Value Investing Research

The Role of the Secular Decline in Interest Rates in Asset Pricing Anomalies

By |November 10th, 2022|Research Insights, Value Investing Research, Macroeconomics Research|

Jules van Binsbergen, Liang Ma and Michael Schwert, authors of the September 2022 study “The Factor Multiverse: The Role of Interest Rates in Factor Discovery,” posed an interesting question: Are the findings of at least some of the reported anomalies the direct result of the 40-year secular decline in global interest rates and thus not really anomalies?

Momentum Everywhere, Including in Factors

By |July 14th, 2022|Research Insights, Factor Investing, Larry Swedroe, Trend Following, Academic Research Insight, Value Investing Research, Momentum Investing Research|

Managed portfolios that exploit positive first-order autocorrelation in monthly excess returns of equity factor portfolios produce large alphas and gains in Sharpe ratios. We document this finding for factor portfolios formed on the broad market, size, value, momentum, investment, prof- itability, and volatility. The value-added induced by factor management via short-term momentum is a robust empirical phenomenon that survives transaction costs and carries over to multi-factor portfolios. The novel strategy established in this work compares favorably to well-known timing strategies that employ e.g. factor volatility or factor valuation. For the majority of factors, our strategies appear successful especially in recessions and times of crisis.

Does Intangible-Adjusted Book-to-Market Work?

By |July 6th, 2022|Research Insights, Factor Investing, Basilico and Johnsen, Academic Research Insight, Value Investing Research|

The book-to-market ratio has been widely used to explain the cross-sectional variation in stock returns, but the explanatory power is weaker in recent decades than in the 1970s. I argue that the deterioration is related to the growth of intangible assets unrecorded on balance sheets. An intangible-adjusted ratio, capitalizing prior expenditures to develop intangible assets internally and excluding goodwill, outperforms the original ratio significantly. The average annual return on the intangible-adjusted highminus-low (iHML) portfolio is 5.9% from July 1976 to December 2017 and 6.2% from July 1997 to December 2017, vs. 3.9% and 3.6% for an equivalent HML portfolio

Combining Factors in Multifactor Portfolios

By |June 30th, 2022|Research Insights, Factor Investing, Larry Swedroe, Value Investing Research, Momentum Investing Research|

Reschenhofer’s findings demonstrate the important role that portfolio construction rules (such as creating efficient buy and hold ranges or imposing screens that exclude stocks with negative momentum) play in determining not only the risk and expected return of a portfolio but how efficiently the strategy can be implemented (considering the impact of turnover and trading costs)—wide (narrow) thresholds reduce (increase) portfolio turnover and transactions costs, thereby increasing after-cost returns and Sharpe ratios. His findings also provide support for multiple characteristics-based scorings to form long-only factor portfolios, encouraging the combination of slow-moving characteristics (such as value, investment and/or profitability) conditional on fast moving characteristics (such as momentum), to reduce portfolio turnover and transactions cost. Fund families such as AQR, Avantis, Bridgeway and Dimensional use such an approach, integrating multiple characteristics into their portfolios conditional on momentum signals.

Can Machine Learning Identify Future Outperforming Active Equity Funds?

By |June 23rd, 2022|Research Insights, Factor Investing, Larry Swedroe, Trend Following, Academic Research Insight, Machine Learning, Value Investing Research, Momentum Investing Research|

We show, using machine learning, that fund characteristics can consistently differentiate high from low-performing mutual funds, as well as identify funds with net-of-fees abnormal returns. Fund momentum and fund flow are the most important predictors of future risk-adjusted fund performance, while characteristics of the stocks that funds hold are not predictive. Returns of predictive long-short portfolios are higher following a period of high sentiment or a good state of the macro-economy. Our estimation with neural networks enables us to uncover novel and substantial interaction effects between sentiment and both fund flow and fund momentum.

Does Emerging Markets Investing Make Sense?

By |June 17th, 2022|Research Insights, Factor Investing, Key Research, Value Investing Research, Momentum Investing Research, Active and Passive Investing, Macroeconomics Research|

The analysis above suggests that portfolios that include or exclude emerging allocations are roughly the same. For some readers, this may be a surprise, but for many readers, this may not be "news." That said, even if the data don't strictly justify an Emerging allocation, the first principle of "stay diversified" might be enough to make an allocation.

Of course, the assumptions always matter.

The Unintended Consequences of Single Factor Strategies

By |June 10th, 2022|Quality Investing, Research Insights, Factor Investing, Larry Swedroe, Value Investing Research, Momentum Investing Research|

Since the 1992 publication of “The Cross-Section of Expected Stock Returns” by Eugene Fama and Kenneth French factor-based strategies and products have become an integral part of the global asset management landscape. While “top-down” allocation to factor premiums (such as size, value, momentum, quality, and low volatility) has become mainstream, questions remain about how to efficiently gain exposure to these premiums. Today, many generic factor products, often labeled as “smart beta”, completely disregard the impact of other factors when constructing portfolios with high exposures to any single factor. However, recent research, such as 2019 study “The Characteristics of Factor Investing” by  David Blitz and Milan Vidojevic, has shown that single-factor portfolios, which invest in stocks with high scores on one particular factor, can be suboptimal because they ignore the possibility that these stocks may be unattractive from the perspective of other factors that have demonstrated that they also have higher expected returns.

Value Investing: Headwinds, Tailwinds, and Variables

By |May 20th, 2022|Research Insights, Factor Investing, Value Investing Research, Tactical Asset Allocation Research|

Investing is no different. A question we regularly get in the current environment is "How does inflation affect value stocks?" Well...it depends. I could show you some data on how value stocks did in the 70's (period of high inflation) versus how they did in the 90's (low inflation). But if WW3 broke out tomorrow, wouldn't that variable quickly top all other variables? Probably. So let's table that variable.

Using Momentum to Find Value

By |May 5th, 2022|Research Insights, Factor Investing, Larry Swedroe, Trend Following, Academic Research Insight, Value Investing Research, Momentum Investing Research|

Value and momentum are two of the most powerful explanatory factors in finance. Research on both has been published for about 30 years. However, it was not until recently that the two had been studied in combination and across markets. Bijon Pani and Frank Fabozzi contribute to the literature with their study “Finding Value Using Momentum,” published in The Journal of Portfolio Management Quantitative Special Issue 2022, in which they examined whether using six value metrics that have an established academic background combined with the trend in relative valuations provide better risk-adjusted returns than Fama-French’s traditional HML (high minus low book-to-market ratio) factor. The value metrics chosen were book value-to-market value; cash flow-to-price; earnings before interest, taxes, depreciation, and amortization (EBITDA)-to-market value; earnings-to-price; profit margin-to-price; and sales-to-price. Using six different measures provides tests of robustness, minimizing the risk of data mining. However with so many dials to turn there is a risk of achieving positive returns that aren't material or achieving postive results with the potential for overfitting.

Betting Against Beta: New Insights

By |April 28th, 2022|Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight, Value Investing Research, Momentum Investing Research, Low Volatility Investing|

The intuition behind betting against beta is that leverage-constrained investors, instead of applying leverage, obtain an expected return higher than the market’s expected return through overweighting high-beta stocks and underweighting low-beta stocks in their portfolios. Their actions lower future risk-adjusted returns on high-beta stocks and increase future risk-adjusted returns on low-beta stocks. We take a deeper look into this idea.

New Accounting Standards and Factor Investing

By |March 7th, 2022|Research Insights, Factor Investing, Basilico and Johnsen, Academic Research Insight, Value Investing Research, Momentum Investing Research, Size Investing Research|

How well do quantitative investors navigate around the changes to the accounting standards that are endemic to the financial data used in quantitative strategies? The numbers reported on financial statements are wholly governed by regulation and by each firm’s interpretation of those accounting standards.  So how do quants stick to their empirical evidence on old data methods or do they react in terms of the strategy when the change in standards is material?

Is The Value Premium Smaller Than We Thought?

By |February 3rd, 2022|Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight, Value Investing Research, Momentum Investing Research|

From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could have caused assumptions to change about why the premium should exist/persist.

Factor Investing in Sovereign Bond Markets

By |January 13th, 2022|Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight, Fixed Income, Value Investing Research, Momentum Investing Research|

The reported results we covered have important implications for investors in terms of portfolio construction, risk monitoring, and manager selection. Because these common factors explain almost all the returns of bond portfolios, investors should construct their bond portfolios using low-cost, passively (systematically) managed funds with these factors in mind and then carefully monitor their exposure to these systematic risks.

The Relationship Between the Value Premium and Interest Rates

By |December 16th, 2021|Research Insights, Factor Investing, Larry Swedroe, Academic Research Insight, Value Investing Research, Tactical Asset Allocation Research|

We've been suffering through the deepest and longest drawdown in values history. Looking for a scapegoat to explain the lackluster performance many have pointed to low interest rates as the root cause of the underperformance. The question is have interest rates impacted value in the past?

Go to Top