Larry Swedroe: Fundamentals v. Price

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

Larry Swedroe: Fundamentals v. Price

Post by Random Walker »

http://www.etf.com/sections/index-inves ... s-vs-price

In this article Larry first reviews Momentum investing based on price, describes another form of Momentum based on fundamentals, and looks at how they do relative to each other and how Momentum works when they are combined in a twin Momentum strategy. He considers price Momentum and fundamental Momentum complimentary since they are weakly correlated. Interested in people's comments.

Dave
Avo
Posts: 1099
Joined: Wed Jun 11, 2008 2:21 am
Location: California

Re: Larry Swedroe: Fundamentals v. Price

Post by Avo »

I always skip to the end of these sorts of articles to see if there is anything I can do to take advantage of the insights in my own investments. The (vague) answer is: buy an AQR multistyle fund.
garlandwhizzer
Posts: 3096
Joined: Fri Aug 06, 2010 3:42 pm

Re: Larry Swedroe: Fundamentals v. Price

Post by garlandwhizzer »

The factor investing story continues to evolve and to get more complex as academics and factor fund groups crank out ever more research. Twin MOM is a new twist and it looks very promising on backtesting but involves even more frequent trading apparently than other MOM strategies. I think Larry's article suggested 88% portfolio turnover per month which is almost like day trading. MOM of all flavors--price, relative, time series, fundamental--has always been robust and impressive on backtesting. Funds which try to harvest these huge gains after costs for investors, however, often struggle to provide outperformance. This new approach seems to work in the large cap space, which is more practical in a high trading volume strategy from a cost/liquidity point of view. That may be the best place to try it. It will be interesting to see the performance of funds adopting this approach in the real world.

Garland Whizzer
Topic Author
Random Walker
Posts: 4714
Joined: Fri Feb 23, 2007 8:21 pm

Re: Larry Swedroe: Fundamentals v. Price

Post by Random Walker »

I'm a factor junkie and have put my faith in persistent human behavior and the data supporting Momentum. I have to admit though, that now seeing Momentum take different forms or get tweeked makes me a bit nervous.

Dave
User avatar
nedsaid
Posts: 14200
Joined: Fri Nov 23, 2012 12:33 pm

Re: Larry Swedroe: Fundamentals v. Price

Post by nedsaid »

This is nothing new. I have invested in such twin momentum type of funds for years through American Century Investments. Their funds are based primarily on Earnings Acceleration as a primary criteria and Price Momentum as a secondary criteria. It is based on the view that money follows earnings. The founder of the fund company, James Stowers, wrote the program that identified companies with accelerating earnings and they are still using a tweaked version of that original program.

American Century's actual process is proprietary but I assume they read the same research and have tweaked their models accordingly. They are probably using other fundamental variables other than just earnings. What they are trying to do is identify earnings acceleration before their competitors do so I am sure they are attempting to use fundamental variables as a predictive device.

They also trotted out funds that focused first on price momentum and secondarily on earnings momentum. These funds have done much less well than the earnings and price momentum fund. So my untrained eye would say that fundamental momentum is the much better approach.

I have found the performance of such earnings and price momentum funds to be hot and cold. Garland Whizzer says that momentum works best with Large Cap and he is probably right. What I found was their Large Cap Growth funds using earnings and price momentum lost their touch and I went heavy into a couple of their Mid-Cap/Small Cap funds. What is ironic is their wonderful Mid-Cap fund in which I have invested in for many years has cooled off and their Large Cap Growth funds in this space have actually done fairly well in recent years. The last decade has been good for their Large Cap Growth funds.

Pretty much, I have done okay because I have been very patient with such funds. There are phases during which these type of funds do well and other phases when they look very ordinary. Pretty much I held for long time periods and held through the various market cycles.

Larry Swedroe analyzed this fund group and found that they trailed Vanguard by 0.1% a year, which pretty much confirmed my eye balling. They were good enough managers that they almost overcame the fee drag of their funds. My performance has been good enough that I have stayed. This group has a good group of Value managers too and I am invested in two of their Value funds.

I do remember an article this fund group put out which talked about using electronic networks to trade, driving down their trading costs significantly. This is another big factor in making such a strategy work, keeping trading costs as low as possible. You would also have to keep your management fees as low as possible too.

Another factor in American Century's earlier success was that their use of computers to screen stocks with their proprietary program gave them an edge over their competitors that probably lasted into the early 1990's. Computers and great software and math PhDs are now ubiquitous in the money management word and the software gets better and the hardware ever faster. Also more research is out there now.

Will these type of funds help you? It depends on when you look. Sometimes you will be very glad that you had them and other times you will wonder what the heck you were thinking. My conclusion is that fundamental momentum works better than price momentum.
A fool and his money are good for business.
Post Reply