Video Interview at NY Society of Security Analyst ETF Forum

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Rick Ferri
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Video Interview at NY Society of Security Analyst ETF Forum

Post by Rick Ferri »

I was in NY in April to participate in the NY Society of Security Analyst (NYSSA) ETF Forum and was cornered for this video. The topic was on "smart beta", also know as "scientific beta" "strategic beta" and factor investing. The video is a little noisy, but you can understand what’s being said. I believe I described what's going on with this space and how you may or may not benefit.

Chris Romano and Rick Ferri ETP Forum NYC April 2015

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Re: Video Interview at NY Society of Security Analyst ETF Forum

Post by garlandwhizzer »

Excellent interview. Rick makes a good point to be aware of in factor investing, the necessity to stick with it for the long term through thick and thin in order to reap the excess returns. That is very hard for most of us, but probably essential for the best outcomes. Also discusses the current crowding of the factor investor space due to popularity of smart beta and factor based etfs and mutual funds. Overgrazing can definitely reduce factor returns at some point. Whether we're at or close to that tipping point now is not clear to me. Would appreciate other Bogleheads' opinions on that question.

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Robert T
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Re: Video Interview at NY Society of Security Analyst ETF Forum

Post by Robert T »

.
Smart beta = regular factor tilt + hyped-up marketing spin

Three observations:

(i) if stock prices in value strategies were being bid up at a much faster and steeper rate than the overall market with recent inflows into value strategies you should observe an increase in portfolio turnover of value funds i.e. as the price of 'value' stocks in a given year are bid up more quickly beyond/past the sell ranges. This does not seem to be happening - at least for some of the fund turnover numbers I looked at for DFA Value strategies.

(ii) for some more popular funds, large inflows seem to have created a larger momentum effect than the historical characteristics of their benchmarks e.g. $5bn additional inflow into 165 stocks in iShares MSCI USA Minimum Volatility, and $4.7 bn additional inflow into 100 stocks in Powershares S&P 500 Low Volatility Fund.

(iii) there does seem to be some evidence that the spread in book-to-market ratios between US value and growth strategies have narrowed (comparing FF LV with FF LG), and that FF LV has become more expensive relative to its historical average. Similar characteristics were observed in 1969, 1998, and 2005. The subsequent 5 year annualized returns in two of these years was higher for LV relative to LG, and lower in one year. The main common element was that overall returns of the market were low, with LV 5 year annualized returns ranging from -4.5% to +2.5%). So perhaps concerns - if there are any - should be more with the overall market (the most dominant equity factor in most investor portfolios).

Reminds me of recent quote from the Aquamarine Fund annual report:
"One reason why most investors do so badly over the long term is that it requires psychological discipline to stick with the program. Thankfully ... the nature of the stock market is ultimately to shift money from impatient investors to patient investors."
Obviously no guarantees.

Robert
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Re: Video Interview at NY Society of Security Analyst ETF Forum

Post by Rick Ferri »

Robert T wrote:.
(i) if stock prices in value strategies were being bid up at a much faster and steeper rate than the overall market with recent inflows into value strategies you should observe an increase in portfolio turnover of value funds i.e. as the price of 'value' stocks in a given year are bid up more quickly beyond/past the sell ranges. This does not seem to be happening - at least for some of the fund turnover numbers I looked at for DFA Value strategies
I agree there isn't evidence of this happening at this time. To clarify, I didn't say this had happened or was a happening, I said it could happen give the momentum behind smart-beta marketing efforts. We shall see :wink:

Rick
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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