Everyone, Even a Passive Vanguard Investor, is a Factor Investor
Much has been made of Factor Investing, and even Vanguard is launching a suite of actively-managed factor ETFs. But even now, with Vanguard offering factor [...]
Do factor portfolios survive transaction costs?
Factor investing, and the associated intellectual battles, have raged for decades in academic finance journals. However, now that factor investing has gone mainstream via ETFs, [...]
Monetary Momentum
On most mainstream finance websites, a good chunk of the stories discuss the FED and where interest rates are going. Intuitively, this makes sense: The [...]
Factor Investors Beware: Positive SMB May Not Mean You Own Small-Caps
Regression analysis is used all the time to assess how a portfolio "loads" on certain factors. The most common factor loadings examined are the market, [...]
Do Portfolio Factors or Characteristics Drive Expected Returns?
This article examines a somewhat overlooked, but important, discussion that raged among academic researchers on the source of the value investing premium in the late 1990s and early 2000s—the topic: factors vs characteristics.
Factor Investing with Factor Expert Lu Zhang
Replicating Anomalies is arguably a "must-read" for anyone who thinks about factor investing and is looking to improve their understanding of the space. Lu Zhang, [...]
Takeaways from a Non-PHD who Powered Through a 144-page Factor Investing Paper
Wes recently challenged me with a unique proposition: Hey Ryan, read through this Replicating Anomalies paper and tell me what you think. Its a bit [...]
Academic Research Insight: Stick to the Fundamentals and Discover Your Industry Peers
Stick to the Fundamentals and Discover Your Peers Jean Overgaard Knudsen, Simon Kold and Thomas Plenborg A version of this paper can be found here Want [...]
Trend-Following: A Deep Dive Into A Unique Risk Premium
Trend-following strategies have historically been laughed at via the modern academic finance research community. Having first-hand knowledge of that community, we can verify that academic [...]
A Fund Flows Theory for Value and Momentum Investing
Value and Momentum Investing -- our two favorite factors. We talk about these phenomena on our blog all the time, and have given both rational and behavioral explanations as to why these may occur. However, very few in the finance community are direct investors into Value and Momentum securities -- the individual stocks (or bonds) themselves. Many use ETFs or mutual funds to gain access to these factors. Institutions generally do the same, either investing in hedge funds or managed accounts. This is delegated asset management, whereby one delegates the decision of the security selection onto a third-party manager. A by-product of delegation is that from time to time, the third-party manager must be assessed. While many may claim the process is most important, the performance is always taken into consideration. So what happens to a Value manager who is overweight the wrong industry? While the manager may be following the same process discussed ex-ante, the ex-post assessment may be that the manager needs to be fired due to underperformance.
Replicating Anomalies
Academic research is amazing and incredibly useful for helping us better understand the complex world in which we live. In fact, academic research has literally [...]
Reconciling Individual Stock Returns and Factor Portfolio Returns
Those in the financial media have recently been writing multiple stories on a fascinating working paper, "Do Stocks Outperform Treasury Bills?" by Hendrik Bessembinder. We [...]
ETF Product Development: Past, Present, and Future
On October 1st, 1908 Henry Ford introduced the Model T to the world. The power of the Model T was that it democratized the automobile [...]
Factor Timing Investigation: Interest Rates, Value Spreads, and Factor Premiums
Now that the Federal Reserve has begun the process of raising interest rates, and has announced their intention to begin to unwind their policy of [...]
Ben Graham on Passive Investing
The passive investing revolution is truly upon us. Ever since 1975, when Jack Bogle introduced the first index mutual fund, passive indexing has marched on [...]
What Happens When you Data Mine 2 million Fundamental Quant Strategies
As we have mentioned before, here, here and here, there is overwhelming evidence that the number of stock anomalies in the universe is much lower than [...]
Short Term Momentum and Long Term Reversals Can Coexist
In their seminal 1993 paper, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” Narasimhan Jegadeesh and Sheridan Titman reported significant returns [...]
Portfolio Allocations using Enterprise Multiples (and others)
A common question asked in the factor investing field is the following -- "how much of the model's performance is driven by sector allocations, and how much is driven by security selection?" Our answer is to simply buy Value stocks or Momentum stocks, regardless of sector constraints. Why? Well a nice anecdote (but not data) is that investing in "cheap" technology stocks was not a great idea in the internet bubble crash.
Academic Research Insight: Can Bond Portfolios Be “Factorized”?
Title: Factor Investing in the Bond Market Authors: Patrick Houweling and Jeroen van Zundert Publication: Financial Analysts Journal, Vol. 3 No. 2, 2017 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516322) What [...]
Trick Question: How is the Momentum Factor Performing YTD?
If you ask your typical long-only investor (or financial advisor) how momentum is doing this year they'll likely say, "Amazing!" This statement will almost surely [...]