a look at different passive strategies
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a look at different passive strategies
http://www.cbsnews.com/8301-505123_162- ... ve-funds/?
Thought would be of interest, even surprised me some of the data points.
Note if you subtracted securities lending revenue the expense gap would be narrower
Have also just finished a series on can passive funds capture their asset class returns in real world. Should be posted shortly, depending on what other events are happening.
Best wishes
Larry
Thought would be of interest, even surprised me some of the data points.
Note if you subtracted securities lending revenue the expense gap would be narrower
Have also just finished a series on can passive funds capture their asset class returns in real world. Should be posted shortly, depending on what other events are happening.
Best wishes
Larry
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Re: a look at different passive strategies
I would have expected the value weightings to be different, but essentially they're identical. Is it easier or less costly to load on value if the size factor is increased?
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Re: a look at different passive strategies
And if you use the Admiral Shares instead of the Investor shares for Vanguard the gap would be even wider...Note if you subtracted securities lending revenue the expense gap would be narrower
I am surprise you didn't structure your analysis as an (Factor Exposure/Expense Ratio). If you goal is to limit fees of portfolio while achieving a certain factor exposure wouldn't that be the relevant question.
Suspect more precision in the calcs than the data warrant
So - wtr the size factor - are you saying a .25 increase in size factor exposure is worth DFA's 27 bps? I can't math ... I don't understand how to use the delta-size-factor-exposure and size-premium variables to arrive at delta-expected-yield and thereby know if it is worth the delta-expense-ratio.
And since the future size premium is unknown - my 'good enough for gov't work' answer is to go with the lower cost fund, especially since my asset allocation to Small-Value is itself a shot in the dark. I know...sadly naive, but true.
And since the future size premium is unknown - my 'good enough for gov't work' answer is to go with the lower cost fund, especially since my asset allocation to Small-Value is itself a shot in the dark. I know...sadly naive, but true.
Re: a look at different passive strategies
And added in the DFA advisor layer of fees, even wider, but hey who's counting?pauliec84 wrote:And if you use the Admiral Shares instead of the Investor shares for Vanguard the gap would be even wider...Note if you subtracted securities lending revenue the expense gap would be narrower
Re: a look at different passive strategies
can someone give the definition or explanation for the two exposure/value factors?
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Re: a look at different passive strategies
Few thoughts
I was surprised to see similar value loading, not sure what is happening because if you look at metrics, whenever I have, DFA fund is higher BTM (lower p/e) and also smaller market cap, where value premium has been larger. So you want small value, really small.
Currently DFA/Vanguard
P/E 11.7/13.5
P/B .95/1.26
P/S .46/.71
p/C 4.28/5.77
As you can see by any metric DFA more valuey.
The size premium has been 3.15 percent, so .25 higher loading is close to 80bp a year.
There are also other factors to consider, but for a post to general public did not want to complicate it--so there are value adds by DFA via screens including MOM, etc. Plus the securities lending which in small value is not that great, but matters some.
Example, value funds tend to load about -.4 on MOM and DFA has got that to zero with the screens. My guess is Vanguard loads negatively. So loses some because of that.
Hope that helps
Larry
I was surprised to see similar value loading, not sure what is happening because if you look at metrics, whenever I have, DFA fund is higher BTM (lower p/e) and also smaller market cap, where value premium has been larger. So you want small value, really small.
Currently DFA/Vanguard
P/E 11.7/13.5
P/B .95/1.26
P/S .46/.71
p/C 4.28/5.77
As you can see by any metric DFA more valuey.
The size premium has been 3.15 percent, so .25 higher loading is close to 80bp a year.
There are also other factors to consider, but for a post to general public did not want to complicate it--so there are value adds by DFA via screens including MOM, etc. Plus the securities lending which in small value is not that great, but matters some.
Example, value funds tend to load about -.4 on MOM and DFA has got that to zero with the screens. My guess is Vanguard loads negatively. So loses some because of that.
Hope that helps
Larry
Re: a look at different passive strategies
Yes - helps. So... the factor load can be used like a percentage to multiply by the premium and get delta expected return. Thanks.
Re: a look at different passive strategies
Fair point about post for general public.
Per MOM Loads:
VIOV MOM = -0.017
VBR MOM = -0.081
DFSVX MOM = -0.030
So not so much different, although I do agree I would expect DFSVX to be more momentum neutral do to the scientific nature of their screens.
Unrelated have you seen this paper: http://subra.x10hosting.com/tcs15.pdf
Makes a good case for momentum and other anomalies being no more.
Per MOM Loads:
VIOV MOM = -0.017
VBR MOM = -0.081
DFSVX MOM = -0.030
So not so much different, although I do agree I would expect DFSVX to be more momentum neutral do to the scientific nature of their screens.
Unrelated have you seen this paper: http://subra.x10hosting.com/tcs15.pdf
Makes a good case for momentum and other anomalies being no more.
Re: a look at different passive strategies
Larry - your logic and example would be much more credible if you used a non-DFA fund to prove the point. By using DFA funds and showing their (apparent) superiority, you perpetuate the view that you are simply selling DFA. How about using an ETF from another fund company to prove the same point? It would remove the constant "DFA is superior" message, and it might be actionable by ordinary investors such as those here.yobria wrote:And added in the DFA advisor layer of fees, even wider, but hey who's counting?pauliec84 wrote:And if you use the Admiral Shares instead of the Investor shares for Vanguard the gap would be even wider...Note if you subtracted securities lending revenue the expense gap would be narrower
Best wishes.
Andy
Re: a look at different passive strategies
This probably reflects the fast that the S&P 600 is designed by a committee and thus is slower to change; small-cap stocks which become mid-caps may stay in the small-cap index rather than moving to the mid-cap index. (At the bottom, small-cap stocks which become micro-caps may also stay in the index, but those stocks are a very small part of the index.)pauliec84 wrote:Fair point about post for general public.
Per MOM Loads:
VIOV MOM = -0.017
VBR MOM = -0.081
DFSVX MOM = -0.030
But this momentum loading appears to be an argument for the S&P index over the MSCI or Russell indexes, now that Vanguard has all three. (On the other hand, the cost difference favors the MSCI; VBR or Admiral Shares of Small-Cap Value Index have 0.10% expenses ignoring the 0.11% acquired expenses from BDCs.)
Re: a look at different passive strategies
The DFA fund certainly had a period of outperformance when it was a much smaller company (total company assets have grown from $50B to $250B over the last 10 years), but it didn't persist as they grew. Over the last eight years, for example:
Re: a look at different passive strategies
Hi Andy, FYI Larry no longer recommends this DFA fund, recommending instead the Bridgeway Omni Small Cap Value fund (BOSVX), which is available to retail investors.Wagnerjb wrote:Larry - your logic and example would be much more credible if you used a non-DFA fund to prove the point. By using DFA funds and showing their (apparent) superiority, you perpetuate the view that you are simply selling DFA. How about using an ETF from another fund company to prove the same point? It would remove the constant "DFA is superior" message, and it might be actionable by ordinary investors such as those here.
Best wishes.
Re: a look at different passive strategies
To my knowledge Bridgeway Omni Small Cap Value fund (BOSVX), which is NOT available to retail investors.
Re: a look at different passive strategies
If the author wants to tilt so badly to SCV he can be 100% SCV
Buy the market. Stay the course.
Buy the market. Stay the course.
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Re: a look at different passive strategies
Not only isn't it available to retail investors, but I believe only members of the Buckingham family can access it, since they essentially co-created it with Bridgeway.pauliec84 wrote:To my knowledge Bridgeway Omni Small Cap Value fund (BOSVX), which is NOT available to retail investors.
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Re: a look at different passive strategies
Andy
The issue has nothing to do with DFA or my "selling" it. And that should be obvious as we don't even have that as our preferred choice as someone has noted. We recommend what is in our opinion in the best interest of our clients. And can show why. We only sell advice, not products and we invest our own money in exactly the same vehicles we recommend. Which is why my assets are in the new Bridgeway Omni fund, which is not available to public. SV is very limited market size and especially so if you have even tighter buying requires which this fund has. So we don't want it to get bloated and either have to close or expand buying ranges.
I showed the fund because it has long enough data to compare. Besides, facts are facts, not opinions which might be biased.
As to returns, while we have been over the same ground before, Yobria keeps bringing up the issue even after it has been explained. So one more time so no one is misled.
Using M* data today
last 5 years, when value premium has been negative most of the period, DFA underperforms 0.9% to 2.2%. But over 10 years its other way around 10.3 vs 8.7,
When risks show up you expect a fund with more exposure to that risk to underperform, it's simply doing it's job.
When the premiums negative we would expect Vanguard to outperform and vice versa. No different than if a stock fund underperforms bonds when equity premium negative,
Now what is missing in discussion is that the higher loadings of DFA/Bridgeway over similar Vanguard funds is that it allows one to hold less beta risk, reducing the downside risk in years like 2008 when it really matters.
Best wishes
Larry
The issue has nothing to do with DFA or my "selling" it. And that should be obvious as we don't even have that as our preferred choice as someone has noted. We recommend what is in our opinion in the best interest of our clients. And can show why. We only sell advice, not products and we invest our own money in exactly the same vehicles we recommend. Which is why my assets are in the new Bridgeway Omni fund, which is not available to public. SV is very limited market size and especially so if you have even tighter buying requires which this fund has. So we don't want it to get bloated and either have to close or expand buying ranges.
I showed the fund because it has long enough data to compare. Besides, facts are facts, not opinions which might be biased.
As to returns, while we have been over the same ground before, Yobria keeps bringing up the issue even after it has been explained. So one more time so no one is misled.
Using M* data today
last 5 years, when value premium has been negative most of the period, DFA underperforms 0.9% to 2.2%. But over 10 years its other way around 10.3 vs 8.7,
When risks show up you expect a fund with more exposure to that risk to underperform, it's simply doing it's job.
When the premiums negative we would expect Vanguard to outperform and vice versa. No different than if a stock fund underperforms bonds when equity premium negative,
Now what is missing in discussion is that the higher loadings of DFA/Bridgeway over similar Vanguard funds is that it allows one to hold less beta risk, reducing the downside risk in years like 2008 when it really matters.
Best wishes
Larry
Re: a look at different passive strategies
Oh, my mistake. I've never actually tried to buy any (surprising, I know).ScottW wrote:Not only isn't it available to retail investors, but I believe only members of the Buckingham family can access it, since they essentially co-created it with Bridgeway.pauliec84 wrote:To my knowledge Bridgeway Omni Small Cap Value fund (BOSVX), which is NOT available to retail investors.
Still it will be interesting to watch this fund in the coming years and see how extreme small/value loadings play out in practice.
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Re: a look at different passive strategies
How much does it matter? Could you give us an example of two portfolios, A and B, that follow your portfolio construction best practices and similar in all regards except thatlarryswedroe wrote:Now what is missing in discussion is that the higher loadings of DFA/Bridgeway over similar Vanguard funds is that it allows one to hold less beta risk, reducing the downside risk in years like 2008 when it really matters.
--portfolio A uses VISVX for its small-cap value allocation
--portfolio B uses DFSVX for its small-cap value allocation
--portfolio B has been suitably adjusted to give the same factor loadings and smaller beta risk
and tell us the percentage declines from December 31, 2007 to February 28, 2008 for the two portfolios?
Once you've done that, people can use their own standard of judgement as whether it's a lot or a little.
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Re: a look at different passive strategies
Yes, that's what my stockbroker said when that penny nanotechnology stock he had me in crashed and burned - "When NanoCorp goes bankrupt, the stock will go down. It's simply doing its job." And indeed, the stock was doing its job. It's just that in taking this uncompensated (disversifiable by owning TSM) risk, my broker wasn't doing his.larryswedroe wrote:Using M* data today last 5 years, when value premium has been negative most of the period, DFA underperforms 0.9% to 2.2%. But over 10 years its other way around 10.3 vs 8.7, When risks show up you expect a fund with more exposure to that risk to underperform, it's simply doing it's job.
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Re: a look at different passive strategies
Risks that are compensated cannot be diversified away. Value and size are such risks in the same way that equity risks are compensated. Clearly with dozens of paper in the literature showing the reasons why they are compensatedIt's just that in taking this uncompensated (disversifiable by owning TSM) risk
Denying facts doesn't change them. Yobria has been asked to explain even a single one of the dozen papers that show the risk story and why it is wrong and he has not done so. We can only wonder why. Yet he continues to cite papers which have been shown to be wrong, on the facts.
Best wishes
Larry
Last edited by larryswedroe on Tue Aug 14, 2012 9:27 am, edited 1 time in total.
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Re: a look at different passive strategies
Nisiprius,
The answer depends on how much one tilts a portfolio, Should not look only at one fund/asset class
You can see how a loading increases expected returns
For each .1 of loading on size you add about 30bp of expected returns and about 45bp for value. So each .1 for both size and value is worth roughly 75bp of expected returns.
Of course the more you tilt the less equity risk you need and the more tracking error risk you take on.
No right answer, but a right answer for each person.
Hope that helps
Larry
The answer depends on how much one tilts a portfolio, Should not look only at one fund/asset class
You can see how a loading increases expected returns
For each .1 of loading on size you add about 30bp of expected returns and about 45bp for value. So each .1 for both size and value is worth roughly 75bp of expected returns.
Of course the more you tilt the less equity risk you need and the more tracking error risk you take on.
No right answer, but a right answer for each person.
Hope that helps
Larry
Re: a look at different passive strategies
Larry,
Shouldn't the table in the article show the FF3F alpha for each fund as well?
My experience is that portfolios tilted towards small and value generally under-perform the FF3F model (they have meaningful negative alpha), and a larger factor loading on HML or SMB often comes at the cost of a larger negative alpha....beyond what can be explained by the expense ratio alone.
This is expected to some degree since the factor portfolios don't include any trading costs, and very small stocks have higher bid-ask spreads and are costly to trade. However, the claim is often made that DFA manages these trading costs much more effectively that other fund companies (liquidity provider, etc), and we need the alphas to evaluate this claim and to do a full comparison of the two funds.
Shouldn't the table in the article show the FF3F alpha for each fund as well?
My experience is that portfolios tilted towards small and value generally under-perform the FF3F model (they have meaningful negative alpha), and a larger factor loading on HML or SMB often comes at the cost of a larger negative alpha....beyond what can be explained by the expense ratio alone.
This is expected to some degree since the factor portfolios don't include any trading costs, and very small stocks have higher bid-ask spreads and are costly to trade. However, the claim is often made that DFA manages these trading costs much more effectively that other fund companies (liquidity provider, etc), and we need the alphas to evaluate this claim and to do a full comparison of the two funds.
Last edited by camontgo on Tue Aug 14, 2012 10:04 am, edited 1 time in total.
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Re: a look at different passive strategies
Another point on expenses,
Most of us who tilt do so with a large holding in a relatively low cost core or TSM type fund and smaller doses of relatively more expensive small and value funds. The heavier the factor loadings of the S and V funds, the less of them you need to obtain the same overall portfolio loadings. That means you use more of the cheaper core holding and less of the relatively expensive funds. So the increased expense of some funds with heavier factor loads is muted somewhat at the overall portfolio expense level.
Dave
Most of us who tilt do so with a large holding in a relatively low cost core or TSM type fund and smaller doses of relatively more expensive small and value funds. The heavier the factor loadings of the S and V funds, the less of them you need to obtain the same overall portfolio loadings. That means you use more of the cheaper core holding and less of the relatively expensive funds. So the increased expense of some funds with heavier factor loads is muted somewhat at the overall portfolio expense level.
Dave
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Re: a look at different passive strategies
Camontango
As I previously mentioned have just completed a series of post looking at the issue have funds been able to earn the return of their asset classes. So that will address the issue pretty clearly I think.
Dave
That is the point I repeatedly have been making. And why one cannot look at these things in isolation. The more you tilt, the less equity overall you need and you can get FI exposure basically for free if you do it yourself. Saving the fund expenses and improving AT returns if in taxable accounts for variety of reasons.
Best wishes
Larry
As I previously mentioned have just completed a series of post looking at the issue have funds been able to earn the return of their asset classes. So that will address the issue pretty clearly I think.
Dave
That is the point I repeatedly have been making. And why one cannot look at these things in isolation. The more you tilt, the less equity overall you need and you can get FI exposure basically for free if you do it yourself. Saving the fund expenses and improving AT returns if in taxable accounts for variety of reasons.
Best wishes
Larry
Re: a look at different passive strategies
A simple example - the largest holding in the Bridgeway Omni SV fund is URI, United Rentals, Inc. The unique risk showed up here, and the stock is down 33% this year. By holding TSM, we could have eliminated this risk - if URI lost busines to a competitor, for example, we'd win either way. Do you agree or disagree?larryswedroe wrote:Risks that are compensated cannot be diversified away. Value and size are such risks in the same way that equity risks are compensated. Clearly with dozens of paper in the literature showing the reasons why they are compensatedIt's just that in taking this uncompensated (disversifiable by owning TSM) risk
Denying facts doesn't change them. Yobria has been asked to explain even a single one of the dozen papers that show the risk story and why it is wrong and he has not done so. We can only wonder why. Yet he continues to cite papers which have been shown to be wrong, on the facts.
Best wishes
Larry
Re: a look at different passive strategies
By holding TSM "we could have participated" in this risk commensurate to our invested amount in URI (and others).yobria wrote:A simple example - the largest holding in the Bridgeway Omni SV fund is URI, United Rentals, Inc. The unique risk showed up here, and the stock is down 33% this year. By holding TSM, we could have eliminated this risk - if URI lost busines to a competitor, for example, we'd win either way. Do you agree or disagree?
By holding TSM "we could have just as easily ignored" URI (and others):
- 1. URI represents $34,215,374 of $70.5 Billion (4.8/100 of 1%) in TSM's Net Assets as of 6/30/12.
2. Consequently, Georgia Gulf Corp (GGC) $11,175,820 of $70.5 Billion (1.6/100 of 1%) -- which is the 11th largest holding in Bridgeway Omni Small-Cap Value BOSVX -- returned 86.51% YTD through 8/13/12.
Landy |
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Re: a look at different passive strategies
This statement not only shows a complete lack of understanding of the difference between uncompensated and compensated risk, it also shows how biased and wrong the author is. So let's see why I draw that conclusion.A simple example - the largest holding in the Bridgeway Omni SV fund is URI, United Rentals, Inc. The unique risk showed up here, and the stock is down 33% this year. By holding TSM, we could have eliminated this risk - if URI lost busines to a competitor, for example, we'd win either way. Do you agree or disagree?
A) First the BOTSX is broadly diversified, holding many hundreds of stocks. This particular stock is currently well under 1% of the fund holdings. Thus the fund diversified the risks of the asset class of small value stocks, and has limited tracking error to the asset class, though some, and it should be random anyway. And SV stocks have outperformed the market by over 4% a year, compensation for their incremental risks. Even using Yobria's metric of SD as the measure of risk. SV stocks have SD of in excess of 35%. The incremental return is compensation for that risk. Of course there are other risk issues besides SD.
B)The author doesn't even know if the fund owned the stock at the start of the year or bought it because it dropped sharply and became a value stock. So he doesn't know if the fund actually lost 33% or any portion of that.
C) What is most amusing is that the author says that the risks could have been diversified by owning TSM. Yet the top ten holdings of such a fund or an S&P 500 fund typically have the top stock at 4-5%, or 5x the concentration risk that BOTSX has, and typically have say 20% in top ten holdings while this fund has less than 8%. So one might ask which fund is taking the uncompensated risks? The fund with more concentration and no expected higher return, or the fund that diversifies the sources of risk, has much less concentration, and has higher expected returns? You decide.
Best wishes
Larry
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Re: a look at different passive strategies
Here is the ultimate irony,
I thought it worthwhile to check the facts about URI after reading Yobria's comments.
So here are the facts about URI and Bridgeway
The fund bought URI at the inception of the fund on 8/31/2011 and then added to that position till 9/15/2011. The average weighted cost is $16.51 and they have 96% unrealized gains on this stock
Further re my comments of yesterday which are important for people to understand. TSM has much higher single stock risk as for example AAPL may be 4-5% of the index. In the large-cap space, stocks tend to have much wider disparity in market caps resulting in higher single stock risk. Whereas smaller caps tend to be bunched together and so any single stock does not dominate the weight. For this same reason top 10 stocks in Dimensional's DFSVX has higher weight than that for Bridgeway's BOSVX (10% vs. 8%) as DFSVX is larger-cap.
Best wishes
Larry
I thought it worthwhile to check the facts about URI after reading Yobria's comments.
So here are the facts about URI and Bridgeway
The fund bought URI at the inception of the fund on 8/31/2011 and then added to that position till 9/15/2011. The average weighted cost is $16.51 and they have 96% unrealized gains on this stock
Further re my comments of yesterday which are important for people to understand. TSM has much higher single stock risk as for example AAPL may be 4-5% of the index. In the large-cap space, stocks tend to have much wider disparity in market caps resulting in higher single stock risk. Whereas smaller caps tend to be bunched together and so any single stock does not dominate the weight. For this same reason top 10 stocks in Dimensional's DFSVX has higher weight than that for Bridgeway's BOSVX (10% vs. 8%) as DFSVX is larger-cap.
Best wishes
Larry
Re: a look at different passive strategies
Right, so it's a bit like holding only Italian stocks. Sometimes the Italian competitor is going to win, sometimes it's going to lose. Compare that to broad global diversification. If people buy Italian products, you win. If they switch to German, or Japanese, you also win. You can still lose if the systemic risk shows up - there's a global recession, for example. But with broad diversification you've eliminated a lot of the "lose" scenarios. Put another way, the diversified portfolio has the same expected (mean) return as the concetrated one, but less risk, and therefore a better median of all possible outcomes.YDNAL wrote:By holding TSM "we could have participated" in this risk commensurate to our invested amount in URI (and others).yobria wrote:A simple example - the largest holding in the Bridgeway Omni SV fund is URI, United Rentals, Inc. The unique risk showed up here, and the stock is down 33% this year. By holding TSM, we could have eliminated this risk - if URI lost busines to a competitor, for example, we'd win either way. Do you agree or disagree?
By holding TSM "we could have just as easily ignored" URI (and others):
Funny how these things work.
- 1. URI represents $34,215,374 of $70.5 Billion (4.8/100 of 1%) in TSM's Net Assets as of 6/30/12.
2. Consequently, Georgia Gulf Corp (GGC) $11,175,820 of $70.5 Billion (1.6/100 of 1%) -- which is the 11th largest holding in Bridgeway Omni Small-Cap Value BOSVX -- returned 86.51% YTD through 8/13/12.
Re: a look at different passive strategies
Are you referring to BOSVX?larryswedroe wrote:A) First the BOTSX is broadly diversified, holding many hundreds of stocks.
You're missing my point, which has nothing to do with BOSVX or URI. I picked that example at random. When you choose not to own the entire market, you're assuming risk that could be diversified away. For example the global stock market grows at 8%/year. If URI loses business to a competitor, it will underperform. If people choose to spend their money on other things, it will underperform. By holding the whole market, I eliminate these unique risks - I get the 8%, whatever happens. Betting on URI or any other single competitor in this space clearly exposes you to risk that could be diversified away.larryswedroe wrote:B)The author doesn't even know if the fund owned the stock at the start of the year or bought it because it dropped sharply and became a value stock.
The "quantity of corporate entity" strawman has been long refuted. It's what's inside that provides the diversification benefit. A large cap with 100 oil wells offers far more diversification than a small cap with one.larryswedroe wrote:C) What is most amusing is that the author says that the risks could have been diversified by owning TSM. Yet the top ten holdings of such a fund or an S&P 500 fund typically have the top stock at 4-5%, or 5x the concentration risk that BOTSX has, and typically have say 20% in top ten holdings while this fund has less than 8%.
I'd say the one that makes a 100% bet on 5% of the market.larryswedroe wrote:So one might ask which fund is taking the uncompensated risks? The fund with more concentration and no expected higher return, or the fund that diversifies the sources of risk, has much less concentration, and has higher expected returns? You decide.
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Re: a look at different passive strategies
Re Yobria's last post
Every statement is simply incorrect
All I can is he clearly doesn't understand the difference between compensated and uncompensated risks and refuses to learn when it is clearly explained.
Also clearly the risks of concentration are much more in the large cap dominated TSM than in small cap or small value type portfolios for reasons I explained. Clearly the single company risk is virtually diversified away when you own 600 companies and you are now left with the risk of the asset class, and compensated with higher EXPECTED returns for taking that risk because it cannot be diversified away.
My last comment, don't have time to waste
Best wishes
Larry
Every statement is simply incorrect
All I can is he clearly doesn't understand the difference between compensated and uncompensated risks and refuses to learn when it is clearly explained.
Also clearly the risks of concentration are much more in the large cap dominated TSM than in small cap or small value type portfolios for reasons I explained. Clearly the single company risk is virtually diversified away when you own 600 companies and you are now left with the risk of the asset class, and compensated with higher EXPECTED returns for taking that risk because it cannot be diversified away.
My last comment, don't have time to waste
Best wishes
Larry
Re: a look at different passive strategies
larryswedroe wrote:My last comment, don't have time to waste
Best wishes
Larry
I'll waste a little time.yobria wrote:You're missing my point, which has nothing to do with BOSVX or URI. I picked that example at random. When you choose not to own the entire market, you're assuming risk that could be diversified away. For example the global stock market grows at 8%/year. If URI loses business to a competitor, it will underperform. If people choose to spend their money on other things, it will underperform. By holding the whole market, I eliminate these unique risks - I get the 8%, whatever happens. Betting on URI or any other single competitor in this space clearly exposes you to risk that could be diversified away.
Nick, a $100 investment (90/10 TSM/BOSVX), means $0.044 in URI in TSM and $0.11 in URI in Bridgeway BOSVX.
- The risk in URI is is not "eliminated" in either investment.
- The same applies to risk/return of ALL 527 (current) holdings in BOSVX and there is no "bet" in URI.
- Investing in the "whole market" is actually a concentrated bet (82%) on 500 Large companies.
(https://personal.vanguard.com/us/funds/ ... statistics)
Landy |
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Re: a look at different passive strategies
I object; this has been coming up a lot lately and it ignores the fact that the bigger a company's market capitalization is, the more it takes to move its price. The whole point of investing in the whole market is to cancel out the effect of speculative trades, and tie your returns as much as possible only to the actual business success of the company.YDNAL wrote:Investing in the "whole market" is actually a concentrated bet (82%) on 500 Large companies.
If company A is ten times as big as company B, and the number of shares outstanding doesn't change, and all other things are equal (humongous assumption I know but bear with me), then if a bunch of investors suddenly decide to sell B and buy A, the price per share of company A's stock will only increase 1/10th as much as the decline in company B's stock.
So you want to be holding ten times as much A as B, and then this speculative move will not affect you.
In the stock market, you vote with your dollars. It's not one company, one vote.
Investing in the whole market is not a "concentrated bet" on 500 large companies. It's a diffuse bet on the companies that, darn it, basically are the market to a good approximation. You want most of your money in those companies because those companies are most of the stock market and most of the business economy.
Coca-Cola is not concentrated water, it's just mostly water.
Last edited by nisiprius on Wed Aug 15, 2012 1:05 pm, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: a look at different passive strategies
^^ Corporate entity count, again, is a strawman. It's what's inside that counts.
If you own a fund that invests in only 5% of the market, you own, on average, only 1 of 20 competitors in any space. Owning TSM diversifies into the other 19, eliminating this unique risk. It's a painfully simple concept.
If you own a fund that invests in only 5% of the market, you own, on average, only 1 of 20 competitors in any space. Owning TSM diversifies into the other 19, eliminating this unique risk. It's a painfully simple concept.
Re: a look at different passive strategies
Objecting is a individual liberty.nisiprius wrote:I object; this has been coming up a lot lately and it ignores the fact that the bigger a company's market capitalization is, the more it takes to move its price. The whole point of investing in the whole market is to cancel out the effect of speculative trades, and tie your returns as much as possible only to the actual business success of the company.YDNAL wrote:Investing in the "whole market" is actually a concentrated bet (82%) on 500 Large companies.
Because someone pays $628.57 for 1-share of Apple APPL which represents 4.4% of Vanguard VFINX, it doesn't mean (1) that you get appropriate economic diversification of every $1 invested in VFINX and (2) that you get expected risk/return commensurate with (say) an investment in Microsoft MSFT (1.8% of VFINX).
Coincidentally, the other day I found this February 2012 article.
http://www.forbes.com/sites/rickferri/2 ... portfolio/
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: a look at different passive strategies
Strangely, in the cases where a large cap was broken into many small caps (Standard Oil, AT&T), its investors have fought the breakup every step of the way. You'd think shareholders would welcome the chance to share in the glorious benefits of small cap investing .
Re: a look at different passive strategies
As a shareholder in DFA and Vanguard funds, I welcome the chance to invest in Small Caps in a diversified and cost effective manner.yobria wrote:Strangely, in the cases where a large cap was broken into many small caps (Standard Oil, AT&T), its investors have fought the breakup every step of the way. You'd think shareholders would welcome the chance to share in the glorious benefits of small cap investing .
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: a look at different passive strategies
Nice try:yobria wrote:Strangely, in the cases where a large cap was broken into many small caps (Standard Oil, AT&T), its investors have fought the breakup every step of the way. You'd think shareholders would welcome the chance to share in the glorious benefits of small cap investing .
1 - existing shareholders wouldn't get the benefit of a risk premium for going from large to small, they would suffer from it.
2 - nobody ever claimed that small cap > monoploy power.
3 - not that it really matters, but 7 RBOCs =/= small cap.
Re: a look at different passive strategies
I'm not sure how this bears on your analysis, but, in my opinion, it is important to remember the price of a security can change (and change dramatically)without a single share/dollar changing hands. Fama is quick to point this out.nisiprius wrote:I object; this has been coming up a lot lately and it ignores the fact that the bigger a company's market capitalization is, the more it takes to move its price. The whole point of investing in the whole market is to cancel out the effect of speculative trades, and tie your returns as much as possible only to the actual business success of the company.YDNAL wrote:Investing in the "whole market" is actually a concentrated bet (82%) on 500 Large companies.
If company A is ten times as big as company B, and the number of shares outstanding doesn't change, and all other things are equal (humongous assumption I know but bear with me), then if a bunch of investors suddenly decide to sell B and buy A, the price per share of company A's stock will only increase 1/10th as much as the decline in company B's stock.
So you want to be holding ten times as much A as B, and then this speculative move will not affect you.
In the stock market, you vote with your dollars. It's not one company, one vote.
Investing in the whole market is not a "concentrated bet" on 500 large companies. It's a diffuse bet on the companies that, darn it, basically are the market to a good approximation. You want most of your money in those companies because those companies are most of the stock market and most of the business economy.
Coca-Cola is not concentrated water, it's just mostly water.
Re: a look at different passive strategies
Couldn't quite decode your whole post, but as long you believe that there are synergies to large caps being large caps, and that breaking them into small caps would destroy shareholder value, increase risk, or be otherwise detremental, we're in agreement. I keep hearing on this board how awful AAPL is for taking up 4% of the entire market, as if dividing it into 100 pieces would somehow increase investor returns.Lumpr wrote:Nice try:yobria wrote:Strangely, in the cases where a large cap was broken into many small caps (Standard Oil, AT&T), its investors have fought the breakup every step of the way. You'd think shareholders would welcome the chance to share in the glorious benefits of small cap investing .
1 - existing shareholders wouldn't get the benefit of a risk premium for going from large to small, they would suffer from it.
2 - nobody ever claimed that small cap > monoploy power.
3 - not that it really matters, but 7 RBOCs =/= small cap.
Re: a look at different passive strategies
Right, that was the inference your were trying to make.yobria wrote:Couldn't quite decode your whole post, but as long you believe that there are synergies to large caps being large caps, and that breaking them into small caps would destroy shareholder value, increase risk, or be otherwise detremental, we're in agreement. I keep hearing on this board how awful AAPL is for taking up 4% of the entire market, as if dividing it into 100 pieces would somehow increase investor returns.Lumpr wrote:Nice try:yobria wrote:Strangely, in the cases where a large cap was broken into many small caps (Standard Oil, AT&T), its investors have fought the breakup every step of the way. You'd think shareholders would welcome the chance to share in the glorious benefits of small cap investing .
1 - existing shareholders wouldn't get the benefit of a risk premium for going from large to small, they would suffer from it.
2 - nobody ever claimed that small cap > monoploy power.
3 - not that it really matters, but 7 RBOCs =/= small cap.