Larry Swedroe: Factors In Fixed Income

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Random Walker
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Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Fri May 04, 2018 9:14 am

http://www.etf.com/sections/index-inves ... nopaging=1

Larry reviews a paper from AQR people looking at the presence of value, momentum, carry, and defensive in the bond markets. The fact that these styles are pervasive across asset classes is one big piece of evidence that provides me with the conviction to take the factor approach. As with equities, the styles tend to be uncorrelated with one another, and the highest Sharpe ratios obtained when form portfolios diversified across factors. The style premiums show low or negative correlation to market premiums and low sensitivity to macroeconomic environment, thus very good diversification benefits.

Dave
Last edited by Random Walker on Fri May 04, 2018 11:21 am, edited 1 time in total.

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Re: Larry Swedroe: Factors In Fixed Income

Post by 2pedals » Fri May 04, 2018 9:52 am

Really? I am not even convinced to use AQR for factors with equities at this point in my life. In my opinion once the "jeannie is out of the bottle" returns are not worth the extra costs going forward.

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Re: Larry Swedroe: Factors In Fixed Income

Post by Theoretical » Fri May 04, 2018 10:40 am

I think for retail investors, cost in the implementation will exceed any benefits, especially because there are retail only products where the consumer has an advantage over institutions: high yield savings accounts and FDIC insurance for CDs and the accounts, along with the benefits available to opportunistic small investors in the secondary CD market (it's not hard to get a 6-9 month shorter maturity and/or a higher yield for buying a small specific lot).

I'm more worried about an LTCM redux with bond leverage reaching crazy levels to harvest these premia.

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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Fri May 04, 2018 11:27 am

2pedals wrote:
Fri May 04, 2018 9:52 am
Really? I am not even convinced to use AQR for factors with equities at this point in my life. In my opinion once the "jeannie is out of the bottle" returns are not worth the extra costs going forward.
That is certainly my concern. First time I read Random Walk Down Wall Street that thinking resonated with me. I view markets as chemical equilibrium in Chem 1 or intersecting lines in Micro Econ 101. Took me almost a decade to evolve into factor mode. I’m especially convinced by value since it has both substantial risk and behavioral stories supporting it. And as I get older, I’m becoming more convinced that humans don’t learn so well from history, human behavior persistent, and behavioral anomalies likely to persist.

Dave

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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Fri May 04, 2018 11:30 am

Theoretical,
The expected after expenses and after tax return on the two AQR funds mentioned in the article are quite a bit higher than CDs and savings accounts. Moreover, they are basically uncorrelated to everything.

Dave

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Re: Larry Swedroe: Factors In Fixed Income

Post by lack_ey » Fri May 04, 2018 11:53 am

Theoretical wrote:
Fri May 04, 2018 10:40 am
I think for retail investors, cost in the implementation will exceed any benefits, especially because there are retail only products where the consumer has an advantage over institutions: high yield savings accounts and FDIC insurance for CDs and the accounts, along with the benefits available to opportunistic small investors in the secondary CD market (it's not hard to get a 6-9 month shorter maturity and/or a higher yield for buying a small specific lot).

I'm more worried about an LTCM redux with bond leverage reaching crazy levels to harvest these premia.
Nobody needs any leverage to invest in the way implied by these or by equity factors. You also don't need to go long/short for some level of exposure.

There's only higher cost involved if a manager wants to charge for it, or to the extent that additional transaction costs are incurred to pursue portfolio turnover. But any active fund could simply use these considerations, potentially among others, to select which securities to own. That doesn't really cost anything.


What I wonder most is if the factor definitions used, especially value, resonate and line up with the way actual managers think of bonds. They make some sense to me, but it's not as clear as something like selecting on price/earnings or price/book in equities.

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Re: Larry Swedroe: Factors In Fixed Income

Post by stlutz » Fri May 04, 2018 7:16 pm

But the strategy that Dave is promoting is a long-short strategy. Or, to quote from the Swedroe article:
At the beginning of each month, for each style, the authors formed tercile portfolios of country assets based on their respective country style metrics and created a position that goes long the most-attractive third tercile and shorts the least-attractive first tercile
The only way you get these magically uncorrelated squiggly lines is to go long/short. And to get a lot of return out of the long/short portfolio, you'll need to use leverage.

Long-only, bonds are pretty highly correlated to each other in general. AA rated corporates aren't going to soar while BBB rated corporates plummet.

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Re: Larry Swedroe: Factors In Fixed Income

Post by Dead Man Walking » Fri May 04, 2018 11:22 pm

Random Walker wrote:
Fri May 04, 2018 11:30 am
Theoretical,
The expected after expenses and after tax return on the two AQR funds mentioned in the article are quite a bit higher than CDs and savings accounts. Moreover, they are basically uncorrelated to everything.

Dave
Would you please document the performance of the two AQR funds. Show us the returns that are "quite a bit" higher than CDs and savings accounts. Are their returns higher than Total Bond Market Fund?

DMW

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Re: Larry Swedroe: Factors In Fixed Income

Post by lack_ey » Sat May 05, 2018 1:29 am

Dead Man Walking wrote:
Fri May 04, 2018 11:22 pm
Would you please document the performance of the two AQR funds. Show us the returns that are "quite a bit" higher than CDs and savings accounts. Are their returns higher than Total Bond Market Fund?

DMW
One is less than a year old. The other in mutual fund form (a similar institutional version existed for about a year prior and returned double digits prior to the mutual fund's inception) started in 2013.

The risk is much higher than in bonds and it invests heavily offsetting long and short in many kinds of assets other than fixed income (and really, only fixed income via futures, which are really only available for things like the 10-year Treasury and similar for other countries, and so on).

But sure, the return seems to have been quite a lot higher than for CDs or a total bond market fund, as one of the most successful (evaluated by performance over betas on asset classes) alternatives mutual funds ever.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

...which is not that impressive ex-post but many here were skeptical and some here did invest in it before it soft closed, so it may not be cherrypicking via 20/20 hindsight.

In any case, the majority of risk taken and returns generated have not been from factors in fixed income, by design (though I think it's contributed).

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Re: Larry Swedroe: Factors In Fixed Income

Post by triceratop » Sat May 05, 2018 6:38 am

Do the AQR factor funds use CDS in implementing their long/short strategies? Everything I have read recently in that space (Hovnanian, Chatham, etc) makes me want to stay very well away from any strategy which uses it.
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Re: Larry Swedroe: Factors In Fixed Income

Post by lack_ey » Sat May 05, 2018 11:40 am

triceratop wrote:
Sat May 05, 2018 6:38 am
Do the AQR factor funds use CDS in implementing their long/short strategies? Everything I have read recently in that space (Hovnanian, Chatham, etc) makes me want to stay very well away from any strategy which uses it.
The newer AQR Multi-Strategy Alternative does use credit-default swaps. The older AQR Style Premia Alternative does not, trading only futures for fixed income.

No individual position is significant within a fund like that, and credit is just a slice of the small allocation to fixed income risk in the fund. The CDS used are for indexes, things like selling protection on Markit CDX North America High Yield Index Series to gain exposure to credit risk from NA high yield bonds. I would call that risky but in the sense of the underlying, not anything particular on top of that.

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Re: Larry Swedroe: Factors In Fixed Income

Post by nisiprius » Sat May 05, 2018 12:51 pm

I've boldfaced some text.
In 2016, in 'Your Complete Guide to Factor-Based Investing,' Berkin and Swedroe wrote:Just as they have for stocks, academics have created an asset pricing model for bonds. In this case, however, the model is much simpler because we only need two factors to explain the vast majority of the difference in returns among bond portfolios: term risk (otherwise known as duration) and default risk (credit).
That was published in 2016; two factors were enough just two years ago.
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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Sat May 05, 2018 2:01 pm

Dead Man Walking wrote:
Fri May 04, 2018 11:22 pm
Random Walker wrote:
Fri May 04, 2018 11:30 am
Theoretical,
The expected after expenses and after tax return on the two AQR funds mentioned in the article are quite a bit higher than CDs and savings accounts. Moreover, they are basically uncorrelated to everything.

Dave
Would you please document the performance of the two AQR funds. Show us the returns that are "quite a bit" higher than CDs and savings accounts. Are their returns higher than Total Bond Market Fund?

DMW
QSPRX, style premia Alternative Fund, 1 year 11.32% and 3 year 8.16%
QMHRX, managed futures, 1 year -3.70% and 3 year -8.54%

That being said, 1 year and 3 year data are virtually useless. In my post I wrote “expected returns”, which are clearly going to be different from actual returns, especially over such very short time periods. If anything this data just supports the lack of correlation.
When one creates a position for these alternatives, he needs to decide whether to take from stocks, bonds, or some of both. He must consider the effect on the portfolio as a whole: expected return, volatility, correlations. Creating the position from the equity side keeps portfolio expected return about constant, decreases portfolio volatility, increases Sharpe ratio. Creating from the bond side will increase portfolio expected return, increase portfolio volatility to a lesser extent, and should also increase Sharpe ratio. Although the investor needs to create the position from stocks or bonds, they are not replacements for stocks or bonds. They are unique, and the investor needs to understand what he is trying to accomplish by creating the alternative position.
So, overall DMW’s question and the answer are irrelevant to the overriding consideration of alternatives in a portfolio.

Dave

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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Sat May 05, 2018 2:08 pm

nisiprius wrote:
Sat May 05, 2018 12:51 pm
I've boldfaced some text.
In 2016, in 'Your Complete Guide to Factor-Based Investing,' Berkin and Swedroe wrote:Just as they have for stocks, academics have created an asset pricing model for bonds. In this case, however, the model is much simpler because we only need two factors to explain the vast majority of the difference in returns among bond portfolios: term risk (otherwise known as duration) and default risk (credit).
That was published in 2016; two factors were enough just two years ago.
Nisiprius,
I think that’s still true. What Larry is talking about in his article is accessing factors totally separate from bond quality and term. The bonds are just one vehicle (asset class) to access the described factors.

Dave

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Re: Larry Swedroe: Factors In Fixed Income

Post by fortyofforty » Sat May 05, 2018 4:02 pm

Dave, just to make certain of one thing: Do you receive any compensation for posting on behalf of Larry or his firm? I don't know if this was already asked and answered but wanted to give you a chance to state unequivocally one way or the other.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Larry Swedroe: Factors In Fixed Income

Post by lack_ey » Sat May 05, 2018 4:08 pm

Random Walker wrote:
Sat May 05, 2018 2:08 pm
nisiprius wrote:
Sat May 05, 2018 12:51 pm
I've boldfaced some text.
In 2016, in 'Your Complete Guide to Factor-Based Investing,' Berkin and Swedroe wrote:Just as they have for stocks, academics have created an asset pricing model for bonds. In this case, however, the model is much simpler because we only need two factors to explain the vast majority of the difference in returns among bond portfolios: term risk (otherwise known as duration) and default risk (credit).
That was published in 2016; two factors were enough just two years ago.
Nisiprius,
I think that’s still true. What Larry is talking about in his article is accessing factors totally separate from bond quality and term. The bonds are just one vehicle (asset class) to access the described factors.

Dave
I think the point being made is that if two factors is sufficient, surely adding more doesn't give you a much better picture.

While I can't speak to what Larry was thinking or is thinking, I would say that term and credit do tell you a large part about bond portfolios and are sufficient for many purposes. I think "vast majority" was and is a little bit of an overstatement or needs to be understood in a certain way. If you're looking at 30-year Treasuries vs. C-rated bonds, term and credit will tell you a lot. If distinguishing between two different core bond portfolios, still, they will tell you a lot, but there is probably room for additional nuance, specifically if examining portfolios constructed with certain tilts in mind.

Equity beta alone will explain a large majority of the difference between 80/20 and 20/80 asset allocations. But that doesn't mean that additional factors aren't useful at times, especially when understanding what is going on with significantly non-market beta tilted portfolios. Good is fine, but maybe we can do better.

Additionally, part of what the paper focuses on is selection across bond markets, which is something of an additional dimension that a two-factor fixed income model on US fixed income doesn't really capture. The Your Complete Guide to Factor-Based Investing quote needs to be understood in the original context, which is not the same.

fortyofforty wrote:
Sat May 05, 2018 4:02 pm
Dave, just to make certain of one thing: Do you receive any compensation for posting on behalf of Larry or his firm? I don't know if this was already asked and answered but wanted to give you a chance to state unequivocally one way or the other.
I think he said previously if anything it's the other way around in terms of cash flow (he's a client of Larry's firm).

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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Sat May 05, 2018 5:31 pm

fortyofforty wrote:
Sat May 05, 2018 4:02 pm
Dave, just to make certain of one thing: Do you receive any compensation for posting on behalf of Larry or his firm? I don't know if this was already asked and answered but wanted to give you a chance to state unequivocally one way or the other.
It’s been brought up less directly in the past, and I sort of ranted an answer. I’m sure you can find the full response in one of my posts about 2 months or so ago. No compensation, but I am a client of his firm.
I was a DIY investor with an all VG TSM super low ER portfolio from 2001-2009, then chose to go the advisor route. It started with an interest in tilting to value in a taxable account. If you’re at all interested, I’ve posted a few times on how I made the decision to go the advisor route. You can probably search “random walker advisor” and find the threads/posts.

In fact, you can tell I’m an amateur because I think my last post regarding the bonds and style investing may have not made much sense. I’d go with what lack_ey said just above. :-)

Dave

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Re: Larry Swedroe: Factors In Fixed Income

Post by fortyofforty » Sat May 05, 2018 5:45 pm

Random Walker wrote:
Sat May 05, 2018 5:31 pm
fortyofforty wrote:
Sat May 05, 2018 4:02 pm
Dave, just to make certain of one thing: Do you receive any compensation for posting on behalf of Larry or his firm? I don't know if this was already asked and answered but wanted to give you a chance to state unequivocally one way or the other.
It’s been brought up less directly in the past, and I sort of ranted an answer. I’m sure you can find the full response in one of my posts about 2 months or so ago. No compensation, but I am a client of his firm.
I was a DIY investor with an all VG TSM super low ER portfolio from 2001-2009, then chose to go the advisor route. It started with an interest in tilting to value in a taxable account. If you’re at all interested, I’ve posted a few times on how I made the decision to go the advisor route. You can probably search “random walker advisor” and find the threads/posts.

In fact, you can tell I’m an amateur because I think my last post regarding the bonds and style investing may have not made much sense. I’d go with what lack_ey said just above. :-)

Dave
Thanks for stating it clearly, Dave. I remember when you wrote you are a client of Larry's firm, but wanted to be clear you post because you believe in what is written, with no suggestion or hint that you receive better service or a discount or some other form of remuneration.
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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Sat May 05, 2018 6:00 pm

By the way, I’d happily post other writer’s articles on the BH site as well. I have posted one or two things I’ve found in the past from AQR or Research Affiliates, but in general the only writings I can find that I think worthwhile are from Larry. I peruse etf.com, the AQR site, Cliff Asness Perspective, Advisor Perspectives, alpha architect. I sometimes look at Wall Street physician, physician on fire, white coat investor, but those sites have material that I think most people who spend lots of time on the sight would find old news boring. If anyone can recommend other sights where I might find good short essays, please let me know.
The real learning for serious amateur investors, I believe, is in the books. Reading the essays in piecemeal fashion isn’t as valuable. The books that have had the biggest influence on me are Bogle’s Common Sense, Bernstein’s Intelligent Asset Allocator, Ferri’s All About Asset Allocation, Gibson’s Asset Allocation, Devil Take The Hindmost for dose of history. Obviously, I’ve read all or nearly all of Larry’s books. But it is reading his books in the context of the others that has caused me to take the route I have. In particular, I strongly recommend Gibson’s book. It lays the groundwork for appreciating factor based investing. Gibson’s book shows the benefits of multi asset class investing: the benefits of multiple uncorrelated asset classes. Once one gains an appreciation for the power of diversification in this way, it is not a big stretch to “look at diversification a different way” and appreciate diversifying across factors and diversifying across alternative sources of return. In his books, Larry displays improved portfolio efficiency by describing narrowing of the SD and cutting tails. Gibson uses efficient frontier graphs to show that diversification simply gets the investor closer to the treasured northwest corner. This is where my posts on volatility drag come from. I believe Larry’s narrow SD / decreased fat tails and Gibson’s northwest corner are different views of the same phenomenon: improved portfolio efficiency.

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Re: Larry Swedroe: Factors In Fixed Income

Post by lazyday » Sun May 06, 2018 3:41 am

Random Walker wrote:
Sat May 05, 2018 6:00 pm
If anyone can recommend other sights where I might find good short essays, please let me know.
Probably nothing new to you below, but just in case:

I like reading shareholder letters / memos from some money managers or capital allocators, such as Buffett, Howard Marks, and anyone at GMO. Edward Chancellor (Devil Take the Hindmost, and of GMO) sometimes writes for places like MoneyWeek or Marketwatch, you can set a google alert.

I appreciate how Research Affiliates goes further than some in using imperfect information to make predictions or help make decisions, and shares some of the data with us.

Philosophical Economics... well, the essays aren't short.

Some people like Hussman's weekly commentary. Maybe good if you're feeling too optimistic.

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Re: Larry Swedroe: Factors In Fixed Income

Post by Robert T » Sun May 06, 2018 2:46 pm

.
Here's the Journal of Portfolio Management version of the AQR paper on Style Investing in Fixed Income - https://www.aqr.com/Insights/Research/J ... xed-Income.

AQR now has a bond mutual fund that "applies fundamental drivers of fixed income returns such as Value, Momentum, Carry and Defensive in a systematic process across a broad range of sectors and issuers. We seek to generate returns through issue selection, curve positioning and currency selection with minimal active duration or spread “bets.” https://funds.aqr.com/our-funds/fixed-i ... fund#qcpix

I would just note that if you compare Panel A and Panel B in the above linked paper - the tilted or COMBO portfolio performs worse when volatility and illiquidity increase such as in 2008 when equity markets tanked. If the reason for holding fixed income is to provide greatest protection in these types of environments then tilting seems to move away from this (increasing risk in these periods).

Will be interesting to see how the mutual fund performs in different market environments.

Robert
.

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Re: Larry Swedroe: Factors In Fixed Income

Post by lack_ey » Sun May 06, 2018 3:05 pm

Oh wow, I didn't realize the AQR core bond fund had already started trading. QCPRX / QCPIX / QCPNX. Simple enough ticker, with the Q like many of their funds, and CP for core plus bond, and the share class designation. Inception April 5th, 2018. I wonder why Larry mentioned the other funds but not their actual bond fund here, which seems more relevant.

To me the expense ratio seems too high for what I would pay for fixed income (0.38% / 0.48% / 0.73% on R6 / I / N), but it's interesting in any case. Looks in line with something like PIMCO Total Return (0.51% on institutional, PTTRX), MetWest Total Return Bond (0.44% on I shares, MWTIX), Dodge & Cox Income (0.43% on the only share class). But especially at 0.73%, no thanks.

I wonder what the portfolio looks like, though. I'll be waiting for a sector breakdown and so on.

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Re: Larry Swedroe: Factors In Fixed Income

Post by nedsaid » Sun May 06, 2018 3:29 pm

fortyofforty wrote:
Sat May 05, 2018 5:45 pm
Random Walker wrote:
Sat May 05, 2018 5:31 pm
fortyofforty wrote:
Sat May 05, 2018 4:02 pm
Dave, just to make certain of one thing: Do you receive any compensation for posting on behalf of Larry or his firm? I don't know if this was already asked and answered but wanted to give you a chance to state unequivocally one way or the other.
It’s been brought up less directly in the past, and I sort of ranted an answer. I’m sure you can find the full response in one of my posts about 2 months or so ago. No compensation, but I am a client of his firm.
I was a DIY investor with an all VG TSM super low ER portfolio from 2001-2009, then chose to go the advisor route. It started with an interest in tilting to value in a taxable account. If you’re at all interested, I’ve posted a few times on how I made the decision to go the advisor route. You can probably search “random walker advisor” and find the threads/posts.

In fact, you can tell I’m an amateur because I think my last post regarding the bonds and style investing may have not made much sense. I’d go with what lack_ey said just above. :-)

Dave
Thanks for stating it clearly, Dave. I remember when you wrote you are a client of Larry's firm, but wanted to be clear you post because you believe in what is written, with no suggestion or hint that you receive better service or a discount or some other form of remuneration.
I have in the past reposted personal messages from Larry without revealing the source. What I did was refer to a secret source or higher authority (wink, wink) and indicate that it wasn't my material. Not difficult to figure out where it came from. Sometimes I would lightly edit the material and disclose that too.

What happens is that I will post something and Larry will respond by personal message. More recently, I disclose whatever re-posts as having come from him. If directly quoted, I would use quotation marks.

I don't know Larry personally other than through the forum and limited e-mail contact. This is a sporadic thing with me and other forum posters. Everyone here was the same ability to contact Larry by personal message or by e-mail. No special privileges here.

It is clear that Larry deeply cares about the forum, he does monitor what goes on here. Again, if someone posts something that raises his eyebrow, he might send a personal message in response. I know Nisiprius has reposted from Larry's personal messages on a couple of occasions. So Larry hasn't really left.

I am not a Buckingham client.
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Re: Larry Swedroe: Factors In Fixed Income

Post by Random Walker » Sun May 06, 2018 4:26 pm

lack_ey wrote:
Sun May 06, 2018 3:05 pm
Oh wow, I didn't realize the AQR core bond fund had already started trading. QCPRX / QCPIX / QCPNX. Simple enough ticker, with the Q like many of their funds, and CP for core plus bond, and the share class designation. Inception April 5th, 2018. I wonder why Larry mentioned the other funds but not their actual bond fund here, which seems more relevant.
I’m not Larry, but I’ll venture a guess. Firstly, bonds are the risk dampening portion of the portfolio. They are purely for safety. So don’t screw around with bonds: use highest quality and short - intermediate term. Secondly, Larry in this paper is just showing the prevelance of the factors: that they exist in asset classes beyond equities. Now he strongly believes in the factors and in investing in them. But he also believes in diversification. The style premia fund invests in 4 factors across I think 4-6 asset classes. The factor premia I believe are uncorrelated with one another within an asset class and for a single factor uncorrelated between asset classes. So huge benefit to the diversification available with multiple factors and multiple asset classes in a single fund.
Applying the factors to a bond only fund seems to go against the theme of only using safest bonds and taking risk elsewhere in the portfolio. Just my guess.

Dave

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Re: Larry Swedroe: Factors In Fixed Income

Post by willthrill81 » Sun May 06, 2018 4:35 pm

Random Walker wrote:
Fri May 04, 2018 11:27 am
And as I get older, I’m becoming more convinced that humans don’t learn so well from history, human behavior persistent, and behavioral anomalies likely to persist.
Being a behavioral researcher by trade, that is my comprehension of the situation as well. Perceptual and cognitive biases are hard to overcome, even when they are known by the actor, which they usually aren't. Consequently, they tend to be pervasive and lead to various factors in equities and fixed income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Factors In Fixed Income

Post by fortyofforty » Sun May 06, 2018 4:42 pm

nedsaid wrote:
Sun May 06, 2018 3:29 pm
fortyofforty wrote:
Sat May 05, 2018 5:45 pm
Random Walker wrote:
Sat May 05, 2018 5:31 pm
fortyofforty wrote:
Sat May 05, 2018 4:02 pm
Dave, just to make certain of one thing: Do you receive any compensation for posting on behalf of Larry or his firm? I don't know if this was already asked and answered but wanted to give you a chance to state unequivocally one way or the other.
It’s been brought up less directly in the past, and I sort of ranted an answer. I’m sure you can find the full response in one of my posts about 2 months or so ago. No compensation, but I am a client of his firm.
I was a DIY investor with an all VG TSM super low ER portfolio from 2001-2009, then chose to go the advisor route. It started with an interest in tilting to value in a taxable account. If you’re at all interested, I’ve posted a few times on how I made the decision to go the advisor route. You can probably search “random walker advisor” and find the threads/posts.

In fact, you can tell I’m an amateur because I think my last post regarding the bonds and style investing may have not made much sense. I’d go with what lack_ey said just above. :-)

Dave
Thanks for stating it clearly, Dave. I remember when you wrote you are a client of Larry's firm, but wanted to be clear you post because you believe in what is written, with no suggestion or hint that you receive better service or a discount or some other form of remuneration.
I have in the past reposted personal messages from Larry without revealing the source. What I did was refer to a secret source or higher authority (wink, wink) and indicate that it wasn't my material. Not difficult to figure out where it came from. Sometimes I would lightly edit the material and disclose that too.

What happens is that I will post something and Larry will respond by personal message. More recently, I disclose whatever re-posts as having come from him. If directly quoted, I would use quotation marks.

I don't know Larry personally other than through the forum and limited e-mail contact. This is a sporadic thing with me and other forum posters. Everyone here was the same ability to contact Larry by personal message or by e-mail. No special privileges here.

It is clear that Larry deeply cares about the forum, he does monitor what goes on here. Again, if someone posts something that raises his eyebrow, he might send a personal message in response. I know Nisiprius has reposted from Larry's personal messages on a couple of occasions. So Larry hasn't really left.

I am not a Buckingham client.
I have no problem with anyone quoting other posters, or other outside sources (as long as the material isn't presented as original). I just wanted it to be clear that Dave was posting what Larry writes out of conviction or desire to share Larry's opinions, not due to any other potential conflict of interest. Dave has stated unequivocally that he receives nothing in return for repeatedly posting from Larry's website. Even if he doesn't post himself, it's like Larry never left. :wink: The more opinions we receive, and the more discussions and disagreements we have, the better off we all are in the long run. As Mao Zedong once promoted as policy, let a hundred flowers bloom.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

golfCaddy
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Re: Larry Swedroe: Factors In Fixed Income

Post by golfCaddy » Sun May 06, 2018 4:53 pm

The problem with claiming a factor persists across asset classes is you need a consistent definition of the factor that applies across asset classes. So if value is defined for stocks as either P/B or P/E, then you need to use P/B or P/E as your definition of the value factor for bonds. That doesn't work for government bonds, but for corporate bonds, you could use P/B or P/E of the issuer. Otherwise, you can't claim a factor persists across asset classes if you get to redefine the factor however you want for each asset class.

lack_ey
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Re: Larry Swedroe: Factors In Fixed Income

Post by lack_ey » Sun May 06, 2018 5:04 pm

golfCaddy wrote:
Sun May 06, 2018 4:53 pm
The problem with claiming a factor persists across asset classes is you need a consistent definition of the factor that applies across asset classes. So if value is defined for stocks as either P/B or P/E, then you need to use P/B or P/E as your definition of the value factor for bonds. That doesn't work for government bonds, but for corporate bonds, you could use P/B or P/E of the issuer. Otherwise, you can't claim a factor persists across asset classes if you get to redefine the factor however you want for each asset class.
Like you I have some reservations about their definitions but am not convinced about using stock valuation metrics for corporate bonds. P/B or P/E measures stock price relative to fundamentals, so it's an indicator of cheapness. I think we would want a definition that describes the cheapness of an issuer's bond (not stock) expressed in relation to some kind of fundamental.

In any case, I think the definitions themselves are worth more discussion and challenges.

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willthrill81
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Re: Larry Swedroe: Factors In Fixed Income

Post by willthrill81 » Sun May 06, 2018 5:13 pm

lack_ey wrote:
Sun May 06, 2018 5:04 pm
golfCaddy wrote:
Sun May 06, 2018 4:53 pm
The problem with claiming a factor persists across asset classes is you need a consistent definition of the factor that applies across asset classes. So if value is defined for stocks as either P/B or P/E, then you need to use P/B or P/E as your definition of the value factor for bonds. That doesn't work for government bonds, but for corporate bonds, you could use P/B or P/E of the issuer. Otherwise, you can't claim a factor persists across asset classes if you get to redefine the factor however you want for each asset class.
Like you I have some reservations about their definitions but am not convinced about using stock valuation metrics for corporate bonds. P/B or P/E measures stock price relative to fundamentals, so it's an indicator of cheapness. I think we would want a definition that describes the cheapness of an issuer's bond (not stock) expressed in relation to some kind of fundamental.

In any case, I think the definitions themselves are worth more discussion and challenges.
I wouldn't say that changing how something is measured necessarily means that the underlying factor is fundamentally different. For instance, most measures of what is 'value' in stocks are highly correlated. Value is typically taken to mean 'cheap', and that conceptualization can be carried over to any asset class I know of.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

golfCaddy
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Re: Larry Swedroe: Factors In Fixed Income

Post by golfCaddy » Sun May 06, 2018 5:26 pm

lack_ey wrote:
Sun May 06, 2018 5:04 pm

Like you I have some reservations about their definitions but am not convinced about using stock valuation metrics for corporate bonds. P/B or P/E measures stock price relative to fundamentals, so it's an indicator of cheapness. I think we would want a definition that describes the cheapness of an issuer's bond (not stock) expressed in relation to some kind of fundamental.

In any case, I think the definitions themselves are worth more discussion and challenges.
From a theoretical perspective, corporate bonds and stocks are equivalent. They're both claims on the future earnings of the same company.

golfCaddy
Posts: 577
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Re: Larry Swedroe: Factors In Fixed Income

Post by golfCaddy » Sun May 06, 2018 5:35 pm

willthrill81 wrote:
Sun May 06, 2018 5:13 pm
I wouldn't say that changing how something is measured necessarily means that the underlying factor is fundamentally different. For instance, most measures of what is 'value' in stocks are highly correlated. Value is typically taken to mean 'cheap', and that conceptualization can be carried over to any asset class I know of.
If dividend yield is a measure of cheapness for stocks, the nearest equivalent for bonds would be yield to maturity. Hence, at a given maturity, junk bonds would be the cheapest bonds and the value bond factor would be junk bond returns - treasury returns.

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