Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Random Walker »

https://alphaarchitect.com/2018/11/15/f ... ntum-dead/

Interesting paper with nice graphics. Very humbling for a factor head like me. S&P 500 is effectively a bet on the mega cap growth corner of the market: a bet that has paid off very well the last 5 years! Value not looking so great in large caps, Momentum looks good in big and small.

Dave
Dead Man Walking
Posts: 1212
Joined: Wed Nov 07, 2007 5:51 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Dead Man Walking »

Dave,

One could probably cherry pick a 5 year time period that shows completely different returns. I've always believed that when one chooses to buy and when one chooses to sell can have a dramatically different impact on total returns. Buying mega cap growth now may have greatly different returns if it is sold 5 years from now. It may be the old buying high selling low scenario. Of course, it could be a buying high and selling higher scenario. Trouble is that determining the future is impossible, which is a helluva great argument for asset allocation!

DMW
fennewaldaj
Posts: 1097
Joined: Sun Oct 22, 2017 11:30 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by fennewaldaj »

Dead Man Walking wrote: Fri Nov 16, 2018 2:01 am Dave,

One could probably cherry pick a 5 year time period that shows completely different returns. I've always believed that when one chooses to buy and when one chooses to sell can have a dramatically different impact on total returns. Buying mega cap growth now may have greatly different returns if it is sold 5 years from now. It may be the old buying high selling low scenario. Of course, it could be a buying high and selling higher scenario. Trouble is that determining the future is impossible, which is a helluva great argument for asset allocation!

DMW
Yeah I wish more analysis were done how most people invest (roughly equally every month or so over 15-40 years)
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by nisiprius »

No, the S&P 500 is not "a bet on the mega cap growth section of the market." It's just a bet on the market, period. (They muddy the waters by talking about "the S&P 500," rather than the total market index most Bogleheads probably use--but since the S&P 500 constitutes 80% of the market, there's a limit on just how different it can be from the market).

This is just a rhetorical ploy that exploits peoples' ignorance of well-known statistical characteristics of the stock market, and of many naturally-occurring distributions.

Beer is 90% water, but drinking beer isn't the same as drinking water.

Just twenty-five words make up 25% of the English language: the, be, to, of, and, a, in that, have, I, it, for not, with, he, as, you, do, at, this, but, his, by, and from--about the same as the percentage of the Dow Jones Industrial Average stocks in the stock market--but writing in English is not tilting toward or betting on those words.

By using this kind of language, Grey and Vogel show that their interest is in selling, not communicating accurate information.

Another indication not to trust these guys' presentation. They claim that "Value works in small-caps (10.03% vs. 7.21%)." They cite research data from Ken French, but they don't say anything about real-world results. 10% versus 7% is a big difference, and if it is consistent or reliable--not just an accidental artifact of date range--it ought to show up in the real world, even if we don't get the exact same numbers.

Using Vanguard funds (blue: small cap value, VISVX; orange: small cap growth, VISGX), over the last five years small-cap value and growth have been virtually tied:

Source

Image

Using iShares ETFs--IJS in particular often praised in the forum the connoisseur's choice--small gap growth outperformed small-cap value (blue: small cap value, IJS; orange: small cap growth, IJT)

Source

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by vineviz »

nisiprius wrote: Fri Nov 16, 2018 6:30 am Another indication not to trust these guys' presentation. They claim that "Value works in small-caps (10.03% vs. 7.21%)." They cite research data from Ken French, but they don't say anything about real-world results. 10% versus 7% is a big difference, and if it is consistent or reliable--not just an accidental artifact of date range--it ought to show up in the real world, even if we don't get the exact same numbers.
An alternative to reflexively mistrusting these guys would be to understand what they said and evaluate whether it is true or not.

Gray was speaking about the value FACTOR over the past ten years, not some random FUND. Is he right? Almost certainly.

The problem when comparing two funds (such as IJR and IJT) is that they are not sorted exclusively on the value FACTOR. iShares S&P Small-Cap 600 Growth ETF isn't purely an anti-value fund: it has other FACTOR characteristics that matter, like the one that Gray mentions right after he mentions value and that you didn't mention at all: momentum.

While the value FACTOR worked over the past five years, so did the momentum FACTOR. The challenge for "real-world" investors is that these FACTOR returns are almost always negatively correlated, and in the past five years have been extremely negatively correlated.

So the performance of IJR relative to IJT isn't just a matter of value outperforming (or not) but is also a matter of momentum outperforming (or not).

In the end I think this all ends up proving that if a few years of underperformance can make you unduly nervous then it's probably a good idea to stick to market-cap weighted indexing unless you REALLY understand how factor investing really works. No one said it would be easy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by nedsaid »

nisiprius wrote: Fri Nov 16, 2018 6:30 am No, the S&P 500 is not "a bet on the mega cap growth section of the market." It's just a bet on the market, period. (They muddy the waters by talking about "the S&P 500," rather than the total market index most Bogleheads probably use--but since the S&P 500 constitutes 80% of the market, there's a limit on just how different it can be from the market).

This is just a rhetorical ploy that exploits peoples' ignorance of well-known statistical characteristics of the stock market, and of many naturally-occurring distributions.

Beer is 90% water, but drinking beer isn't the same as drinking water.

Just twenty-five words make up 25% of the English language: the, be, to, of, and, a, in that, have, I, it, for not, with, he, as, you, do, at, this, but, his, by, and from--about the same as the percentage of the Dow Jones Industrial Average stocks in the stock market--but writing in English is not tilting toward or betting on those words.

By using this kind of language, Grey and Vogel show that their interest is in selling, not communicating accurate information.

Well, actually Nisiprius, the top 100 stocks in market capitalization are just over 50% of the market cap of the Total US Stock Market. So yes, the US Total Stock Market Index and the S&P 500 Indexes are essentially Mega-Cap Growth. Doesn't mean these indexes aren't very good investments, indeed my largest holding is the US Total Stock Market Index.

Also want to point out that the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have accounted for a large part of the US Stock Market's rise the last few years. These five stocks have been spectacular investments.

We have been in a Large Growth market for a decade now, so it isn't surprising that Value, particularly Large Value seems to be dead. It isn't that Value has done horrible, it is that Value has trailed Large Growth. My foggy memory remembers that Small Value has fared better than Large Value.

It is possible that the markets have changed. Perhaps the factor premiums have been taken away and the markets are even more efficient than ever. We will see. I have my doubts. Greed and fear have not yet been repealed.
A fool and his money are good for business.
cheezit
Posts: 493
Joined: Sat Jul 14, 2018 7:28 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by cheezit »

fennewaldaj wrote: Fri Nov 16, 2018 2:17 am
Dead Man Walking wrote: Fri Nov 16, 2018 2:01 am Dave,

One could probably cherry pick a 5 year time period that shows completely different returns. I've always believed that when one chooses to buy and when one chooses to sell can have a dramatically different impact on total returns. Buying mega cap growth now may have greatly different returns if it is sold 5 years from now. It may be the old buying high selling low scenario. Of course, it could be a buying high and selling higher scenario. Trouble is that determining the future is impossible, which is a helluva great argument for asset allocation!

DMW
Yeah I wish more analysis were done how most people invest (roughly equally every month or so over 15-40 years)
Interesting that you bring this up. I recently took a peek in another thread at the returns of value vs blend for large, mid and small caps since the inception of the iShares S&P ETFs that track the relevant indices, with the investments being DCAd'd over the period in question, roughly 2001-2018, because that's how I (and I think most others) invest. The iShares ETFs seemed like an interesting way to look at it because the S&P indices they track have a quality filter that I have been told makes the value factor "work better".

For large caps, S&P 500 beat S&P 500 value by an annualized 1.52% MWRR
For mid caps, S&P 400 beat S&P 400 value by an annualized 0.41% MWRR
For small caps, S&P 600 beat S&P 600 value by an annualized 0.87% MWRR
cheezit
Posts: 493
Joined: Sat Jul 14, 2018 7:28 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by cheezit »

vineviz wrote: Fri Nov 16, 2018 7:02 am
nisiprius wrote: Fri Nov 16, 2018 6:30 am Another indication not to trust these guys' presentation. They claim that "Value works in small-caps (10.03% vs. 7.21%)." They cite research data from Ken French, but they don't say anything about real-world results. 10% versus 7% is a big difference, and if it is consistent or reliable--not just an accidental artifact of date range--it ought to show up in the real world, even if we don't get the exact same numbers.
An alternative to reflexively mistrusting these guys would be to understand what they said and evaluate whether it is true or not.

Gray was speaking about the value FACTOR over the past ten years, not some random FUND. Is he right? Almost certainly.

The problem when comparing two funds (such as IJR and IJT) is that they are not sorted exclusively on the value FACTOR. iShares S&P Small-Cap 600 Growth ETF isn't purely an anti-value fund: it has other FACTOR characteristics that matter, like the one that Gray mentions right after he mentions value and that you didn't mention at all: momentum.

While the value FACTOR worked over the past five years, so did the momentum FACTOR. The challenge for "real-world" investors is that these FACTOR returns are almost always negatively correlated, and in the past five years have been extremely negatively correlated.

So the performance of IJR relative to IJT isn't just a matter of value outperforming (or not) but is also a matter of momentum outperforming (or not).

In the end I think this all ends up proving that if a few years of underperformance can make you unduly nervous then it's probably a good idea to stick to market-cap weighted indexing unless you REALLY understand how factor investing really works. No one said it would be easy.
A few questions:

1) The "momentum factor" isn't included in either the Fama-French 3-factor model nor the Fama-French 5-factor model. Whose research is it based on?
2) If indices that target specific factors cannot be used to effectively invest in those factors due to cross-correlations with other factors, does this mean factor investing can only be done with multifactor funds? If so, which of the factor advocates were warning people to high heaven against eg. getting their value factor exposure for small-caps through IJS or VIOV prior to the long period of underperformance?
3) How can someone who is intrigued by factor investing avoid goalpost-moving and other mental gymnastics in evaluating how any of this works? Eg. if someone is looking for ways to improve portfolio return and efficiency, they're going to want to believe that factors are both real and that investment vehicles exist to efficiently and inexpensively gain exposure to them. They're going to be apt to see X years of value overperformance as confirmation that "it still works", but see Y years of value underperformance as either a buying opportunity "because it's due to revert" or as however you're measuring value performance being a defective measurement. What framework can we set up a priori to avoid this sort of trap?
wolf359
Posts: 3207
Joined: Sun Mar 15, 2015 8:47 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by wolf359 »

Random Walker wrote: Thu Nov 15, 2018 9:58 pm https://alphaarchitect.com/2018/11/15/f ... ntum-dead/

Interesting paper with nice graphics. Very humbling for a factor head like me. S&P 500 is effectively a bet on the mega cap growth corner of the market: a bet that has paid off very well the last 5 years! Value not looking so great in large caps, Momentum looks good in big and small.

Dave
I'm missing something here. He's describing the way the market works, then using it to declare parts of the market dead or not.

Fact #1: You make money by selling something for more than you bought it for. You lose money if you sell it for less than you bought it. If I'm following as asset allocation model, I should be more of what dropped, and hold less of what's high.

Fact #2: Past performance is not indicative of future results. The fact that one asset class performed well in any given time period DOES NOT mean that that asset class will ALWAYS outperform in every other timeframe. See CALLAN table. If I knew that S&P 500 was going to be the best performer 5 years ago, I would have bought only the S&P 500. I have no idea what single asset class is going to be the best performer over the NEXT 5 years. I don't think the article author does, either.

Fact #3: The factor theory works on timeframes of 20-30 years. He's using a 5 year timeframe.

Growth usually outperforms during a bull market, because everyone is optimistic. You need to look at an entire market cycle. I've always thought that the hype about smart beta (marketing term for value investing) and factor investing (the most popular factor is value) meant that too many people were piling into value. As a result, I expect that value returns will lag, because it's been too popular over recent years. What may be happening is that people are giving up on value, and buying S&P 500. Eventually they may oversell value, then value stock returns will improve.

To me, that's the best time to make sure your S&P 500 allocation doesn't get out of whack, and keep up on your other asset allocations. Buy consistently over time to dollar cost average through the rough patches.

I have no idea which factor or portion of the market will succeed in the long term. That's what diversification is for.
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by vineviz »

cheezit wrote: Fri Nov 16, 2018 9:04 am A few questions:

1) The "momentum factor" isn't included in either the Fama-French 3-factor model nor the Fama-French 5-factor model. Whose research is it based on?
These are all great questions, and I’ll try to give you MY thoughts on all three today.

For this first question, the short answer is that Mark Carhart is generally credited with extending the Fama-French three factor model to four factors by including momentum.

This article is a good summary of the factor and includes links to several published papers on it, including Carhart’s: https://seekingalpha.com/article/400664 ... tum-factor
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by willthrill81 »

vineviz wrote: Fri Nov 16, 2018 7:02 amIn the end I think this all ends up proving that if a few years of underperformance can make you unduly nervous then it's probably a good idea to stick to market-cap weighted indexing unless you REALLY understand how factor investing really works. No one said it would be easy.
:thumbsup

Any deviation from buy-and-hold of a market cap-weighted index will underperform that index at some point, and this may go on for years. If you're not prepared to deal with that, then don't do it.
The Sensible Steward
Topic Author
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Random Walker »

Wolf359,
I don’t know a lot about the alpha architect guys, but they are heavy on value and momentum. I don’t think anything in the article is going to cause them to deviate from their philosophy. I think they are just showing that segments of the market and factors can underperform for extended periods. Of course no one knows how the future will play out, but I think their bets on value and momentum aren’t changing anytime soon. Like you, I’m sure they take a long term view. They know 5 years is potentially just noise in the data.

Dave
Coato
Posts: 215
Joined: Wed Oct 21, 2015 4:34 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Coato »

This article reinforces my belief that if the factors work it is because of human behaviors and not an efficient market. I would think that if you owned a chunk of small and value positions you would be happy that at least a percentage of people who keep reading these articles are piling out of those funds and into the S&P.

In a diversified portfolio you want to also own the unpopular thing right? Or do I have this wrong?
User avatar
White Coat Investor
Posts: 17409
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by White Coat Investor »

Pick something reasonable and stick with it. Over a typical 60 year investing career, most segments of the market will have their day in the sun multiple times.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by retiringwhen »

White Coat Investor wrote: Fri Nov 16, 2018 10:24 am Pick something reasonable and stick with it. Over a typical 60 year investing career, most segments of the market will have their day in the sun multiple times.
+1
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by nisiprius »

vineviz wrote: Fri Nov 16, 2018 7:02 am...Gray was speaking about the value FACTOR over the past ten years, not some random FUND. Is he right? Almost certainly...
His words:
Below is a chart of the past recent performance (five years) on generic small value/growth (“value”) and small winner/loser (“momentum”) portfolios from Ken French’s site.
  • He says five years, not ten.
  • He says "portfolios," not "factors."
He gives this link to Ken French's website. The website says:
The portfolios, which are constructed at the end of each June, are the intersections of 5 portfolios formed on size (market equity, ME) and 5 portfolios formed on the ratio of book equity to market equity (BE/ME). The size breakpoints for year t are the NYSE market equity quintiles at the end of June of t. BE/ME for June of year t is the book equity for the last fiscal year end in t-1 divided by ME for December of t-1. The BE/ME breakpoints are NYSE quintiles.
So, no, Gray was not looking at factors. If he were looking at factors he would presumably have linked to some of French's factor data, such as these:
Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by vineviz »

nisiprius wrote: Fri Nov 16, 2018 10:37 am He says five years, not ten.
[*]He says "portfolios," not "factors."
[/list]
I appreciate and value your skeptical and evidence-based approach to investment topic, even when your proclivity to contradict an expert appears to preempt an attempt to fully understand their argument.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
whodidntante
Posts: 13114
Joined: Thu Jan 21, 2016 10:11 pm
Location: outside the echo chamber

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by whodidntante »

Large cap tech stocks have had an amazing run, hats off. But some of the headliners seem on tenuous ground to me. I can't make a great argument for why Amazon and Netflix stocks should have any nominal returns for the next 15 years, given current valuations. You're essentially buying hope.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by willthrill81 »

whodidntante wrote: Fri Nov 16, 2018 11:24 am Large cap tech stocks have had an amazing run, hats off. But some of the headliners seem on tenuous ground to me. I can't make a great argument for why Amazon and Netflix stocks should have any nominal returns for the next 15 years, given current valuations. You're essentially buying hope.
I'm inclined to agree. Amazon's earnings would have to increase exponentially to even remotely justify their current price.
The Sensible Steward
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by retiringwhen »

willthrill81 wrote: Fri Nov 16, 2018 11:44 am
whodidntante wrote: Fri Nov 16, 2018 11:24 am Large cap tech stocks have had an amazing run, hats off. But some of the headliners seem on tenuous ground to me. I can't make a great argument for why Amazon and Netflix stocks should have any nominal returns for the next 15 years, given current valuations. You're essentially buying hope.
I'm inclined to agree. Amazon's earnings would have to increase exponentially to even remotely justify their current price.
I remember thinking the same about Applied Materials and Cisco in 2000 and that has definitely been the case. Both are still well run companies making money, but never caught up to their stock prices. I also thought that Apple was a has been.....
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by vineviz »

cheezit wrote: Fri Nov 16, 2018 9:04 am 2) If indices that target specific factors cannot be used to effectively invest in those factors due to cross-correlations with other factors, does this mean factor investing can only be done with multifactor funds? If so, which of the factor advocates were warning people to high heaven against eg. getting their value factor exposure for small-caps through IJS or VIOV prior to the long period of underperformance?
My take on this question probably hinges more the word "effectively" than you'd probably like, but I don't think I'd go so far as to say that that indexes which tilt towards certain factors (e.g. the S&P SmallCap 600 Value index) can't be used and used well to build a portfolio.

I do think it is prudent for any investor who is moving away from strict market cap weighted index funds to examine any fund they intend to use to ascertain both that it DOES contain the exposures they want and DOES NOT contain exposures they don't want. Not every investor is able or willing to do that, of course, which is one of the reasons I say factor-based investing isn't for everyone.

It IS possible to build "pure" exposure to a single factor, but the mechanics to do so are difficult and costly. For this reason, many investors (and I put myself into this category) end up finding a balance between exposure and convenience that is "good enough". Historically, for instance, the S&P SmallCap 600 Value index has provide more than enough benefit from value, size, and quality factor exposure to offset the small impact of negative momentum exposure. That hasn't been true over the past five years, but periods of factors being in and out of favor are par for the course.

Hope this helps.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
vineviz
Posts: 14921
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by vineviz »

cheezit wrote: Fri Nov 16, 2018 9:04 am 3) How can someone who is intrigued by factor investing avoid goalpost-moving and other mental gymnastics in evaluating how any of this works? Eg. if someone is looking for ways to improve portfolio return and efficiency, they're going to want to believe that factors are both real and that investment vehicles exist to efficiently and inexpensively gain exposure to them. They're going to be apt to see X years of value overperformance as confirmation that "it still works", but see Y years of value underperformance as either a buying opportunity "because it's due to revert" or as however you're measuring value performance being a defective measurement. What framework can we set up a priori to avoid this sort of trap?
I think this is a tough question and gets to questions of investor psychology that affect everyone, not just factor investors.

One thing I'd say, which I've said before, is that investors who are what I call "regret averse" probably would be better suited by a more passive approach to investing. Because risk factors do experience periods of underperformance and outperformance, you need an emotional constitution that will allow you to maintain an even temperament through both periods: not getting overconfident when things are going your way and not radically restructuring your portfolio when your recent performance is weak.

While it is theoretically possible that certain factors will lose their potency, my view is that wondering if "value is dead" or "size is dead" is framing the question in the wrong way. These factors have LOOKED dead in the past, for instance, only to come roaring back in a huge way.

For instance, the markets from 1996 to 2000 looked an awful lot like the markets of 2014 to 2018 in many ways. Market and momentum factors were producing HUGE returns while value and size factors were both sadly negative.

From 2000 to 2006, on the other hand, things almost completely reversed. The market factor was negative and momentum was greatly diminished, while size and value really showed up.

Image

This data is based on the AQR definitions, but much the same result would flow from the Fama-French factor definitions. Any claims that factor investing was "dead" in 1999 were premature at best.

So rather than getting drawn into debates about whether Factor X is dead, investors should focus on the core investment principles that apply to EVERYONE: keep a diligent focus on costs, don't chase performance, and take on only as much risk as you can handle. Factor investors are taking on a little more complexity than "pure" market-cap weight Bogleheads, and they need to understand and own that fact.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
bgf
Posts: 2085
Joined: Fri Nov 10, 2017 8:35 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by bgf »

nedsaid wrote: Fri Nov 16, 2018 8:48 am We have been in a Large Growth market for a decade now, so it isn't surprising that Value, particularly Large Value seems to be dead.
im just waiting for the cover of businessweek to read "THE DEATH OF VALUE."
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
User avatar
Robert T
Posts: 2803
Joined: Tue Feb 27, 2007 8:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Robert T »

.
Looking at 5 year periods reminds me of this earlier piece by Cliff Asness

https://www.aqr.com/Insights/Perspectiv ... e-Long-Run

Robert
.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by rkhusky »

nisiprius wrote: Fri Nov 16, 2018 6:30 am No, the S&P 500 is not "a bet on the mega cap growth section of the market." It's just a bet on the market, period. (They muddy the waters by talking about "the S&P 500," rather than the total market index most Bogleheads probably use--but since the S&P 500 constitutes 80% of the market, there's a limit on just how different it can be from the market).

This is just a rhetorical ploy that exploits peoples' ignorance of well-known statistical characteristics of the stock market, and of many naturally-occurring distributions.
+1
The S&P 500 is approximately equally distributed between growth and value.

Morningstar defines giant-cap stocks as the top 40% of the market and the largest 50 stocks fit into that space, which seems like it might be most appropriate for the mega-cap label. Since the S&P 500 includes another 450 stocks, with labels of large-cap (next 30%) and mid-cap (next 20%), it is definitely not a "bet" on mega-caps or on growth.

And if you look at VFINX (Index 500) at portfoliovisualizer.com and run a standard FF 3-factor analysis, you can see that loading on size is -0.14 and loading on value is 0.01, indicating that VFINX is neither growth or value. (Sept 2003 - Sept 2018)

Compare to FGRTX (Fidelity Mega Cap) with 100 stocks. Size loading is -0.20 and value loading is 0.08. (Sept 2003 - Sept 2018).

Compare to VTSMX (Total Stock Market). Size loading is 0 and value loading is 0. (Sept 2003 - Sept 2018).

And FGRTX has twice as many stocks as in Morningstar's giant-cap category (couldn't quickly find a fund with just the largest 50 stocks).

Vanguard's Mega Cap ETF (MGC) has 250 stocks with a size loading of -0.17 and a value loading of 0. Instead of MegaCap, this seems more like LargeCap.

Note that one of the footnotes says "Large could be considered mega-cap as well. " But I suppose Mega-Cap sounds better, as in "S&P 500 (a.k.a., mega-cap U.S. stocks)".
cheezit
Posts: 493
Joined: Sat Jul 14, 2018 7:28 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by cheezit »

vineviz,

Thank you for your detailed replies. I'll be in the woods most of next week, maybe I'll be able to able to digest it all if Bambi is uncooperative :beer
Slick8503
Posts: 322
Joined: Tue Nov 16, 2010 9:25 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Slick8503 »

Thank you for the very appropriate and helpful article link, RobertT.
Topic Author
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Random Walker »

Yes, that Rober T article from Asness/AQR was a perfect complement to the alpha architect article. I think alpha architect was implicitly making the same point. 5 years is a short time and most anything can happen over that period. The last 5 years has been a large growth boom. For the long term alpha architect is sticking with their value bet.

Dave
Slick8503
Posts: 322
Joined: Tue Nov 16, 2010 9:25 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Slick8503 »

I also appreciate all of the Larry and related articles you post for the readers here Random Walker. I do not participate much, but they are helpful to me and I'm sure others.
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by nedsaid »

bgf wrote: Fri Nov 16, 2018 2:42 pm
nedsaid wrote: Fri Nov 16, 2018 8:48 am We have been in a Large Growth market for a decade now, so it isn't surprising that Value, particularly Large Value seems to be dead.
im just waiting for the cover of businessweek to read "THE DEATH OF VALUE."
Me too!
A fool and his money are good for business.
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by nisiprius »

That Businessweek article deserves more respect than it gets. It is commonly misrepresented as an example of foolish pessimism due to overreaction to normal stock market movements. In reality it is not about market fluctuation, it is about inflation, as is clear when the title is quoted accurately (as it rarely is): "The Death of Equities: How inflation is destroying the stock market."

This quote is a good capsule summary of the article:
The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. “People no longer think of stocks as an inflation hedge, and based on experience, that’s a reasonable conclusion for them to have reached,” says Richard Cohn, an associate professor of finance at the University of Illinois.
The rebirth of equities did not arise from the exuberant engines of entrepreneurial energy, but from the brutal containment of inflation by Volcker.

It is a perfectly sensible piece--and explains why so many brokerages failed and why it was necessary to create the SIPC--and the lesson I take from it is not "stocks always bounce back," it is "stocks are not always an inflation hedge."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
bgf
Posts: 2085
Joined: Fri Nov 10, 2017 8:35 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by bgf »

good point. buffetts 1979 shareholders letter does a great job explaining how inflation and taxes could make equities a very poor investment. the "investor's misery index"

many investors even on this board have probably forgotten what that period was like.

its impossible for me to forget... i wasnt born yet ;-)
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by nedsaid »

nisiprius wrote: Sun Nov 18, 2018 10:25 am That Businessweek article deserves more respect than it gets. It is commonly misrepresented as an example of foolish pessimism due to overreaction to normal stock market movements. In reality it is not about market fluctuation, it is about inflation, as is clear when the title is quoted accurately (as it rarely is): "The Death of Equities: How inflation is destroying the stock market."

This quote is a good capsule summary of the article:
The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. “People no longer think of stocks as an inflation hedge, and based on experience, that’s a reasonable conclusion for them to have reached,” says Richard Cohn, an associate professor of finance at the University of Illinois.
The rebirth of equities did not arise from the exuberant engines of entrepreneurial energy, but from the brutal containment of inflation by Volcker.

It is a perfectly sensible piece--and explains why so many brokerages failed and why it was necessary to create the SIPC--and the lesson I take from it is not "stocks always bounce back," it is "stocks are not always an inflation hedge."
Just looked up the article. It has a date of August 13, 1979. The article has the reputation as a contrary indicator signaling the bottom of the stock market but the bull market actually didn't start until almost 5 years later in 1984. It was also written by our very own Barry Ritholz. Sadly, this probably means that the recovery of the Value premium is a ways off. Maybe 3-5 years. Oh well, just more patience is required.
A fool and his money are good for business.
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by Taylor Larimore »

Random Walker wrote: Thu Nov 15, 2018 9:58 pm https://alphaarchitect.com/2018/11/15/f ... ntum-dead/

Interesting paper with nice graphics. Very humbling for a factor head like me. S&P 500 is effectively a bet on the mega cap growth corner of the market: a bet that has paid off very well the last 5 years! Value not looking so great in large caps, Momentum looks good in big and small.

Dave
Dave:

Interesting article. Makes Total Market Index Funds look good.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
2015
Posts: 2906
Joined: Mon Feb 10, 2014 1:32 pm

Re: Alpha Architect: Factor Investing Fact Check: Are Value And Momentum Dead?

Post by 2015 »

That's the thing about the 3 fund PF and total stock market. It's just not possible to do stupid stuff when you opt for simplicity and stick with it.

Sooner or later, complexity is always a "tragic bet" (phrase from the article) in any adaptive system. I recommend reading Complexity: A Guided Tour.
Post Reply