SA #15: VLUE – Transparent Value With Little Industry Bets

VLUE: Transparent Value With Little Industry Bets
February 28, 2023

Summary

  • The core idea of value investing remains unchanged since its introduction by Graham and Dodd in the 1930s: fundamentally cheap stocks tend to beat expensive stocks on average.
  • The iShares Edge MSCI USA Value Factor ETF tracks the MSCI USA Enhanced Value Index and provides cheap, efficient, and transparent systematic value exposure among US large caps.
  • Importantly, the underlying value index incorporates several insights of the literature on the value factor (multiple value signals, value-rankings within sectors, and no unintended industry bets).
  • For investors who want US value exposure without running into unintended sector bets and without taking too much active risk, VLUE is an interesting instrument.


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SA #14: IWN – Low Growth Is Not Necessarily Value

IWN: Low Growth Is Not Necessarily Value
February 28, 2023

Summary

  • Systematic value investing is the idea that fundamentally cheap stocks tend to outperform expensive stocks over the long term on average.
  • The iShares Russell 2000 Value ETF tracks the Russell 2000 Value Index and offers a simple, transparent, and cheap implementation of the value premium for US small caps.
  • Unfortunately, the index equates “value” with “low sales growth” and therefore contradicts with well-known results of the academic and practitioner literature on the value factor.
  • Despite decent performance since inception in 2000 and over the last years, IWN is therefore not my preferred value instrument.


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AgPa #43: Buffett’s Alpha

Buffett’s Alpha (2018)
Andrea Frazzini, David Kabiller, Lasse Heje Pedersen
Financial Analysts Journal 74(4), URL

In this week’s AGNOSTIC Paper, the authors use the major factor premiums to examine one of the best long-term investment track records in the world – Warren Buffett and Berkshire Hathaway. The latest annual report just came out a few days ago and (as usual) summarizes Berkshire’s performance on the first page. From 1965 to 2022, Berkshire returned 19.8% per year versus 9.9% for the S&P 500. That’s a 24,708% cumulative return for the S&P 500, and an unbelievable 3,787,464% return for Berkshire. There are some investors who achieved even better results over shorter time periods. But to the best of my knowledge, there is no 58-year track record that is even remotely comparable to Buffett.

  • How good is Berkshire? Damn good…
  • The Buffett Style: cheap stocks with high-quality and low-risk
  • Don’t practice what you preach – Buffett’s Leverage…
  • Systematizing Buffett and Berkshire

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SA #13: QVAL – A Close Look At The Methodology

QVAL: A Close Look At The Methodology
February 20, 2023

Summary

  • Value investing is one of the oldest investment styles, and the original idea remains unchanged: cheap stocks tend to outperform expensive stocks on average.
  • Despite weak performance from 2018 until recently, the underlying drivers of the value premium remain still valid and the factor enjoyed a comeback since late 2020.
  • The Alpha Architect U.S. Quantitative Value ETF couldn’t detach itself from the difficult value-period and has massively underperformed the S&P 500 benchmark since its inception in October 2014.
  • QVAL also had problems within the value world. The ETF underperformed two simple academic value benchmarks from Kenneth French’s website, and 7 other well-known value peers.
  • Some of the underperformance could come from the fact that Alpha Architect does not consider more recent academic insights on value investing in some parts of their process.


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AgPa #42: Global Factors since 1800

Global factor premiums (2021)
Guido Baltussen, Laurens Swinkels, Pim van Vliet
Journal of Financial Economics 124(3), 1128-1154, URL

This week’s AGNOSTIC Paper is another out-of-sample test of the major factors and goes even further back in time than the last one. The authors examine the major factor premiums among equity indices, government bond indices, currencies, and commodities in a sample that ranges from December 31, 1799 to December 31, 2016.

  • Momentum, Value, and Low-Risk “worked” globally, in different asset classes, and out-of-sample
  • There is little evidence for factor decay

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AgPa #41: US Factors before 1926

The Cross-Section of Stock Returns before CRSP (2023)
Guido Baltussen, Bart van Vliet, Pim van Vliet
SSRN Working Paper, URL

This week’s AGNOSTIC Paper is an unprecedented out-of-sample test of the four major factors (Momentum, Value, Low-Risk, Size). The authors construct a novel dataset of US stocks that reaches from 1866 to 1926. It therefore extends the extensively studied CRSP dataset by 60 years.

  • Momentum, Value, and Low-Risk were there before 1926
  • Factors weren’t stronger before 1926
  • Machine learning models find the same factors

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SA #12: VOO – Global Revenues And Global Diversification Are Not The Same

VOO: Global Revenues And Global Diversification Are Not The Same
February 07, 2023

Summary

  • In 2017, about 29% of S&P 500 revenues came from overseas. This fraction increased to about 40% by the end of 2022.
  • Some investors argue that this global exposure is a substitute for true international diversification, i.e., that it is not required to invest in non-US stocks.
  • Global revenues certainly help to stabilize the fundamentals and stock prices of the underlying companies, but they are unlikely to save your portfolio from bets on the wrong country/region.
  • A counterexample from European stock markets shows that true global diversification was much better to escape the region’s underperformance than overweighting European companies with a higher share of global revenues.
  • That said, the Vanguard S&P 500 ETF (VOO) remains an outstanding instrument to track the S&P 500 Index. But despite global revenues of the underlying firms, it remains a bet on US large caps.


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SA #11: QMOM – Second-Best In The Momentum Crash of January 2023

QMOM: Second-Best In The Momentum Crash Of January 2023
February 06, 2023

Summary

  • January 2023 was brutal for momentum because many of last year’s losers suddenly outperformed – a momentum crash par excellence.
  • The Dow Jones US Market Neutral Momentum Index, a simple and transparent implementation of the long-short momentum factor, lost 19% YTD (as of February 3, 2023).
  • Most of the losses came from the short-side. The Dow Jones US Low Momentum Index, the portfolio of past losers, returned 25.68% YTD.
  • The Alpha Architect U.S. Quantitative Momentum ETF returned -0.83% YTD and underperformed the US market by >10% points. Although painful, this is still second-best in a peer-group of other momentum ETFs.
  • This speaks for the differentiated momentum process of Alpha Architect. Nobody likes bad months, but momentum crashes are actually a plausible reason why momentum worked historically and probably continues to do so in the future.


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AgPa #40: Size Effect – Fact and Fiction

Fact, Fiction, and the Size Effect (2018)
Ron Alquist, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2018, 45 (1) 34-61, URL/AQR

After examining several Facts and Fictions around factor investing in general, momentum, value, and low-risk, this week’s AGNOSTIC Paper tackles the final anomaly. The size effect received a lot of attention in both academia and the investment industry, probably because it is one of the oldest documented anomalies. In this final paper of their Fact and Fictions series, the authors examine some myths around it.

  • Fiction: Size is the strongest documented factor
  • Fact: The size effect weakened since its discovery
  • Fiction: The size effect is robust across different measures
  • Fact: The size effect is strongly related to the January effect
  • Fiction: Size also works in international equity markets
  • Fact: Size does not work within other asset classes
  • Fact: Most of the size effect are micro cap stocks
  • Fact: Size is difficult to implement in real-world portfolios
  • Fiction: The size effect is more than just a liquidity effect
  • Fiction: There are economic theories for the size effect
  • Fiction: Size works because other factors are stronger among small cap stocks
  • Fact: There are reasons to overweight small caps even without the size effect
  • Fact and Fiction: The size effect is stronger when controlling for other factors
  • Fact: Size receives a lot of attention despite weak evidence

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SA #10: ACWI Vs. VT – Vanguard Wins Again

ACWI Vs. VT: Vanguard Wins Again
January 30, 2023

Summary

  • In this article, I focus on the iShares MSCI ACWI ETF (ACWI) and how it compares to the Vanguard Total World Stock ETF (VT).
  • For the longest common period since June 2008, ACWI currently lags VT by about 14%-points or 41 basis points per year.
  • The performance gap mostly comes from different underlying indices. VT tracks an index with >9,400 stocks whereas ACWI ignores small caps and “only” holds about 2,800 positions.
  • ACWI is thus farther away from the academic idea of truly passive investing (holding a market-cap weighted portfolio of all investable stocks).
  • ACWI also comes with higher fees (0.32% TER vs. 0.07% for VT). For investors who seek passive exposure to global stock markets, VT therefore seems the better choice.


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