Growth Predictions, Growth Surprises, and Equity Returns
What matters is not the expectation of future growth, but the deviation between projected growth and realized growth, which, by definition is a surprise, and, thus, is not forecastable.
About Larry Swedroe
Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future.Artificial Intelligence and the Risks of Harking (Hypothesizing After-the-Fact)
Because AI systems can produce hundreds of seemingly coherent theoretical explanations for mined empirical results, investors need to establish high hurdles before allocating to anomaly-based strategies.
Private Credit: Upper Versus Lower Middle Market Lending
Given the similar net returns that UMM and LMM loans have delivered, allocators should consider diversifying across borrower size cohorts. Since LLM loans are somewhat riskier, careful due diligence should be performed in terms of a lender’s credit loss history, fees/expenses, and use of leverage.
Investigating Simple Formulaic Investing
Simple, easy-to-implement, systematic formula-based investing can still generate market outperformance, providing investors with efficient exposure to well-documented factor premiums.
Forecasting Earnings, Artificial Intelligence (AI) Versus Equity Analysts
A critical task in stock selection is identifying a firm’s true profitability. Given the potential of AI to deal with large data, an important question is: Can AI outsmart seasoned analysts?
Intangibles and the Performance of the Value Factor
Systematic factor-driven value strategies have underperformed broad market indices (such as the S&P 500) over the past 15+ years. That has led many to question [...]
Private Equity Versus Public Equity Returns
Cliffwater found that private equity allocations by state pensions produced a 11.0% net-of-fee annualized return over the 23-year period ending June 30, 2023. Over the same period the CRSP 1-10 Index (U.S. total market) returned 7.2% and the MSCI All Country World ex USA Index returned 4.4%.
Diversifying Trend Following Strategies Improves Portfolio Efficiency
Allocation to trend following can further improve the efficiency of their portfolio by also adding allocations to the other uncorrelated strategies, further reducing tail risks by reducing the dispersion of potential outcomes.
Calendar Anomalies, Much Ado About Nothing
An anomaly is a pattern in stock returns that deviates from what is expected based on established financial theories or models. These patterns can sometimes [...]
Improving Low Volatility Strategies
The bottom line is that returns to the low volatility anomaly have only justified investing when low-volatility stocks were in the value regime, after periods of strong market performance, and when they excluded high-volatility stocks that have low short interest (providing clues as to how to improve its performance). This may be why live funds have been generating large negative alphas once we account for common factor exposures.
The Explosive Growth of Private Credit: Is There a Bubble?
The growth rate of private credit has been so rapid (growing to nearly $2 trillion by the end of 2023, roughly ten times larger than it was in 2009), that concerns about there being a bubble have been raised.
Markets Becoming More Efficient: The Disappearing Index Effect
Greenwood and Sammon’s findings of a disappearing index effect provides further support for the findings of McLean and Pontiff, Does Academic Research Destroy Stock Return Predictability? 2016. Once anomalies are well recognized by the market they decline and may even disappear, though limits to arbitrage can allow them to persist. Their findings also provide support for Andrew Lo’s The Adaptive Markets Hypothesis (2004). The bottom line is that markets are becoming more efficient, raising the hurdles for active managers to generate alpha.
Using Trading Volume to Optimize Portfolio Construction and Implementation
The authors of the research discussed developed a machine learning model that can accurately predict trading volume for individual stocks. They then demonstrated how this model can be used to construct a portfolio that outperforms a traditional market-cap weighted portfolio.
Academic Anomalies Formed After Information Events
The hurdles to adding alpha for active managers are getting higher—investment practitioners make use of it as soon as or shortly after it is available.
Artificial Intelligence, Textual Analysis and Hedge Fund Performance
There’s no reason to think that the use of AI should lead to persistent fund outperformance, with any advantages gained likely being short lived.
The Sahm Rule as a Recession Indicator
Because the Sahm rule focuses solely on the unemployment rate, caution is warranted before assuming it is signaling a recession.
The Hidden Cost of Index Replication
An index-tracking approach generally lacks flexibility, which detracts from performance, leaving returns on the table. Intelligent design can overcome such issues. For example, an S&P 500 Index could choose to rebalance one month ahead of the scheduled reconstitution, minimizing the impact of reconstitution. Direct index funds are already engaging in such strategies with ETFs.
Can Skewness Identify Future Outperforming Mutual Funds
While the skewness metric did demonstrate that it could select funds with managers skilled a security selection, the fund’s expenses and implementation meant that the fund was just about able to cover its expenses, and that was before the negative impact of active management on after-tax returns—and the finding was not statistically significant at even the 10% level of confidence.
Data-driven Approach to Clustering Similar Macroeconomic Regimes
Knowing what economic regime we might be in won’t provide you with the crystal ball allowing you to foresee what geopolitical events will drive markets, whether “black swans” will appear, or identify whatever unexpected events or government policy actions will drive markets.
Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha
Joseph Liberman, Stanley Krasner, Nathan Sosner, and Pedro Freitas, authors of the September 2023 study “Beyond Direct Indexing: Dynamic Direct Long-Short Investing,” examined if the utilization of leverage and long-short strategies motivated by the literature on factor-based investing could improve on the tax benefits of direct indexing and tax-loss harvesting.