Factor Investing?

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lazylarry
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Factor Investing?

Post by lazylarry » Sat May 26, 2018 12:04 pm

Wondering if anyone knows of any prospective analyses looking at factor investing vs investing in the total stock market or S&P500. E.g. something similar to a SPIVA report but focusing on fund managers or even passively managed funds that used factor investing.

Also, did anyone have a link to that study in 1980s that showed that the top performing actively managing funds over five years typically performed in the worst quintile in the next five years? Or even an updated version of this.
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alex_686
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Re: Factor Investing?

Post by alex_686 » Sat May 26, 2018 12:14 pm

lazylarry wrote:
Sat May 26, 2018 12:04 pm
Wondering if anyone knows of any prospective analyses looking at factor investing vs investing in the total stock market or S&P500. E.g. something similar to a SPIVA report but focusing on fund managers or even passively managed funds that used factor investing.
I am not sure what you are asking. Could you please clarify?

Specifically, what factors are you thinking about? Size (Large verse Small) Value v. Growth? The 4 most common factors are Value, Momentum, Size, and Low Beta.

I also think you question might be a bit off. You start off with the market basket and then slice up the market basket according to the factors that you chose. Those factors let you create a passive index. The rules are specified in advance, the selection of stocks is mechanical. This is not exactly active management.

Lastly, consider the Value factor that I quoted above. Value offer a higher return and a higher risk than the market basket. It probably offers the same risk adjusted return as the market basket. This point is debated.

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Re: Factor Investing?

Post by lazylarry » Sun May 27, 2018 12:16 am

I'm asking about any factors. For instance, has someone in the past said, "hey - I think that choosing small cap value is gonna be a winner". And then invested with some major tilt to small cap value for some time period, and then compared that to just tracking the US stock market. But on a prospective rather than retrospective basis. I'm much more curious about factors like momentum but not sure if anyone has ever looked at that prospectively.
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dbr
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Re: Factor Investing?

Post by dbr » Sun May 27, 2018 7:26 am

lazylarry wrote:
Sun May 27, 2018 12:16 am
I'm asking about any factors. For instance, has someone in the past said, "hey - I think that choosing small cap value is gonna be a winner". And then invested with some major tilt to small cap value for some time period, and then compared that to just tracking the US stock market. But on a prospective rather than retrospective basis. I'm much more curious about factors like momentum but not sure if anyone has ever looked at that prospectively.
I don't think your question makes any sense unless I don't understand what you are asking. By the time the comparison can be made the data is retrospective by definition, and, of course, there are lots of people who set up some portfolio design and then look to see what has happened after a time.

FisherBlack
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Re: Factor Investing?

Post by FisherBlack » Sun May 27, 2018 7:57 am

A very large portion of factors out there are crap. https://papers.ssrn.com/sol3/papers.cfm ... id=2961979

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oldcomputerguy
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Re: Factor Investing?

Post by oldcomputerguy » Sun May 27, 2018 8:14 am

lazylarry wrote:
Sun May 27, 2018 12:16 am
I'm asking about any factors. For instance, has someone in the past said, "hey - I think that choosing small cap value is gonna be a winner". And then invested with some major tilt to small cap value for some time period, and then compared that to just tracking the US stock market. But on a prospective rather than retrospective basis. I'm much more curious about factors like momentum but not sure if anyone has ever looked at that prospectively.
It seems that you're asking if anyone has ever predicted how this or that factor will do in the future versus the broad market. If that's the case, I'm afraid you won't get very many (if any) helpful responses. It's pretty well acknowledged around here that nobody can predict the future, and that nobody can predict the market.

If you're asking whether anyone has used past data comparisons to guide future portfolio construction, that's a bit more of a complicated subject. We all do that to an extent when we use things like the SPIVA report to guide us to passive index fund investing. But when you try to predict how one segment of the market will do versus the broad market, you run into the proverbial caveat "past performance is no guarantee of future results".

I wish you luck, however, in your pursuit. If you come across such an analysis, come back and post a reference here. I'm sure it would be a topic of interest to some.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

alex_686
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Re: Factor Investing?

Post by alex_686 » Sun May 27, 2018 9:28 am

lazylarry wrote:
Sun May 27, 2018 12:16 am
I'm asking about any factors. For instance, has someone in the past said, "hey - I think that choosing small cap value is gonna be a winner". And then invested with some major tilt to small cap value for some time period, and then compared that to just tracking the US stock market. But on a prospective rather than retrospective basis. I'm much more curious about factors like momentum but not sure if anyone has ever looked at that prospectively.
Yes.

I know a decent amount about factor investing from reading many academic articles. I would suggest that you find a good book on the subject because I am not going to be able to subject justice - but I will try.

Let us look at momentum. It is a trend following factor. You follow the heard because the herd is usually right. So you revive higher returns. Until the herd goes over a cliff and you receive much lower returns. So now we have a distribution. So you forecast what the market will do, plug it into that distribution curve, and now you have a range of outcomes. Output is statically significant.

Does this help?

dbr
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Re: Factor Investing?

Post by dbr » Sun May 27, 2018 9:33 am

alex_686 wrote:
Sun May 27, 2018 9:28 am
lazylarry wrote:
Sun May 27, 2018 12:16 am
I'm asking about any factors. For instance, has someone in the past said, "hey - I think that choosing small cap value is gonna be a winner". And then invested with some major tilt to small cap value for some time period, and then compared that to just tracking the US stock market. But on a prospective rather than retrospective basis. I'm much more curious about factors like momentum but not sure if anyone has ever looked at that prospectively.
Yes.

I know a decent amount about factor investing from reading many academic articles. I would suggest that you find a good book on the subject because I am not going to be able to subject justice - but I will try.

Let us look at momentum. It is a trend following factor. You follow the heard because the herd is usually right. So you revive higher returns. Until the herd goes over a cliff and you receive much lower returns. So now we have a distribution. So you forecast what the market will do, plug it into that distribution curve, and now you have a range of outcomes. Output is statically significant.

Does this help?
Did you look at it prospectively? If so, when, and what was your conclusion?

alex_686
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Re: Factor Investing?

Post by alex_686 » Sun May 27, 2018 9:58 am

dbr wrote:
Sun May 27, 2018 9:33 am
Did you look at it prospectively? If so, when, and what was your conclusion?
Kinda of. Only in the past year have I added a low volatility fund to my portfolio. I can only work with my personal individual data set so I am not going to be able to tell the difference between skill and luck in a statistically significant fashion.

I try to ground my investment philosophy on solid theory, forward looking assessments, tempered by experience and wisdom. I put a low weight on back-testing. It can validate theories. However past preform ace is based on economic structures. If there are secular changes, and there always are, then the theory may still hold but relationships must be tweaked.

Back to low volatility funds. For myself, the risk-reward profile of equities and bonds are poor. As a passive investor I can't say it is overvalued, but wisdom and experience tells me I should be careful. I am a point of life where I still need to earn returns that are greater than bonds but I need to take some risk off of the table. Low volatility funds seem to be the answer.

Lets say that after 10 years we find that low volatility funds have under-preformed. Would that be considered a failure? No. I wanted to take risk off of the table so that meant I had to take returns off of the table as well. Let say that after 10 years and a market crash or two happened and I under-preformed. I would consider that to be a failure.

livesoft
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Re: Factor Investing?

Post by livesoft » Sun May 27, 2018 10:01 am

Didn't Larry Swedroe publish a book or two about all this?

Yes, he did with Andrew L. Berkin.
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Re: Factor Investing?

Post by nisiprius » Sun May 27, 2018 10:09 am

Note that I'm a factor skeptic an the data point I'll present works against my personal views.

There is a piece of data that supports factor investing and seems "prospective." In 1998, Bill Schultheis published a book, "The Coffeehouse Investor," which presented a "Coffeehouse Portfolio" which was a simplified, round-number version of the kinds of factor-based portfolios that were common at the time. There were numerous similar portfolios put down in writing as definite recommendations at about the same time, just five years after the Fama-French work, and now have twenty years of "out-of-sample" real-world performance behind them.

Portfolio 1 (blue) is the "Coffeehouse Portfolio."
Portfolios 2 and 3 are non-factor-based portfolios with the same overall stock/bond allocation.
Portfolio 2 is the 60% Vanguard Total Stock Market Index Fund, 40% Total Bond Market Index Fund.
Portfolio 3 is 42% Total Stock, 14% Total International, 40% Total Bond.

In brief, the story, not only for Coffeehouse but for other similar portfolios I've looked at, is that they were really impressive for ten years, mostly because of a single thing: during 2000-2002, when the stock market in general was in a bad decline, several of the "diversifier" and "uncorrelated" stock asset subclasses were going up or holding steady.

However, this did not hold true after about 2007. All of the stock constituents in the Coffeehouse and similar portfolios went down right along with the stock market in general, and the performance of it and similar factor-based portfolios for the last ten years has been just about the same as that of untilted portfolios.

Still, the record is: if you followed the advice of Bill Schultheis and "the DFA crowd," you'd have beaten untilted portfolios for ten years and then tied them for ten. Thus, you'd have been ahead overall, and by a meaningful amount.

Logically you might think about would be fine, but people don't like to pay advisory fees for ten years of tying the market. In my cynical view, this is what is responsible for the emergence of the "factor zoo."

Source

All data since publication of "The Coffeehouse Investor:"

Image

Last ten years only:

Image
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Re: Factor Investing?

Post by Robert T » Sun May 27, 2018 4:26 pm

.
Based on retrospective analysis (e.g. Fama-French 1993, books by Bernstein, Swedroe, Swensen etc) set up a portfolio in 2003 (75:25 stock:bond portfolio with tilt to smaller cap and value). Have kept the same asset allocation/factor load targets over last 15+ years.

Prospective (expected long-term future) portfolio returns at start of 2003 = 7.5%, with expected calendar year downside of 30-35%.

Actual returns over last 15 years (2003-2017) = 9.9% annualized return, with max calendar year loss of 28.7%, compared to 8.2% annualized return, with max calendar year loss of -32.4% for 75% Vanguard Aggressive Growth: 25% Vanguard Moderate Growth (75:25 stock:bond portfolio with no tilt to small caps and value).

1.7% higher annualized return
26% greater portfolio value from $1 invested at start of 2003
Slightly lower 2008 downside

Performed better than expected (so far).

Obviously no guarantees.

Robert
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livesoft
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Re: Factor Investing?

Post by livesoft » Sun May 27, 2018 4:52 pm

@Robert T, since you keep excellent records I wonder if you plugged your portfolio into Portfolio Visualizer if it would tell you a performance number that matches or achieves your actual real-world experience. My guess is that Portfolio Visualizer results would not even come close because it cannot do most of the rebalancing with its methodology that you probably do. If that is true, then I would say that Portfolio Visualizer gives flawed information and its reports need to be discounted.
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Re: Factor Investing?

Post by Taylor Larimore » Sun May 27, 2018 5:05 pm

Bogleheads:

Never forget:
Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Best wishes
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Re: Factor Investing?

Post by jeffyscott » Sun May 27, 2018 5:24 pm

nisiprius wrote:
Sun May 27, 2018 10:09 am
In brief, the story, not only for Coffeehouse but for other similar portfolios I've looked at, is that they were really impressive for ten years, mostly because of a single thing: during 2000-2002, when the stock market in general was in a bad decline, several of the "diversifier" and "uncorrelated" stock asset subclasses were going up or holding steady.

However, this did not hold true after about 2007. All of the stock constituents in the Coffeehouse and similar portfolios went down right along with the stock market in general, and the performance of it and similar factor-based portfolios for the last ten years has been just about the same as that of untilted portfolios.
Yes, it worked because in 2000-2002 you could avoid over-priced parts of the market, you just needed to avoid tech stocks and large cap growth. In contrast in 2007, everything was high (kinda like now at least for US stocks).
press on, regardless - John C. Bogle

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Robert T
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Re: Factor Investing?

Post by Robert T » Mon May 28, 2018 4:47 am

livesoft wrote:
Sun May 27, 2018 4:52 pm
@Robert T, since you keep excellent records I wonder if you plugged your portfolio into Portfolio Visualizer if it would tell you a performance number that matches or achieves your actual real-world experience. My guess is that Portfolio Visualizer results would not even come close because it cannot do most of the rebalancing with its methodology that you probably do. If that is true, then I would say that Portfolio Visualizer gives flawed information and its reports need to be discounted.
Not possible to do. While there have been no changes to my asset allocation (75:25 stocks:bonds, 50:37:13 US:EAFE:EM in equities) and factor exposure targets (1.0/0.2/0.4 market/size/value load targets within equities, and 0.0/0.5 default/term load targets within bonds) there have been changes to the underlying funds used - for example i initially use Dodge & Cox International for international value exposure as there were no international value index funds available at the time.

Interestingly my returns have been the same as a DFA ' Balanced Strategy' over this same time period even though the US:International equity split differed. https://www.portfoliovisualizer.com/bac ... ion17_2=25 . Subtracting a 1% advisor fee from the DFA portfolio would have reduced the end portfolio value by 17%. Costs matter (as we learn from John Bogle).

Robert
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Re: Factor Investing?

Post by livesoft » Mon May 28, 2018 5:52 am

@Robert T, thanks for pointing to the DFA Balanced strategy and link to Portvolio Visualizer. That's quite a lot of DFA funds in the DFA strategy, so I put in a third portfolio consisting of DGSIX (DFA 60/40 Global) and DGEIX (DFA 100 Global) in a ratio of 68/32 to get a 75/25 portfolio and took a look (start year got adjusted]
Link

End results are not too similar for the two DFA portfolios. It is as if DFA can not run its own strategy in a balanced fund ... or what?
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Robert T
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Re: Factor Investing?

Post by Robert T » Mon May 28, 2018 6:48 am

livesoft wrote:
Mon May 28, 2018 5:52 am
@Robert T, thanks for pointing to the DFA Balanced strategy and link to Portvolio Visualizer. That's quite a lot of DFA funds in the DFA strategy, so I put in a third portfolio consisting of DGSIX (DFA 60/40 Global) and DGEIX (DFA 100 Global) in a ratio of 68/32 to get a 75/25 portfolio and took a look (start year got adjusted]
Link

End results are not too similar for the two DFA portfolios. It is as if DFA can not run its own strategy in a balanced fund ... or what?

"Over the long haul what matters is factor exposure and expense"


The "DFA Global" funds have a smaller tilt to small caps and value than the "DFA Balanced" allocations.

e.g. http://www.efficientfrontier.com/ef/404/grail.htm and over time the "DFA Global" funds have shifted away from including 'component' funds (as in Bill Bernstein's linked article) to including the DFA "core" funds which may be even less tilted to small cap and value.

Robert
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Re: Factor Investing?

Post by dkturner » Mon May 28, 2018 7:13 am

Factor investing seems to work best when there had been widely varying performances of different asset classes over the prior decade. As several posters have noted that had been the case in the period 1998-2006, but not recently. Unless you consider international stocks to be a “factor” there really have not been any wide variances in the performance of equity asset classes in the last decade.

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Re: Factor Investing?

Post by livesoft » Mon May 28, 2018 7:21 am

dkturner wrote:
Mon May 28, 2018 7:13 am
Factor investing seems to work best ....
I am unconcerned if factor investing is "best." Like many of the Bogleheads who have positions in Vanguard Wellesley and Wellington, I simply want my factor investing to stay ahead of the total market weighted (aka 3-fund) portfolio year-in-year-out. I also want my factor investing to stay ahead of Wellington and Wellesley.

I think on this forum, too often "best" is translated at 1% or more per year better, when it might only mean being 0.001% better.
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Re: Factor Investing?

Post by jeffyscott » Mon May 28, 2018 8:04 am

Robert T wrote:
Sun May 27, 2018 4:26 pm
.
Based on retrospective analysis (e.g. Fama-French 1993, books by Bernstein, Swedroe, Swensen etc) set up a portfolio in 2003 (75:25 stock:bond portfolio with tilt to smaller cap and value). Have kept the same asset allocation/factor load targets over last 15+ years.

Prospective (expected long-term future) portfolio returns at start of 2003 = 7.5%, with expected calendar year downside of 30-35%.

Actual returns over last 15 years (2003-2017) = 9.9% annualized return, with max calendar year loss of 28.7%, compared to 8.2% annualized return, with max calendar year loss of -32.4% for 75% Vanguard Aggressive Growth: 25% Vanguard Moderate Growth (75:25 stock:bond portfolio with no tilt to small caps and value).

1.7% higher annualized return
26% greater portfolio value from $1 invested at start of 2003
Slightly lower 2008 downside

Performed better than expected (so far).

Obviously no guarantees.

Robert
.
That about matches one of the best (or luckiest?) funds I own, T. Rowe Capital Appreciation (PRWCX). M* shows just over 10% for 15 years (might be a bit different period than you are using) and rolling returns shows worst 12 months at about -30%, or for strictly calendar year it's -27%. I think it has also typically been 75% stocks.

I've used value and small to some extent, but with some strategic variations based on expected returns (using GMO forecasts and more recently also RA). Proportionally similar results to yours, I think. Returns for 15 years were 9.1% as of 3/31/18 or 8.5% as of end of 2017. Worst calendar year was -21.5% and -23% was worst 12 months (based on quarterly data). Equities went from 72% to 40% over that time, was right at 50% during 2007-08. Factors would probably put my equities a bit higher, due to the use of corporate and other risky bonds.

I have used low cost managed funds more so than actual index funds, nearly all were from T. Rowe, Vanguard, and Dodge and Cox.
press on, regardless - John C. Bogle

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