Equities

AgPa #48: Investable Machine Learning for Equities

Investable and Interpretable Machine Learning for Equities (2022)
Yimou Li, Zachary Simon, David Turkington
The Journal of Financial Data Science Winter 2022, 4(1), URL

Regular readers of this blog know that machine learning in asset management is one of my favorite topics and I recently found new interesting material. This week’s AGNOSTIC Paper is the first of two studies and examines an important issue with machine learning models in great detail: interpretability…

  • Machine learning models outperform simpler methods
  • Different models learn different investment approaches

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SA #17: IUSV – Transparent Value With Modest Active Risk

IUSV: Transparent Value With Modest Active Risk
March 29, 2023

Summary

  • The general idea behind the value factor is that a diversified portfolio of fundamentally cheap stocks should outperform over the long term.
  • Since January 2017, the iShares Core S&P U.S. Value ETF has tracked the S&P 900 Value Index and provides transparent exposure to the well-researched value premium.
  • S&P uses three well-known fundamental valuation ratios to identify and overweight “cheap” value stocks with respect to the overall market index.
  • Relying on multiple value signals is in line with the research consensus of the literature on the value factor and differentiates IUSV from some competitors.
  • Despite the recent value drawdown, IUSV kept up with a peer group and should be a reasonable instrument for investors who want to have U.S. large-cap value exposure at modest active risk.


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SA #16: IWD – Low Growth Is Not Necessarily Value – Also For Large Caps

IWD: Low Growth Is Not Necessarily Value – Also For Large Caps
March 27, 2023

Summary

  • There are countless methods and nuances of (systematic) value investing, but the general idea remains “cheap beats expensive”. Not always, but on average over the long run.
  • The iShares Russell 1000 Value ETF tracks the Russell 1000 Value Index and offers a simple, transparent, and cheap implementation of the value premium for US large caps.
  • The Russell value process unfortunately equates “low sales growth” with “value” which contradicts with the best practices discussed in the literature on the value factor.
  • Despite decent performance when compared to an investable value peer-group, IWD is therefore not my preferred value implementation.


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AgPa #47: Equity Factors without Shorting

When Equity Factors Drop Their Shorts (2020)
David Blitz, Guido Baltussen, Pim van Vliet
Financial Analysts Journal, 76(4), URL

This week’s AGNOSTIC Paper examines the important issue of performance contributions from the long and short legs of the major factor premiums. In English: can we profitably invest in factors without shorting a large number of stocks?

  • The long-legs of factors are more important than the short-legs
  • The same pattern holds in international markets

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AgPa #46: Transaction Costs and Capacities of Factor Strategies

Transaction Costs of Factor-Investing Strategies (2019)
Feifei Li, Tzee-Man Chow, Alex Pickard, Yadwinder Garg
Financial Analysts Journal 75(2), 47-61, URL

In this week’s AGNOSTIC paper, the authors develop a transaction cost model and use it to estimate the capacity of the major factors. There are many ways to define capacity in more detail, but the general idea is quite simple. It is the amount of money you can invest in a profitable strategy before you move prices too much and lose your advantage. Unfortunately, what theoretically sounds simple and intuitive is actually quite difficult to estimate in practice…

  • Implementation costs depend on tilt, turnover, and execution speed
  • Capacities of factors for a maximum cost of 0.5% per year
  • There is not yet a consensus on factor capacities

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AgPa #44: Betting against Quant – Thematic Indices

Betting against Quant: Examining the Factor Exposures of Thematic Indexes (2021)
David Blitz
The Journal of Beta Investment Strategies Winter 2021, URL/SSRN

This week’s AGNOSTIC Paper examines a recent trend in the asset management industry: thematic indices. The sales pitch is simple. With a thematic index you can easily invest in the “next big things”. Artificial intelligence, aging population, e-sports and gaming, healthcare breakthroughs – just name your buzzword and you will find an investment product for it. This week’s paper is among the first that examine such thematic investments through the lens of the major factor premiums.

  • Thematic indices are more volatile and have higher betas than the overall market
  • Thematic indices tend to hold expensive, low-quality stocks with neutral momentum
  • There are still reasons why thematic indices exist

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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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