grok87 wrote:Maybe to move onto something actionable...

I guess the question is (at least for me), is it better to invest in a Large Cap Value fund or a Large Cap "High Profitability/Low Investment" Fund (assuming you could find one).

I don't know the answer to this but I suspect that the latter might better avoid value traps.

Would be interested in what you and Robert think..

Here are the returns from Ken French’s dataset:

1964-2016: Annualized Return / Standard Deviation / Sharpe Ratio / Max One Year Loss (2008)12.3 / 18.7 / 0.50 /-38.8 = FF Large Cap Low Investment/High Profit

12.1 / 19.2 / 0.48 / -39.3 = FF Large Cap Value

..9.8 / 17.4 / 0.38 / -36.7 = FF Market

A 0.2% higher return and 0.5 lower standard deviation …

A key difference between FF Large Cap Low Investment/High Profit and FF Large Cap Value is exposure to “High Profit”. Below are the “investment” and “profit” factor loads from 1964-2016. FF LV has higher exposure to low investment companies (0.65 vs. 0.55), and lower exposure to high gross profit companies (0.05 vs. 0.37).

P1 = FF Large Cap Low Investment/High Profit

P2 = FF Large Cap Value

P1 / P2

1.04 / 1.07 = Market

-0.03 / 0.03 = Size

0.37 / 0.05 = Profit

0.55 / 0.65 = Investment

What impact would simply increasing exposure to high gross profit companies in a ‘value’ portfolio have on performance? This is what DFA did and the resulting effect in simulated historical performance was to increase annualized returns by 0.2 to 0.3% and to marginally lower the standard deviation (derived from the DFA Matrix books).

1975-2012: Annualized return (%) / Standard Deviation

DFA Core 2 without profitability 14.0 / 17.4

DFA Core 2 with profitability 14.3 / 17.6

DFA Vector without profitability 15.6 / 19.5

DFA Vector with profitability 15.8 / 19.3

DFA Targeted value without profitability 17.6 / 21.8

DFA Targeted value with profitability 17.8 / 21.7

So with respect to your question – the FF Large Cap Low Investment/High Profit was marginally 'better' than FFLV (at least in simulated backtested data).

I would just note that some “value series” have higher exposure to ‘high profit’ companies than FF LV – notably the Dimensional Large Value series (with ‘profitability’ sorts), and the RAFI series (as reflected in simulated data from 1964).

I am conscious that this is a thread about "alternative funds", so perhaps getting a bit off track.

Robert

.