managers
  • Active managers still overcharge – net alphas are negative

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SA #4: QMOM – Best-In-Class Momentum, Now 20% Cheaper

QMOM: Best-In-Class Momentum, Now 20% Cheaper
December 30, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies and has produced significant outperformance in the past.
  • The Alpha Architect U.S. Quantitative Momentum ETF follows a differentiated investment process that delivered strong momentum exposure in the past.
  • Over the last 5 years, QMOM outperformed several other momentum exchange-traded funds and an academic benchmark from Kenneth French.
  • On December 1, 2022, Alpha Architect (the manager of QMOM) announced that they will lower the management fee from 0.49% to 0.39% per 01/31/2023.
  • This is a reduction of about 20% and makes the QMOM ETF even more attractive for investors who seek active momentum exposure.


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SA #3: MTUM – Momentum, But Somewhat Slow

MTUM: Momentum, But Somewhat Slow
December 28, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies, and has provided significant outperformance in the past.
  • The MTUM ETF tracks the MSCI USA Momentum SR Variant Index and is an easy way to add momentum to a portfolio.
  • The ETF follows a transparent methodology and has performed mostly in line with the academic momentum benchmark from Kenneth French since 2013.
  • The key problem of the methodology, however, is the slow, six-month rebalancing – also the reason why MTUM suffered in 2022.
  • For investors who don’t want to take too much active risk and/or monitor active managers, the MTUM ETF is still a reasonable momentum implementation.


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AgPa #34: Inefficient Christmas Gifts

The Deadweight Loss of Christmas (1993)
Joel Waldfogel
The American Economic Review 83(5), 1328-1336, URL

Welcome to the Christmas edition! As a rare exception, this AGNOSTIC Paper is not about finance and investing. Instead, we will look at the economics of Christmas gifts…

  • Many non-cash gifts are economically inefficient
  • The deadweight loss of Christmas is in the billions

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AgPa #33: World Cups and Stock Markets

Sports Sentiment and Stock Returns (2007)
Alex Edmans, Diego García and Øyvind Norli
The Journal of Finance 62(4), 1967-1998, URL

Given that this week’s AGNOSTIC Paper coincides with the final of the World Cup, I couldn’t resist the temptation. Below you can see a chart of the knockout stage of this year’s tournament. But since you are visiting a nerdy finance website, the focus is not on the results, but on the post-match stock market returns of the playing countries…


You may (understandably) say that this is some nice storytelling but not much more. However, I didn’t made this up to create a story but the idea of this analysis actually comes from this week’s AGNOSTIC paper…

  • Stock markets of losing countries tend to underperform after important matches
  • The effect most likely comes from bad mood after sport losses

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AgPa #32: Agnostic Fundamental Analysis (3/3)

Boosting agnostic fundamental analysis: Using machine learning to identify mispricing in European stock markets (2022)
Matthias X.Hanauer, Marina Kononova, Marc Steffen Rapp
Finance Research Letters 48, URL/SSRN

The third and final post about agnostic fundamental analysis. This week’s AGNOSTIC Paper challenges the simple linear methodology and introduces vastly improved valuation models…

  • More sophisticated valuation models yielded better performance
  • Different models emphasize different fundamental variables

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AgPa #31: Agnostic Fundamental Analysis (2/3)

Global market inefficiencies (2021)
Söhnke M. Bartram, Mark Grinblatt
Journal of Financial Economics 139(1), 234-259, URL/SSRN

The second AGNOSTIC Paper on agnostic fundamental analysis. This one is the international out-of-sample test where the authors apply their methodology to stock markets around the world. The results point in the same direction and suggest robust out-of-sample evidence…

  • Undervalued stocks outperformed overvalued stocks – also globally
  • Agnostic fundamental analysis yielded significant alpha – globally and against up to 80 factors
  • Agnostic fundamental analysis remains profitable after transaction costs
  • The degree of market efficiency differs around the world

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AgPa #30: Agnostic Fundamental Analysis (1/3)

Agnostic fundamental analysis works (2018)
Söhnke M. Bartram, Mark Grinblatt
Journal of Financial Economics 128(1), 125-147, URL/SSRN

This week’s AGNOSTIC Paper tackles a very basic question: Does fundamental analysis work? For that purpose, the authors introduce an agnostic valuation model that explains the market capitalization of companies by their most recent fundamentals. A strategy that bets on the convergence of prices and estimated “fair” values generated strong profits between 1987 and 2012…

  • Undervalued stocks outperformed overvalued stocks by about 0.5% per month
  • Agnostic fundamental analysis yielded significant alpha

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SA #2: QMOM – A Close Look At The Methodology

QMOM: A Close Look At The Methodology
November 20, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies and produced significant outperformance in the past.
  • Over the last 5 years, the QMOM ETF outperformed the academic benchmark from Kenneth French and several other momentum ETFs.
  • The QMOM ETF achieved this by a differentiated momentum-investment process, which I will analyze in this article.
  • The QMOM ETF delivered momentum exposure and helps to add momentum to basically all portfolios.


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SA #1: MSCI – Even Quality Can Become Too Expensive

MSCI: Even Quality Can Become Too Expensive
November 9, 2022

Summary

  • On October 25, MSCI reported quite strong 9M numbers and, for the moment, defended its high multiples (LTM P/E about 44).
  • In this article, I focus on a high-level valuation of MSCI to decide if it’s worth analyzing the stock in more detail.
  • Using a standard DCF-WACC model, market data for interest rates, and reasonable estimates for future fundamentals suggests massive overvaluation (theoretical downside of 54%).
  • The result is very similar when comparing MSCI to common valuation multiples of a peer group. Depending on the multiple, the company trades at a premium of up to 60%.
  • MSCI is undeniably a very high-quality company. But at the current levels, the company just appears way too expensive. So I am not yet interested.


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