Constructing a 100% equity diversified Factor portfolio

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Daedalu5
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Constructing a 100% equity diversified Factor portfolio

Post by Daedalu5 » Fri Oct 19, 2018 5:34 pm

Hello,

After doing some reading it is now my goal to construct a very aggressive, 100% equity, 75 domestic / 25 international portfolio based on the Carhart 4 Factor model. In particular, I am convinced that premia for size, value, and momentum exist. I would like to maximize my exposure to all 3 of these factors using the lowest cost, most reputable funds/ETFs.

DOMESTIC PORTION:
So far just fooling around in portfoliovisualizer, I have:

50% IJS ishares s&p 600 value
30% VFMF vanguard multifactor
10% MTUM ishares Edge momentum
10% VFMO vanguard momentum

This gives me Market 0.9, Size 0.5, Value 0.26, Momentum 0.11

And positive alpha if that matters.

I am a bit confused though because these Vanguard funds are very new and I’m not sure the factor numbers are the “true” numbers, can anyone advise?

I also realize MTUM and VFMO are redundant, but I’m hedging my bets because I’m not sure which one best represents what it’s supposed to represent. It really blows my mind how much funds/etfs which are supposed to represent the same thing differ. That’s how I found IJS, combing through a bunch of “small cap value” that isn’t really small cap value.

The idea is to skew the factors as high as possible.

INTERNATIONAL PORTION:

40% VWO Vanguard emerging markets
40% VSS Vanguard international small cap
20% IMTM ishares Edge international momentum

This gives Market 1.04, Size 0.49, Value 0.13, Momentum 0.2

With NEGATIVE alpha. Does this matter? These funds are very young and their asset classes have sucked in recent years.

I’m sure there are other fund choices I could consider that would perhaps skew the factors higher while maintaining a low expense ratio, but I’m less knowledgeable about international funds, especially when getting into small cap / value territory. Any suggestions?


TOTAL
So that puts us at (roughly) :

10% VWO
10% VSS
5% IMTM
37.5% IJS
7.5% MTM
7.5% VFMO
22.5% VFMF



I don’t know how to backtest this. I can’t backtest the tickers meaningfully in POrtfolio visualizer because everything is too new. I can backtest some of the asset classes but “momentum” is not an asset class unfortunately. Any help here?

What do you think? I’m trying to be extremely aggressive and I have a very long time horizon and multiple streams of active income from businesses.

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ruralavalon
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Re: Constructing a 100% equity diversified Factor portfolio

Post by ruralavalon » Sat Oct 20, 2018 11:11 am

That's hyper-complex, too complex in my opinion.

If a hypothesis is not testable (not falsifiable), then it is just a guess and not worth much.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

HEDGEFUNDIE
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Re: Constructing a 100% equity diversified Factor portfolio

Post by HEDGEFUNDIE » Sat Oct 20, 2018 11:13 am

VFMF and ISCF are all you need.

Daedalu5
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Re: Constructing a 100% equity diversified Factor portfolio

Post by Daedalu5 » Sat Oct 20, 2018 12:35 pm

Just discovered ISCF, thanks. Does seem superior to VSS. Has a strong size factor and a decent momentum factor. One thing that concerns me though is it actually has a negative value factor...this may be due to the short time it has been in existence though.

I also discovered EMGF which now appears to be the clear choice for emerging markets over VWO. Strong value, size, and momentum all in one package.

I do think IMTM would be unnecessary given these two funds, so I’d be willing to do the international portion as 50 ISCF / 50 EMGF.

Certainly would feel better about it if there was a stronger value factor though...the DFA INTL SCV fund for example seems to do this better, but it’s also been around a long time. I wouldn’t necessarily have a problem paying a bit to access DFA funds, but it seems like the INTL SCV fund is the only one they have that is markedly superior to what’s available from others. In fact their domestic funds don’t allow me to tilt to the factors I want as well as the non DFA offerings...momentum in particular.



Also for the domestic funds, VFMO seems better than MTM so I’m just going to go all VFMO instead of half VFMO half MTM.

So the winner for now is:

12.5% ISCF
12.5% EMGF
22.5% VFMF
37.5% IJS
15% VFMO

The domestic portion is: market 0.9, size 0.55, value 0.26, momentum 0.11
The international is: market 1.13, size 0.88, value -0.09, Momentum 0.24

The lack of value exposure on the international side is annoying, but there doesn’t appear to be a way to get it outside of DFA. Just having “not significantly tilted to negative value” is about the best you can do outside of DFA, it seems.

If anyone knows anything I can do to increase the exposure to momentum, size, and value, please let me know!

Longtermgrowth
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Re: Constructing a 100% equity diversified Factor portfolio

Post by Longtermgrowth » Sat Oct 20, 2018 4:04 pm

Daedalu5 wrote:
Sat Oct 20, 2018 12:35 pm
The lack of value exposure on the international side is annoying, but there doesn’t appear to be a way to get it outside of DFA. Just having “not significantly tilted to negative value” is about the best you can do outside of DFA, it seems.

If anyone knows anything I can do to increase the exposure to momentum, size, and value, please let me know!
If you haven't already seen Paul Merriman's helpful best in class ETF list, it's worth a look. I also thoroughly enjoy his podcasts.
https://paulmerriman.com/best-in-class- ... portfolio/

drk
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Re: Constructing a 100% equity diversified Factor portfolio

Post by drk » Sat Oct 20, 2018 4:34 pm

Here you go: Trev H's Simplified Ultimate Buy and Hold. Be careful not to rely solely on back-testing to set fine-grained percentage allocations.

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Taylor Larimore
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Re: Constructing a 100% equity diversified Factor portfolio

Post by Taylor Larimore » Sat Oct 20, 2018 5:01 pm

What do you think? I’m trying to be extremely aggressive

Daedalu5:

"Aggressive" is the industry's euphemism for "risky."

I think a "100% equity diversified factor portfolio" is very unwise.

Factor Investing -- What Went Wrong
"By and large I do not approve of factor funds." -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Daedalu5
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Re: Constructing a 100% equity diversified Factor portfolio

Post by Daedalu5 » Sat Oct 20, 2018 5:12 pm

Longtermgrowth,

That link was super helpful. It looks like I am on the right track with IJS, although he switches to SLYV in a tax advantaged account...no problem, I can do that too.

For international, his ultra aggressive portfolio uses DLS, EWX and VWO. I’m not sure if he wrote off EMGF because of its short track record or small size, but it absolutely kills both EWX and VWO as well as a combo of the two, when plugged into portfolio visualizer using the criteria he specifies (AQR 4 factor plus quality). For this reason I am comfortable using EMGF instead of a EWX VWO combo. One thing I don’t like is that EMGF is large and mid size companies...would prefer some small in there too, but somehow the factor regression shows more small in it than EWX, the emerging “small” fund.

DLS does indeed seem superior to ISCF currently. Could just be ISCF’s short track record? Maybe split between ISCF and DLS? Thanks for this, it seems like DLS should be half of international developed if not the whole thing.

I can’t plug VFMF or VFMO into the AQR factor regression as they are too new. I substituted MTUM for VFMO and I like the pure momentum exposure that resulted. I think this might have some rebalancing benefits when included with IJS as opposed to just having IJS by itself. If you do a combo of, say, 20% MTUM (Or VFMO) 80% IJS, you get a big boost to momentum while not materially sacrificing size, quality, and value. I like this more balanced overall approach and I like the ability to rebalance between the very different categories.

As for VFMF, it just seems like a great all-around fund, with high scores for all factors. This may be irrational but I’d like to include it, too.

So looks like now we have:

37.5% IJS
22.5% VFMF
15% VFMO
12.5% DLS (or possibly 50/50 DLS and ISCF)
12.5% EMGF


Probably not a whole lot of min-maxing that can be done from this point, I think I have my answers!

carguyny
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Re: Constructing a 100% equity diversified Factor portfolio

Post by carguyny » Sat Oct 20, 2018 5:30 pm

You're missing a lot of options, do more research and find what you like best. Some examples include without having to google any are GEM, GSIE, GSSC, GSLC, USMF, DWMF, EMMF.

Lots of choices, some with substantial assets, low bid/asks and some with hardly anything. Make sure you understand what holds which markets and how their factors are determined.

Daedalu5
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Re: Constructing a 100% equity diversified Factor portfolio

Post by Daedalu5 » Sat Oct 20, 2018 7:27 pm

The sentiment on here seems negative against the Goldman funds, because they select for individual factors and then wrap them into a single fund instead of selecting for all of them simultaneously as a whole. I am probably expressing this wrongly, but look up some posts on here and you’ll see what I mean. The wisdom tree ones are interesting, I will check those out, thanks!

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ruralavalon
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Re: Constructing a 100% equity diversified Factor portfolio

Post by ruralavalon » Sun Oct 21, 2018 11:14 am

Taylor Larimore wrote:
Sat Oct 20, 2018 5:01 pm
What do you think? I’m trying to be extremely aggressive

Daedalu5:

"Aggressive" is the industry's euphemism for "risky."

I think a "100% equity diversified factor portfolio" is very unwise.

Factor Investing -- What Went Wrong
"By and large I do not approve of factor funds." -- Jack Bogle
Best wishes.
Taylor
That's an interesting article by Allan Roth, thanks for posting the link.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Rowan Oak
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Location: Yoknapatawpha

Re: Constructing a 100% equity diversified Factor portfolio

Post by Rowan Oak » Sun Oct 21, 2018 7:21 pm

Daedalu5 wrote:
Fri Oct 19, 2018 5:34 pm
Hello,

After doing some reading it is now my goal to construct a very aggressive, 100% equity, 75 domestic / 25 international portfolio based on the Carhart 4 Factor model. In particular, I am convinced that premia for size, value, and momentum exist. I would like to maximize my exposure to all 3 of these factors using the lowest cost, most reputable funds/ETFs.

DOMESTIC PORTION:
So far just fooling around in portfoliovisualizer, I have:

50% IJS ishares s&p 600 value
30% VFMF vanguard multifactor
10% MTUM ishares Edge momentum
10% VFMO vanguard momentum

This gives me Market 0.9, Size 0.5, Value 0.26, Momentum 0.11

And positive alpha if that matters.

I am a bit confused though because these Vanguard funds are very new and I’m not sure the factor numbers are the “true” numbers, can anyone advise?

I also realize MTUM and VFMO are redundant, but I’m hedging my bets because I’m not sure which one best represents what it’s supposed to represent. It really blows my mind how much funds/etfs which are supposed to represent the same thing differ. That’s how I found IJS, combing through a bunch of “small cap value” that isn’t really small cap value.

The idea is to skew the factors as high as possible.

INTERNATIONAL PORTION:

40% VWO Vanguard emerging markets
40% VSS Vanguard international small cap
20% IMTM ishares Edge international momentum

This gives Market 1.04, Size 0.49, Value 0.13, Momentum 0.2

With NEGATIVE alpha. Does this matter? These funds are very young and their asset classes have sucked in recent years.

I’m sure there are other fund choices I could consider that would perhaps skew the factors higher while maintaining a low expense ratio, but I’m less knowledgeable about international funds, especially when getting into small cap / value territory. Any suggestions?


TOTAL
So that puts us at (roughly) :

10% VWO
10% VSS
5% IMTM
37.5% IJS
7.5% MTM
7.5% VFMO
22.5% VFMF



I don’t know how to backtest this. I can’t backtest the tickers meaningfully in POrtfolio visualizer because everything is too new. I can backtest some of the asset classes but “momentum” is not an asset class unfortunately. Any help here?

What do you think? I’m trying to be extremely aggressive and I have a very long time horizon and multiple streams of active income from businesses.
This is a very complicated strategy.

You may want to read this recent post by Rick Ferri and reconsider:
Set it and forget it

Also, Taylor Larimore's post on Simplicity
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

jalbert
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Re: Constructing a 100% equity diversified Factor portfolio

Post by jalbert » Mon Oct 22, 2018 3:16 am

Just discovered ISCF, thanks. Does seem superior to VSS. Has a strong size factor and a decent momentum factor. One thing that concerns me though is it actually has a negative value factor...this may be due to the short time it has been in existence though.
Stocks with positive loading on momentum tend to have negative loading in value and vice versa. It is difficult to construct a portfolio with deep value loading and high momentum loading.

Holding separate value and momentum funds may even incur unnecessary round trip transaction costs when a stock appreciates out of the value fund and is bought by the momentum fund.

I’m not a big believer in momentum. I’m not convinced it is a statistically significant effect, and being a trading strategy, there is no reason to believe it will experience mean reversion when it fails, even if it is a real effect.
Risk is not a guarantor of return.

Daedalu5
Posts: 8
Joined: Sat Aug 11, 2018 2:17 pm

Re: Constructing a 100% equity diversified Factor portfolio

Post by Daedalu5 » Tue Oct 23, 2018 11:59 am

You have a very good point, and also yes I agree this portfolio is too complex. I’ve been running regressions and looking at the prospectuses of several of the funds since I made my last post.

I first decided it would be best to simplify to something like 70% SMLF and/or IJS, and 15% ISCF 15% EMGF. This way I get all the factors combined into one fund for each geographic region and I’m not uselessly buying stocks in one fund that will then be sold in another fund, or vice versa.

I also did some more research on the momentum factor, and personally I believe more in the value/size/quality premiums. These also tend to come packaged together, unlike the momentum factor. That’s what this is really all about, at the end of the day...which data do you believe in?

I decided I want a neutral momentum portfolio with 70% US SCV / 15% INTL SCV / 15% emerging SCV. I then ran more regressions to see how best to obtain this. To put it simply, if i plugged the portfolio into Morningstar instant x ray and saw a 100 in the Southwest corner box and a 0 in the others I would be elated. The closest I could get to this is a portfolio using DFA funds. I tried non DFA combos of SLY, IJS, DGS, DLS, FNDC, none of it works out quite correctly. A very simple DFA portfolio of 70% DEVSX / 15% DFA international SCV and 15% DFA emerging small company (value + size sum is better in this fund than their emerging value fund), even after the expense ratio which is .2-.3 higher, gives me the highest concentration of small, value, and quality with neutral momentum. Additionally I can look back at 20+ years of consistent performance unlike these newer funds. They have kept their strategy consistent over time, which makes me feel safe.

This for me is an easy, set it and forget it portfolio instead of trying to approximate what I want with a bunch of non DFA funds, which are nearly as expensive, and checking back every year to make sure they aren’t deviating from the concentrations I want.

Through this board I found FPL capital which allows access for essentially $1000 annually and some change. This makes sense for me as I have a large amount to invest. I’m also accredited and they have access to private equity from KKR and Blackstone, which is a plus. I’m interested in some of their buyout funds. Not into alternative credit, fixed income, real estate (I own directly), or hedge funds.

With this DFA three fund portfolio and a sprinkling of some private buyout funds, over a multi-decade time horizon I think I will end up where I want to be.

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Taylor Larimore
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The Three-Fund Portfolio

Post by Taylor Larimore » Tue Oct 23, 2018 3:19 pm

Daedalu5:

You may be interested in the low cost, low maintenance, and many benefits of The Three-Fund Portfolio.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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