USA

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 #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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SA #8: SPMO – Large Cap Momentum At Its Best

SPMO: Large Cap Momentum At Its Best
January 19, 2023

Summary

  • Momentum is the simple idea that stocks which performed relatively strong over the recent past (winners) tend to outperform those that performed poorly (losers).
  • The Invesco S&P 500 Momentum ETF invests in the 100 stocks with the highest “momentum score” (12-month return) from the S&P 500 Index.
  • Since inception in 2015, SPMO delivered momentum exposure with respect to the academic benchmark of Kenneth French. Since 2017, it also outperformed most momentum-peers.
  • SPMO especially outperformed MTUM, a similar large cap momentum ETF. However, most of this outperformance is unlikely systematic and probably comes from different rebalancing dates in 2022.
  • For investors who actively want large-cap momentum exposure, SPMO is a reasonable and cheap instrument. For those who want general momentum exposure, a fund with a larger universe is probably the better choice.


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SA #7: ITOT Vs. VTI – Since 2015 Very Similar, But VTI Still Ahead

ITOT Vs. VTI: Since 2015 Very Similar, But VTI Still Ahead
January 13, 2023

Summary

  • The iShares Core S&P Total U.S. Stock Market ETF (ITOT) and Vanguard Total Stock Market ETF (VTI) are among the largest ETFs to invest passively in the US equity market.
  • For the longest common period since 2004, ITOT underperformed VTI by about 20%-points or slightly more than 20 basis points per year.
  • However, just looking at this long-term performance chart is somewhat misleading here. Because of several changes, the two funds tracked 5 different indices over the last 15 years.
  • Starting in December 2015, ITOT switched from the S&P 1500 to the S&P Total Market Index which made the two ETFs mostly comparable. The performance gap to VTI also narrowed.
  • The analysis shows that even passive investors should not only compare ETFs by their historical performance but also pay close attention to the underlying indices, and even more important, index/benchmark changes.


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SA #6: VTI – Truly Passive Investing In The U.S. Market

VTI: Truly Passive Investing In The U.S. Market
January 6, 2023

Summary

  • In this article, I examine how investors can get truly passive exposure to the US equity market.
  • Passive investing emerged from academia and offers benefits through diversification, low fees, and historically better performance than the average active manager.
  • To passively invest in US equities, we need a market cap-weighted portfolio of all investable US stocks.
  • One proxy for that is the CRSP U.S. Total Market Index which currently consists of slightly more than 4,000 stocks – 8 times more than the S&P 500.
  • Historically, VTI followed this index with almost no tracking error and is thus among the best instruments to invest truly passively in US equities.


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SA #5: VOO – One Of The Best S&P 500 ETFs, But Far From Truly Passive

VOO: One Of The Best S&P 500 ETFs, But Far From Truly Passive
January 4, 2023

Summary

  • The S&P 500 Index is probably the most important equity index in the world.
  • For many investors, an ETF that tracks the S&P 500 became synonymous with passive investing.
  • In this article, I will compare the three largest ETFs on the index (SPY, IVV, and VOO) and challenge the passiveness of the S&P 500.
  • Based on historical performance, current expense ratios, scale, and the underlying manager profile, I would personally use the Vanguard S&P 500 ETF to track the index.
  • Within the US, the S&P 500 is a reasonable passive benchmark. From a global perspective, however, it is an active bet on US large caps.


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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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