Value Investing

AgPa #53: Investing in Interesting Times

Investing in Interesting Times (2023)
Annti Ilmanen
The Journal of Portfolio Management Multi-Asset Special Issue 2023, URL/AQR

Almost exactly one year ago, Antti Ilmanen (Partner at AQR Capital Management) released his outstanding book Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least. The book is (in my opinion) a must-read and the timing couldn’t have been better. Many of the key themes began to materialize in 2022. Given how much markets have changed since then, Antti released a few updates for six of his major ideas in this week’s AGNOSTIC Paper.

  • The low expected return challenge
  • Investors’ response to low expected returns – private markets
  • What happened in 2022 and where we stand now
  • Long-only versus long-short strategies
  • Downside protection via trend-following

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SA #18: RPV – ‘Pure Value’ Is Indeed More Value Than ‘Value’

RPV: 'Pure Value' Is Indeed More Value Than 'Value'
April 08, 2023

Summary

  • Systematic value investors bet that a diversified portfolio of fundamentally “cheap” stocks should outperform a portfolio of “expensive” stocks over the long term.
  • The Invesco S&P 500 Pure Value ETF tracks the S&P 500 Pure Value Index and was incepted in March 2006.
  • Compared to other “smart-beta” value ETFs, RPV is a more aggressive value-strategy and only invests in the top 20% value stocks of the S&P 500 universe (currently 82 positions).
  • With this methodology and three fundamental valuation ratios as value signals, the investment process underlying RPV incorporates several best-practices from the academic literature on the value-factor.
  • RPV is well positioned in a value-peer group and (in my opinion) a very good instrument for investors seeking concentrated exposure to the value-factor.


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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 #45: Factor Investing in Private Debt

Investing with Style in Liquid Private Debt (2022)
Thomas Mählmann, Galina Sukonnik
Financial Analysts Journal 78(3), URL

This week’s AGNOSTIC Paper is yet another out-of-sample test of the Momentum and Value factor. The authors apply the factors within the relatively new asset class of private debt. More specifically, for “[…] loans to non-investment grade issuers, commonly known as leveraged loans.” This is obviously not my main area of expertise, but I learned from the paper that there is quite some trading of such loans in private secondary markets. Implementing a factor strategy for leveraged loans is obviously more complicated than for equities, but this is exactly what makes this study so interesting.

  • Private debt improves multi-asset portfolios
  • Value and Momentum are profitable within private debt

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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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AgPa #38: Value Investing – Fact and Fiction

Fact, Fiction, and Value Investing (2015)
Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2015, 42(1) 34-52, URL/AQR

After busting some myths around momentum, this week’s AGNOSTIC Paper is the sequel for value investing. The authors, the same AQR crew as last week, present several Facts and Fictions around value investing which is actually one of the oldest investment styles out there.

  • Fiction: Value investing requires concentrated portfolios
  • Fiction: Value has low turnover and is thus passive
  • Fact: Fundamental indexing is similar to systematic value investing
  • Fact: Profitability signals improve value investing
  • Fiction: Value is redundant in modern factor models
  • Fact: Value also works in other asset classes
  • Fact: Value is best measured by a composite of signals
  • Fact: Value is quite weak among large caps
  • Fiction: The value premium should disappear because there are no plausible explanations

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