Random Walker wrote: ↑Mon Jul 06, 2020 1:48 pm
marcopolo wrote: ↑Mon Jul 06, 2020 1:29 pm
To a casual observer it appears that most are simply guessing what this fund is actually doing, even its supporters seems to only speculate on the AQR implementation, and what is in the attribution report explaining its latest performance.
So, do those that buy into this strategy essentially ignore the advice to only invest in things you understand? Just put your faith in AQR and the RIAs that sell their products?
There are always different levels of understanding. Understanding is not digital, it’s analog. How much does one need to understand about an individual stock or the intricacies of a stock index’s formation to invest in it? How much does one need to know about bonds to invest in total bond index? In my own case, invested in passive equity funds, several alternative funds, and a municipal bond ladder, I’d say I have a solid layman’s understanding of the purpose of each portfolio component. But not a lot beyond that. I do put substantial trust in my RIA. How much do any of us really understand? How many muni investors really appreciate how to price the various call features of their bonds?
I think one of the strongest arguments for index investing is that for the most part we don’t know what we don’t know!
I agree on non-binary of 'understanding'. For example something like a Total Bond Market fund is not actually simple. Considering which factors like credit, liquidity, embedded options etc. provide the spread over treasuries, the particular quirks of 'slightly' credit risky instruments (like corporate bonds) in an index format, the effect of term premium in constant maturity instruments and on and on. I don't think but a small % of investors in those funds understand all that in any detail, as is clear when such funds are discussed here (a relatively sophisticated crowd by retail investor standards). It's difficult to even analyze stuff like the effect of embedded options (the holder of the fund is short, where a good deal of the apparent yield premium over T comes from). In case of Vanguard anyway, who doesn't give any relevant info, some other fund co's at least give a black box generated 'option adjusted spread'.
Does that mean TBM are dangerous instruments everyone should steer clear of? Obviously not. If you understand you're getting some more spread by taking some generally moderate risk (didn't look so moderate for a bit this past March, but then the Fed stepped in), that's OK. And maybe the fund will also produce more/less performance than what's explained by ex-ante SEC yield and subsequent yield movements (via term premium, embedded options, downgrades of corp bonds out of the index, etc) which you might never be able to get quite to the bottom of. And maybe the vagaries will cause you to mis-estimate the true value of the fund v say a simpler highest yielding CD. But it's not the end of the world.
And while I would *not* directly compare the suitability of QSPIX to TBM as a general investment tool, I think it's somewhat parallel. A lot of the dozen pages threads I've read about this fund, going back years to being a lurker, were suggestions it would blow up. The more sensible criticisms IMO were always that the (carry, value, momentum, defensive) factors which had worked in historical sampling fund is based on would generally just start treading water, 'yesterday's strategies'. Then maybe one of them in one particular asset class would be a real disaster (like say...value stocks
) And with lots of real costs (it's not *just* a big fat check to Cliff Asness), it would have a negative return (now -4.4% pa 5 yr per Yahoo Finance). And guess what? But again before getting on too high horse about how investors in this should know *exactly* why it has performed as it has, try exactly tying in the performance of a TBM fund to all factors especially over a period of widely varying yield curve shape and level, liquidity and credit premia, that's also hard. We don't focus so much on that perhaps because rates keep going down.
I'm not saying I predicted anything about QSPIX. I invested in this fund in early 2015 as part of semi-fooling around money in IRA, with expectation it might do as the factors did historically, or might just spin its wheels. I dumped it in early 2019 when my return was down to +1.9% pa after being pretty good for awhile. No self back patting, that's just when the wheel spin outcome began to seem too likely. Obviously I could have made more than 1.9% in various other things never bothering with QSPIX at all.