VFMF (Vanguard Multifactor) == Closet Value Index Fund

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hdas
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VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by hdas » Tue Jun 11, 2019 12:00 pm

I've been following the performance (I don't own the fund) of VFMF (Vanguard Multifactor). And trying to figure out why the terrible performance, given that Momentum and Quality have been doing ok.....Mr. Gray from Alpha Architect seems to be commenting about the same issue in twitter.

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Cheers :greedy
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Re: VFMF (Vanguard Multifactor) == Closet Value Index

Post by whodidntante » Tue Jun 11, 2019 12:04 pm

I personally want a strong value loading in a multi-factor fund, because value has had the second largest factor premium, followed by market. But as you noted, this can cause significant deviation from market performance. I guess that's also the point. If it had been 10 points ahead I don't think anyone would complain. :happy

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by vineviz » Tue Jun 11, 2019 12:12 pm

hdas wrote:
Tue Jun 11, 2019 12:00 pm
I've been following the performance (I don't own the fund) of VFMF (Vanguard Multifactor). And trying to figure out why the terrible performance, given that Momentum and Quality have been doing ok.
I wouldn't necessarily take that as a given.

Since the inception of VFMF, the monthly factor premiums (using Alpha Architects' own data) have been negative for size, value, momentum, and quality. At least they were through the end of April.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index

Post by hdas » Tue Jun 11, 2019 12:14 pm

whodidntante wrote:
Tue Jun 11, 2019 12:04 pm
I personally want a strong value loading in a multi-factor fund, because value has had the second largest factor premium, followed by market. But as you noted, this can cause significant deviation from market performance. I guess that's also the point. If it had been 10 points ahead I don't think anyone would complain. :happy
I'm not questioning the deviation from market performance, but instead the overwhelming effect of the value factor performance on the supposedly "multifactor" fund. Momentum has been on a tear, quality doing ok.....I guess I don't see the "balancing" effect of the multifactor approach in this case. :greedy
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by pdavi21 » Tue Jun 11, 2019 12:24 pm

There are risks that tend to be higher with a tilted fund:
1. Index Choice
2. Factor Methodology
3. Expenses

There could, theoretically be two multi-factor funds that have vastly differing performance over longer term intervals because one decided to hold a few high climbing stocks while one decided not to.

I recently saw someone quote a joke, "Fruit is good, cake is good. So fruitcake must be good." I think this can also be an interesting analogy for multifactor funds. If Momentum, quality, value, (and size?) or whatever factors the fund is targeting perform a certain way separately, it is not 100% guaranteed that combing those factors will yield an aggregate performance that is comparable to the weighted average of each factor's performance. It could be that the best momentum stocks have a high P/E and are not value stocks. Or that only large momentum stocks do better, while small momentum stocks perform poorly, for example.

That being said, over this tiny term interval, probably the factors targeted did poorly in aggregate.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by hdas » Tue Jun 11, 2019 12:31 pm

vineviz wrote:
Tue Jun 11, 2019 12:12 pm
hdas wrote:
Tue Jun 11, 2019 12:00 pm
I've been following the performance (I don't own the fund) of VFMF (Vanguard Multifactor). And trying to figure out why the terrible performance, given that Momentum and Quality have been doing ok.
I wouldn't necessarily take that as a given.

Since the inception of VFMF, the monthly factor premiums (using Alpha Architects' own data) have been negative for size, value, momentum, and quality. At least they were through the end of April.
Ok, fair enough, that doesn't explain why the fund is less balanced than expected, or why is mostly value. And I think the question is still open if this specific multifactor implementation is good.

Code: Select all

Portfolio performance statistics
Note: The time period was automatically adjusted based on the available data (Mar 2018 - May 2019) for the selected asset: Vanguard US Multifactor ETF (VFMF)

        CAGR	Stdev	BestY	WorstY	Max. DD
VFMF	-4.45% 	17.86%	5.82%	-10.73%	-18.66% 	
VFVA	-7.72% 	22.73%	5.93%	-14.62%	-20.67% 	
QUAL	3.45% 	16.51%	12.31%	-7.11%	-14.61% 	
QMOM   -0.79% 	23.91%	17.48%	-15.72%	-25.76% 	
VTI      2.97% 	16.57%	10.83%	-6.41%	-14.20%
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by pdavi21 » Tue Jun 11, 2019 1:59 pm

hdas wrote:
Tue Jun 11, 2019 12:31 pm
vineviz wrote:
Tue Jun 11, 2019 12:12 pm
hdas wrote:
Tue Jun 11, 2019 12:00 pm
I've been following the performance (I don't own the fund) of VFMF (Vanguard Multifactor). And trying to figure out why the terrible performance, given that Momentum and Quality have been doing ok.
I wouldn't necessarily take that as a given.

Since the inception of VFMF, the monthly factor premiums (using Alpha Architects' own data) have been negative for size, value, momentum, and quality. At least they were through the end of April.
Ok, fair enough, that doesn't explain why the fund is less balanced than expected, or why is mostly value. And I think the question is still open if this specific multifactor implementation is good.

Code: Select all

Portfolio performance statistics
Note: The time period was automatically adjusted based on the available data (Mar 2018 - May 2019) for the selected asset: Vanguard US Multifactor ETF (VFMF)

        CAGR	Stdev	BestY	WorstY	Max. DD
VFMF	-4.45% 	17.86%	5.82%	-10.73%	-18.66% 	
VFVA	-7.72% 	22.73%	5.93%	-14.62%	-20.67% 	
QUAL	3.45% 	16.51%	12.31%	-7.11%	-14.61% 	
QMOM   -0.79% 	23.91%	17.48%	-15.72%	-25.76% 	
VTI      2.97% 	16.57%	10.83%	-6.41%	-14.20%
I think you are making a mistake in assuming that combining factors will combine performance. A portfolio that is part VFVA/QUAL/QMOM/VTI will contain vastly different holdings than one that applies all four factors.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by nisiprius » Wed Jun 12, 2019 7:02 am

The great thing about multifactor funds from the point of view of investment firms is that they have solved the problem of benchmarking. That is, they have solved the awkward problem of being able to compare funds to a benchmark, and to each other. No two of them are alike. The actual strategies themselves are often described as "rules-based," but the actual rules are not disclosed in detail.

I don't think there is even a way for an ordinary retail investor, relying on regulatory documents, to verify whether or not one of these funds is even following the rules it says it is following. Hey, OK, they probably are, but still.

For a traditional index fund, even one that is factor-based, the objective is simple and it is easy to tell how well the fund is achieving it. For example, the Vanguard Value Index Fund (according to the "strategy and policy" link from the "portfolio & management" tab at VIVAX) is simple:
The fund employs an indexing investment approach designed to track the performance of the CRSP US Large Cap Value Index, a broadly diversified index predominantly made up of value stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
How well has it done it? This well:
Image

How did it do compared with a competitor's large-cap value ETF--SPYV, iShares S&P 500 Value? Here's the comparison, and it's reasonable apples-to-apples:
Source

Image

Once you get into the world of multifactor funds, that all goes out the window. No two are alike. No two can be properly compared with each other. They don't follow any published index. They all seem to be described as "rules-based," but you don't get to see a detailed statement of the rules; the holdings of the fund may be transparent, but the fund's strategy, what it is trying to do--exactly--is not. Suddenly, the objectives turn to mush; for VFMF,
The fund invests primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market by investing in stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals as determined by the advisor. The portfolio will include a diverse mix of companies representing many different market sectors and industry groups. The advisor uses a quantitative model to evaluate all of the securities in an investment universe comprised of U.S. large, mid, and small capitalization stocks and to construct a U.S. equity portfolio that seeks to achieve exposure to multiple factors subject to a set of reasonable constraints designed to foster portfolio diversification, liquidity, and lower volatility.
How the heck can anybody tell whether or not, or how well, the advisor is doing what it claims to be doing? Apart from the claim that a "quantitative" model is used, or that it is "rules-based," it might as well be an active fund in terms of knowing what it is doing. Some fund companies actually use the word "proprietary" to describe their strategies, although Vanguard doesn't.

And the companies' performance reports for these funds use so-called "benchmarks" that are just plain stupid:

Image

The Russell 3000? That's just a total market index (and not one that Vanguard usually uses; why here?) It is doesn't make any more sense to compare VFMF to the Russell 3000 than to compare the Vanguard Value Index Fund to the Russell 3000. This isn't supposed to be a total market index ETF, why is Vanguard comparing it to one?

None of this seems to bother the factor mavens much, but it bothers me. The new breed of factor funds are pigs in a poke, and you are just as reliant on your personal trust in the managers' wisdom as you would be with an actively managed fund. People enjoy doing Kreminology in an attempt to reverse-engineer just what the managers are doing--just the way enthusiasts for actively managed funds do. One thing they do have going for them is that the costs are relatively low, and that if the strategy is rules-based and if they truly follow the rules then you shouldn't get the phenomena of a manager suddenly and capriciously making major changes in strategy.

Except when you do, of course--as when the "AQR Risk Parity" fund becomes the "AQR Multi-Asset Fund.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by azanon » Wed Jun 12, 2019 8:33 am

TBH, I'm surprised it sells at all. I get a value investor. I also get a momentum investor. I don't get both of those at the same time though given that they generally prefer polar opposite types of stocks.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by columbia » Wed Jun 12, 2019 8:49 am

“Rules based” appears to be the foundation of Wellington and Wellesley. But an investor will never really know what the rules are. It’s certainly better than turning those funds over to the new hot hand, who will eventually run out of luck.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by nisiprius » Wed Jun 12, 2019 8:55 am

azanon wrote:
Wed Jun 12, 2019 8:33 am
TBH, I'm surprised it sells at all. I get a value investor. I also get a momentum investor. I don't get both of those at the same time though given that they generally prefer polar opposite types of stocks.
In "A Review of Equity Factor Premia," Jared Kizer wrote:
Some factor premia have negative correlation with each other, namely value and momentum. Practically, it is impossible, therefore, to own a stock portfolio that is both deeply tilted toward value and deeply tilted toward momentum. At best, stock portfolios can be moderately tilted toward both. More generally, it is not feasible to build portfolios that capture significant amounts of multiple factor premia.
I think, though, that the "multifactor" funds try to get around this by market timing factors.

Arnott and Research Associates openly advocate "timing:" factors: Timing smart beta strategies? Of course! Buy low, sell high.
A contrarian timing approach—emphasizing factors or strategies trading cheap relative to their own historical norms, and deemphasizing the more expensive factors or strategies—can improve performance, but should be used in moderation to avoid increasing portfolio risk from a loss of diversification.
Others would probably object to a characterization of "market timing," but use something that superficially sounds like it. "Time series momentum?" Indeed. And what is traditional market timing but "time series asset allocation?" And don't traditional market timers claim that what they are doing is "rules based," too?
Last edited by nisiprius on Wed Jun 12, 2019 9:06 am, edited 4 times in total.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by pdavi21 » Wed Jun 12, 2019 8:59 am

Also, you should be multiplying the total returns, not weighted averaging the percentages (assuming performance is 100% factor driven-which it is not).

It's because if momentum returned 3%, and value lost 8%, you'd expect momentum stocks with a value filter to return 1.03 x 0.92-1 and not 3% x 50% - 8% x 50%.

EDIT: You also have to assume that factor performance is independent from other factors or your sample pot...which is also false.

EDIT: Also VFMF has a huge size tilt. Where is your size return?
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by nisiprius » Wed Jun 12, 2019 9:21 am

It's a tiny period of time, but interesting. Morningstar classifies VFMF as "mid-cap blend." Therefore, let's not blame this on the terrible unfairness of large-cap growth having broken the factor rules by doing so well for so long.

Here's a comparison of VFMF (blue) with Morningstar's category average for mid-cap blend funds (orange), and Vanguard's own single-factor ETF, VO, the Vanguard Mid-Cap Index ETF.

Source

Image
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by nisiprius » Wed Jun 12, 2019 9:28 am

azanon wrote:
Wed Jun 12, 2019 8:33 am
...TBH, I'm surprised it sells at all...
Well, it hasn't sold a lot. $83 million-with-an-m since 2/15/2018.

What's a fair comparison? VO, Vanguard Mid-Cap Index ETF, has $25 billion, but that's after 15 years of operation. There must be a way to figure out how much has been invested in VO since 2/15/2018, but I don't know how to do it. Can anybody help?
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by vineviz » Wed Jun 12, 2019 9:39 am

nisiprius wrote:
Wed Jun 12, 2019 9:28 am
There must be a way to figure out how much has been invested in VO since 2/15/2018, but I don't know how to do it. Can anybody help?
Vanguard Mid-Cap ETF $1,818.59 million

That’s about 22x VFMF.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by azanon » Wed Jun 12, 2019 10:09 am

nisiprius wrote:
Wed Jun 12, 2019 9:28 am
azanon wrote:
Wed Jun 12, 2019 8:33 am
...TBH, I'm surprised it sells at all...
Well, it hasn't sold a lot. $83 million-with-an-m since 2/15/2018.

What's a fair comparison? VO, Vanguard Mid-Cap Index ETF, has $25 billion, but that's after 15 years of operation. There must be a way to figure out how much has been invested in VO since 2/15/2018, but I don't know how to do it. Can anybody help?
And the one I own has even less (VFVA - Vanguard Value Factor) - 6x million or thereabouts.

Granted, two things quickly come to mind as to why neither are selling great yet: 1. Growth outperformance since launch and 2. (this one by far the more important) Vanguard barely promoting their existence, and not suggesting their use by individual investors. Compare that to the Global Wellesley/wellington products that were advertised front-and-center on their homepage last year just prior to launch.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by Brogleski » Wed Jun 12, 2019 10:57 am

nisiprius wrote:
Wed Jun 12, 2019 9:28 am
azanon wrote:
Wed Jun 12, 2019 8:33 am
...TBH, I'm surprised it sells at all...
Well, it hasn't sold a lot. $83 million-with-an-m since 2/15/2018.

What's a fair comparison? VO, Vanguard Mid-Cap Index ETF, has $25 billion, but that's after 15 years of operation. There must be a way to figure out how much has been invested in VO since 2/15/2018, but I don't know how to do it. Can anybody help?
https://www.etf.com/etfanalytics/etf-fund-flows-tool
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by nisiprius » Wed Jun 12, 2019 11:04 am

Brogleski wrote:
Wed Jun 12, 2019 10:57 am
nisiprius wrote:
Wed Jun 12, 2019 9:28 am
azanon wrote:
Wed Jun 12, 2019 8:33 am
...TBH, I'm surprised it sells at all...
Well, it hasn't sold a lot. $83 million-with-an-m since 2/15/2018.

What's a fair comparison? VO, Vanguard Mid-Cap Index ETF, has $25 billion, but that's after 15 years of operation. There must be a way to figure out how much has been invested in VO since 2/15/2018, but I don't know how to do it. Can anybody help?
https://www.etf.com/etfanalytics/etf-fund-flows-tool
Thank you! Vineviz already posted the actual answer, but now I know a way to do it for myself.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by HEDGEFUNDIE » Wed Jun 12, 2019 11:10 am

nisiprius wrote:
Wed Jun 12, 2019 7:02 am

The Russell 3000? That's just a total market index (and not one that Vanguard usually uses; why here?) It is doesn't make any more sense to compare VFMF to the Russell 3000 than to compare the Vanguard Value Index Fund to the Russell 3000. This isn't supposed to be a total market index ETF, why is Vanguard comparing it to one?
Because if you are a factor investor, VFMF is supposed to be your substitute for a total market fund.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by cheezit » Wed Jun 12, 2019 11:11 am

hdas wrote:
Tue Jun 11, 2019 12:31 pm
vineviz wrote:
Tue Jun 11, 2019 12:12 pm
hdas wrote:
Tue Jun 11, 2019 12:00 pm
I've been following the performance (I don't own the fund) of VFMF (Vanguard Multifactor). And trying to figure out why the terrible performance, given that Momentum and Quality have been doing ok.
I wouldn't necessarily take that as a given.

Since the inception of VFMF, the monthly factor premiums (using Alpha Architects' own data) have been negative for size, value, momentum, and quality. At least they were through the end of April.
Ok, fair enough, that doesn't explain why the fund is less balanced than expected, or why is mostly value. And I think the question is still open if this specific multifactor implementation is good.

Code: Select all

Portfolio performance statistics
Note: The time period was automatically adjusted based on the available data (Mar 2018 - May 2019) for the selected asset: Vanguard US Multifactor ETF (VFMF)

        CAGR	Stdev	BestY	WorstY	Max. DD
VFMF	-4.45% 	17.86%	5.82%	-10.73%	-18.66% 	
VFVA	-7.72% 	22.73%	5.93%	-14.62%	-20.67% 	
QUAL	3.45% 	16.51%	12.31%	-7.11%	-14.61% 	
QMOM   -0.79% 	23.91%	17.48%	-15.72%	-25.76% 	
VTI      2.97% 	16.57%	10.83%	-6.41%	-14.20%
VFQY and VFMO make more sense than QUAL and QMOM as points of comparison, given that they're run by Vanguard and use the same ranking-within-cap-buckets methodology as VFMF and VFVA. Re-reading the VFMF-and-friends whitepaper will probably make it more obvious why the weightings are what they are.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by afan » Wed Jun 12, 2019 11:24 am

I don't tilt, so I have not followed the fund. That said, I don't recall Vanguard promising a particular, fixed, weighting of factors. Perhaps it did and I missed it.

If, like other funds that chase multiple factors, this fund can and does change its factor weighting over time, the only way to benchmark it would be against a comparable mix of factors, matched to the fund weightings. That would require the fund to tell you each time the weightings were changed. Since I don't think they do this, one is not going to be able to determine how much of its performance is due to the, varying, weights across time.

If it uses simple index like approaches to the individual positions used to achieve the desired factor loads, then one could say that all of the difference between the fund's performance and a mix of factors would be the extent to which the funds weights deviated from whatever mix you used as a benchmark.

If you believe in factors, the maybe VTI would be an appropriate benchmark, since it is supposed to be neutral to factors other than beta.

Or save money and drama by putting your money into the benchmark instead of chasing factors.
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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by AlexisAtEasternState » Tue Jul 02, 2019 7:16 pm

hdas wrote:
Tue Jun 11, 2019 12:00 pm
I've been following the performance (I don't own the fund) of VFMF (Vanguard Multifactor). And trying to figure out why the terrible performance, given that Momentum and Quality have been doing ok.....
It is entirely possible all factors outperform a cap weighted index and a multifactor approach underperforms, depending on the construction of each. The key point to keep in mind is that Vanguard's multifactor fund is not an index of indexes. That is, it selects the securities which are "B+" overall, rather than those which are straight A on rank to any single factor.

Check out "The Merits and Methods of Multi-Factor Investing" by S&P - https://www.spindices.com/documents/res ... esting.pdf.

See the following exhibit I built using MSCI factor index data
Image

If you don't want value exposure in your factor fund, you should really reconsider whether factor investing is for you overall.
nisiprius wrote:
Wed Jun 12, 2019 7:02 am
The great thing about multifactor funds from the point of view of investment firms is that they have solved the problem of benchmarking. That is, they have solved the awkward problem of being able to compare funds to a benchmark, and to each other. No two of them are alike. The actual strategies themselves are often described as "rules-based," but the actual rules are not disclosed in detail.
The Russell 3000 is the constituent universe from which the funds' draw securities.
I like to compare the Vanguard's factor funds to a size adjusted Russell 3000 benchmark which matches the fund's construction methodology and consists of 1/3 Russell top 200, 1/3 Russell Midcap 800, 1/3 Russell 2000 SmallCap as this gets you closer to the impact of factor impact other than market cap tilts. Russell 3000 vs funds is largely measuring the performance of small vs large.
nisiprius wrote:
Wed Jun 12, 2019 7:02 am
I don't think there is even a way for an ordinary retail investor, relying on regulatory documents, to verify whether or not one of these funds is even following the rules it says it is following.
Agreed.
Vanguard does not market these funds to retail investors and deliberately hides them from their retail website.
nisiprius wrote:
Wed Jun 12, 2019 7:02 am
None of this seems to bother the factor mavens much, but it bothers me. The new breed of factor funds are pigs in a poke, and you are just as reliant on your personal trust in the managers' wisdom as you would be with an actively managed fund. People enjoy doing Kreminology in an attempt to reverse-engineer just what the managers are doing--just the way enthusiasts for actively managed funds do. One thing they do have going for them is that the costs are relatively low, and that if the strategy is rules-based and if they truly follow the rules then you shouldn't get the phenomena of a manager suddenly and capriciously making major changes in strategy.
The wisdom is not the manager's intuition alone but decades of academic research and hundreds of peer reviewed journal articles.
I would also add that using a rules based approach allows one to exploit behavioral biases and institutional constraint responsible for some factors existing in the first place (quality & low volatility).
afan wrote:
Wed Jun 12, 2019 11:24 am
I don't tilt, so I have not followed the fund. That said, I don't recall Vanguard promising a particular, fixed, weighting of factors. Perhaps it did and I missed it.

If, like other funds that chase multiple factors, this fund can and does change its factor weighting over time, the only way to benchmark it would be against a comparable mix of factors, matched to the fund weightings.
None of Vanguard's factor funds use factor timing. Here is a step-by-step guide to their methodology: https://advisors.vanguard.com/iwe/pdf/FASFMTH.pdf

However, this new ETF from Blackrock does: https://www.ishares.com/us/products/307 ... n-etf-fund

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by Forester » Wed Jul 03, 2019 2:50 am

My idea of multi factor would be a fund that selects the cheapest 5% of stocks, has sector constraints, and throws out the 20% of the universe with the worst 6mo price momentum. Whether that's practical or not I don't know.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by fennewaldaj » Wed Jul 03, 2019 3:15 am

Forester wrote:
Wed Jul 03, 2019 2:50 am
My idea of multi factor would be a fund that selects the cheapest 5% of stocks, has sector constraints, and throws out the 20% of the universe with the worst 6mo price momentum. Whether that's practical or not I don't know.
I don't know if there are any funds of any sort that go as far as the cheapest 5% of stocks. What typical gets classified as deep value is more like cheapest 20%.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by Forester » Wed Jul 03, 2019 3:58 am

The issue is that only the cheapest 5% of stocks outperform over the long term. The cheapest 6% to 10% match the market (Carlisle, Deep Value 2014).

So a multifactor fund which simultaneously buys the cheapest 30% of stocks and then the 30% of some other factor..... you may as well just buy a regular market cap index fund and pocket the cheaper expenses. "Multifactor" sounds more diversified, sounds more advanced, is a warm fuzzy buzzword which can be sold to the public.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by fennewaldaj » Wed Jul 03, 2019 4:59 am

Forester wrote:
Wed Jul 03, 2019 3:58 am
The issue is that only the cheapest 5% of stocks outperform over the long term. The cheapest 6% to 10% match the market (Carlisle, Deep Value 2014).

So a multifactor fund which simultaneously buys the cheapest 30% of stocks and then the 30% of some other factor..... you may as well just buy a regular market cap index fund and pocket the cheaper expenses. "Multifactor" sounds more diversified, sounds more advanced, is a warm fuzzy buzzword which can be sold to the public.
Carlisle just started his own fund for what its worth. Its called ZIG and it is 130% long value short 30% short growth. IT sounds like he has some momentum screens in the shorts (so he is looking for overvalued companies with negative momentum). He discusses it in this podcast with meb faber.

https://mebfaber.com/2019/05/29/episode ... get-cheap/

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by garlandwhizzer » Wed Jul 03, 2019 1:03 pm

vineviz wrote:

Since the inception of VFMF, the monthly factor premiums (using Alpha Architects' own data) have been negative for size, value, momentum, and quality. At least they were through the end of April./quote]

This is an important observation and flies in the face of multi-factor theory. Interesting that no one mentioned that. Interesting to note also than during this 15 month of so time span while V, MOM, SIZE and QUAL were all negative BETA was hugely positive. Since the inception of VFMF about 15 months ago, VFMV has a total return of -1.1% according to Morningstar charts. During the same time frame VTI, a harvestable measure of BETA, has a total return of +11.4%. That amounts to a net loss of 12.5% for those who jumped out of BETA and into the more sophisticated and theoretically appealing VFMF in just 15 months. VFMF has also been considerably more volatile and had greater maximal drawdowns than VTI during its lifetime. The much touted diversification of investing in multiple separate sources of return completely backfired and did the multi-factor quest for outperformance. They did provide diversification in the form of greater risk and volatility and lower returns. This is not the kind of diversification that we desire. You can achieve the same benefit by periodically burning your money. In short thus far VFMF like most multi-factor funds has been a dismal failure during its short existence. Multi-factor has not been playing a zero sum game apart from beta. It has been playing a negative sum game apart from beta even as beta marches on to new heights.

Clearly this short time frame is not long enough to make definitive judgements about the future of VFMF or multi-factor funds in general. On the other hand, it seems to me that even these short term results should pose a question the levels of faith that many multi-factor enthusiasts have that multi-factor will both outperform and do so with less volatility/risk over the long haul. Theory suggests that all factors other than BETA should not go negative simultaneously and remain so for 15 months running. Multi-factor in theory is very appealing, no doubt about that, but thus far in practice its performance has been the opposite of appealing. In theory, theory always works. In reality theory sometimes works and sometimes doesn't.

Garland Whizzer

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by hdas » Wed Jul 03, 2019 1:17 pm

garlandwhizzer wrote:
Wed Jul 03, 2019 1:03 pm

This is an important observation and flies in the face of multi-factor theory. Interesting that no one mentioned that. Interesting to note also than during this 15 month of so time span while V, MOM, SIZE and QUAL were all negative BETA was hugely positive. Since the inception of VFMF about 15 months ago, VFMV has a total return of -1.1% according to Morningstar charts. During the same time frame VTI, a harvestable measure of BETA, has a total return of +11.4%. That amounts to a net loss of 12.5% for those who jumped out of BETA and into the more sophisticated and theoretically appealing VFMF in just 15 months. VFMF has also been considerably more volatile and had greater maximal drawdowns than VTI during its lifetime. The much touted diversification of investing in multiple separate sources of return completely backfired and did the multi-factor quest for outperformance. They did provide diversification in the form of greater risk and volatility and lower returns. This is not the kind of diversification that we desire. You can achieve the same benefit by periodically burning your money. In short thus far VFMF like most multi-factor funds has been a dismal failure during its short existence. Multi-factor has not been playing a zero sum game apart from beta. It has been playing a negative sum game apart from beta even as beta marches on to new heights.

Clearly this short time frame is not long enough to make definitive judgements about the future of VFMF or multi-factor funds in general. On the other hand, it seems to me that even these short term results should pose a question the levels of faith that many multi-factor enthusiasts have that multi-factor will both outperform and do so with less volatility/risk over the long haul. Theory suggests that all factors other than BETA should not go negative simultaneously and remain so for 15 months running. Multi-factor in theory is very appealing, no doubt about that, but thus far in practice its performance has been the opposite of appealing. In theory, theory always works. In reality theory sometimes works and sometimes doesn't.

Garland Whizzer
It's worth mentioning that you can structure a portfolio diversified across all factors that looks very different to VFMF and that has outperformed TSM over the last years. My criticism applies specifically to VFMF. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by HippoSir » Wed Jul 03, 2019 4:00 pm

hdas wrote:
Wed Jul 03, 2019 1:17 pm
It's worth mentioning that you can structure a portfolio diversified across all factors that looks very different to VFMF and that has outperformed TSM over the last years. My criticism applies specifically to VFMF. :greedy
Assuming approximately equal factor weights and the absence of factor timing strategies, I'm curious how? The performance attribution for VFMF shows that:

https://www.portfoliovisualizer.com/fac ... e&total1=0

it has significant factor loadings on value and size, which have been very negative, as well as momentum and quality, which have been slightly positive but not enough to overcome the weight of significant value/size underperformance. Since the beginning of this year in fact, according to AQR data, all factors have underperformed market beta. If a multifactor fund was outperforming under these conditions, I'd be concerned that it was not achieving any actual exposure to the targeted factors.

VFMF has certainly underperformed the broader market, but it seems to be doing exactly what it is designed to do, offering deep multi-factor exposures in an integrated fund. I'm probably biased since I tilt multifactor, but I've been quite impressed with VFMF (compared to the iShares competitors I was looking at), for offering consistent, strong factor exposure. It's painful when factors underperform, but therein lies the risk of deviating from market beta.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by hdas » Wed Jul 03, 2019 4:09 pm

HippoSir wrote:
Wed Jul 03, 2019 4:00 pm
hdas wrote:
Wed Jul 03, 2019 1:17 pm
It's worth mentioning that you can structure a portfolio diversified across all factors that looks very different to VFMF and that has outperformed TSM over the last years. My criticism applies specifically to VFMF. :greedy
Assuming approximately equal factor weights and the absence of factor timing strategies, I'm curious how? The performance attribution for VFMF shows that:

https://www.portfoliovisualizer.com/fac ... e&total1=0

it has significant factor loadings on value and size, which have been very negative, as well as momentum and quality, which have been slightly positive but not enough to overcome the weight of significant value/size underperformance. Since the beginning of this year in fact, according to AQR data, all factors have underperformed market beta. If a multifactor fund was outperforming under these conditions, I'd be concerned that it was not achieving any actual exposure to the targeted factors.

VFMF has certainly underperformed the broader market, but it seems to be doing exactly what it is designed to do, offering deep multi-factor exposures in an integrated fund. I'm probably biased since I tilt multifactor, but I've been quite impressed with VFMF (compared to the iShares competitors I was looking at), for offering consistent, strong factor exposure. It's painful when factors underperform, but therein lies the risk of deviating from market beta.
See this :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by HippoSir » Wed Jul 03, 2019 4:16 pm

hdas wrote:
Wed Jul 03, 2019 4:09 pm
See this :greedy
I did a regression on that portfolio over the same period VFMF has been around (unfortunately could only do 12 month roll period, not daily, so results not exact):

https://www.portfoliovisualizer.com/fac ... total1=100

The factor regression analysis indicates a light size factor exposure, with minimal value/quality exposure. It looks like just a complicated way of achieving mostly market beta. This is exactly my concern with the "sleeve" approach. You just end up with more expensive beta.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by hdas » Wed Jul 03, 2019 4:44 pm

HippoSir wrote:
Wed Jul 03, 2019 4:16 pm
hdas wrote:
Wed Jul 03, 2019 4:09 pm
See this :greedy
I did a regression on that portfolio over the same period VFMF has been around (unfortunately could only do 12 month roll period, not daily, so results not exact):

https://www.portfoliovisualizer.com/fac ... total1=100

The factor regression analysis indicates a light size factor exposure, with minimal value/quality exposure. It looks like just a complicated way of achieving mostly market beta. This is exactly my concern with the "sleeve" approach. You just end up with more expensive beta.
You are missing BAB and term + credit factors. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by HippoSir » Wed Jul 03, 2019 5:01 pm

hdas wrote:
Wed Jul 03, 2019 4:44 pm
You are missing BAB and term + credit factors. :greedy
None of those funds are fixed income as far as I'm aware, so term+credit factors don't apply, and just like its value/quality loads, there is minimal Low Beta load (0.09). The only loading it has seems to be size.

EDIT: I don't think BAB factor really applies here either, since as far as I understand it requires taking short positions against beta. It also isn't one of the factors targeted by a multifactor fund like VFMF/LRGF/SMLF/etc. I'm unsure why it is is relevant in the context of performance of a multifactor fund. The original assertion was "It's worth mentioning that you can structure a portfolio diversified across all factors that looks very different to VFMF and that has outperformed TSM over the last years.", but the example given has little to no exposure to value/quality/momentum and hence does not seem to be very diversified across factors, rather, it is largely exposed to standard market beta.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by KyleAAA » Wed Jul 03, 2019 5:59 pm

Why such a large negative alpha? I would expect some, but -3ish% seems excessive. Is it due to reconstitution?

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by HippoSir » Wed Jul 03, 2019 7:00 pm

KyleAAA wrote:
Wed Jul 03, 2019 5:59 pm
Why such a large negative alpha? I would expect some, but -3ish% seems excessive. Is it due to reconstitution?
This is a reasonable concern I share. If you look at the alpha over the past year, it's all over the place. It's hard to get an idea of where it's going to trend long term. I tend to trust Vanguard to properly control costs/alpha, but we shall see.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by hdas » Wed Jul 03, 2019 7:07 pm

HippoSir wrote:
Wed Jul 03, 2019 5:01 pm
hdas wrote:
Wed Jul 03, 2019 4:44 pm
You are missing BAB and term + credit factors. :greedy
None of those funds are fixed income as far as I'm aware, so term+credit factors don't apply, and just like its value/quality loads, there is minimal Low Beta load (0.09). The only loading it has seems to be size.

EDIT: I don't think BAB factor really applies here either, since as far as I understand it requires taking short positions against beta. It also isn't one of the factors targeted by a multifactor fund like VFMF/LRGF/SMLF/etc. I'm unsure why it is is relevant in the context of performance of a multifactor fund. The original assertion was "It's worth mentioning that you can structure a portfolio diversified across all factors that looks very different to VFMF and that has outperformed TSM over the last years.", but the example given has little to no exposure to value/quality/momentum and hence does not seem to be very diversified across factors, rather, it is largely exposed to standard market beta.
Run the regression over the last 3 years. Include BAB+Term. See the significant exposure in all factors. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by vineviz » Wed Jul 03, 2019 7:54 pm

KyleAAA wrote:
Wed Jul 03, 2019 5:59 pm
Why such a large negative alpha? I would expect some, but -3ish% seems excessive. Is it due to reconstitution?
Usually this boils down to a systematic mismatch between the factor model the fund is using and the factor model used in the regression. In effect the regression is moving returns from beta to alpha.

However, it’s also possible that this is partly an intentional trade off: maintain higher factor loads at the expense of transaction costs.

Vanguard’s QEG is taking a bottoms up approach to their factor model, for better or worse, so we’ll likely always be a little uncertain about their process.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by AlexisAtEasternState » Thu Jul 04, 2019 1:25 pm

garlandwhizzer wrote:
Wed Jul 03, 2019 1:03 pm
vineviz wrote:

Since the inception of VFMF, the monthly factor premiums (using Alpha Architects' own data) have been negative for size, value, momentum, and quality. At least they were through the end of April./quote]

This is an important observation and flies in the face of multi-factor theory. Interesting that no one mentioned that. Interesting to note also than during this 15 month of so time span while V, MOM, SIZE and QUAL were all negative BETA was hugely positive. Since the inception of VFMF about 15 months ago, VFMV has a total return of -1.1% according to Morningstar charts. During the same time frame VTI, a harvestable measure of BETA, has a total return of +11.4%. That amounts to a net loss of 12.5% for those who jumped out of BETA and into the more sophisticated and theoretically appealing VFMF in just 15 months. VFMF has also been considerably more volatile and had greater maximal drawdowns than VTI during its lifetime. The much touted diversification of investing in multiple separate sources of return completely backfired and did the multi-factor quest for outperformance. They did provide diversification in the form of greater risk and volatility and lower returns. This is not the kind of diversification that we desire. You can achieve the same benefit by periodically burning your money. In short thus far VFMF like most multi-factor funds has been a dismal failure during its short existence. Multi-factor has not been playing a zero sum game apart from beta. It has been playing a negative sum game apart from beta even as beta marches on to new heights.

Clearly this short time frame is not long enough to make definitive judgements about the future of VFMF or multi-factor funds in general. On the other hand, it seems to me that even these short term results should pose a question the levels of faith that many multi-factor enthusiasts have that multi-factor will both outperform and do so with less volatility/risk over the long haul. Theory suggests that all factors other than BETA should not go negative simultaneously and remain so for 15 months running. Multi-factor in theory is very appealing, no doubt about that, but thus far in practice its performance has been the opposite of appealing. In theory, theory always works. In reality theory sometimes works and sometimes doesn't.

Garland Whizzer
All of this is entirely wrong

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by whodidntante » Thu Jul 04, 2019 3:12 pm

azanon wrote:
Wed Jun 12, 2019 8:33 am
TBH, I'm surprised it sells at all. I get a value investor. I also get a momentum investor. I don't get both of those at the same time though given that they generally prefer polar opposite types of stocks.
No one would buy value stocks if they perpetually had negative momentum. In fact, there wouldn't be any value stocks.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by klaus14 » Thu Jul 04, 2019 4:37 pm

whodidntante wrote:
Thu Jul 04, 2019 3:12 pm
azanon wrote:
Wed Jun 12, 2019 8:33 am
TBH, I'm surprised it sells at all. I get a value investor. I also get a momentum investor. I don't get both of those at the same time though given that they generally prefer polar opposite types of stocks.
No one would buy value stocks if they perpetually had negative momentum. In fact, there wouldn't be any value stocks.
Why not? Value stock label is not sticky. it depends on the price.
Value shows up after negative momentum. Value disappears after positive momentum.

---

I'll keep my VFMF shares because i don't want to chase performance but severe underperformance is disappointing. Looks like it's due to underperformance of Small and Value plus higher transaction costs due to active management trying to keep factor loads up (instead of rebalancing quarterly like MSCI indexes)

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by Dead Man Walking » Thu Jul 04, 2019 5:40 pm

AlexisAtEasternState wrote:
Tue Jul 02, 2019 7:16 pm

Check out "The Merits and Methods of Multi-Factor Investing" by S&P - https://www.spindices.com/documents/res ... esting.pdf.

Vanguard does not market these funds to retail investors and deliberately hides them from their retail website
None of Vanguard's factor funds use factor timing. Here is a step-by-step guide to their methodology: https://advisors.vanguard.com/iwe/pdf/FASFMTH.pdf

However, this new ETF from Blackrock does: https://www.ishares.com/us/products/307 ... n-etf-fund
[/quote]

Alexis,

The links you provided were very informative. Thanks for posting them.

The data in the S&P link was convincing. I am surprised that no US provider has an ETF that tracks the S&P 500 Quality, Value, and Momentum Multifactor Index. Invesco S&P 500 QVM ETF (PQVM) is available in Europe.

The Vanguard link explains how they construct their single factor funds, but doesn’t explain how the multifactor fund is constructed. I may have missed it.

The BlackRock US Equity Factor Rotation ETF (DYNF) sounds like a venture in crystal ball management! I am adding it to my Morningstar watch list.

DMW

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by muffins14 » Fri Jul 05, 2019 4:51 pm

I haven't seen a detailed paper, but there is a single bullet point in the product brief here https://advisors.vanguard.com/iwe/pdf/FASFAMF.pdf that leads me to think it's an average of each of the factor scores that make up the other funds (Value, Quality, Momentum). However it's not exactly clear to me if the score they are referring to is the adjusted percentile score (-0.5 to 0.5 instead of 0 to 100), or some other quantity. Anecdotally, that seems somewhat reasonable given that you do see similar holdings in the top 10-15 of VFMF as you do in MTUM -- so some high-momentum stocks you see in MTUM are also included in VFMF as long as they aren't in the bottom 50th percentile as ranked by either the value or quality metrics they choose.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by arcticpineapplecorp. » Fri Jul 05, 2019 5:03 pm

pdavi21 wrote:
Tue Jun 11, 2019 12:24 pm
I recently saw someone quote a joke, "Fruit is good, cake is good. So fruitcake must be good."
Not exactly the quote. More like this:

"The most dissapointing cake has to be fruitcake. You'd think it would be better. Doesn't add up. Fruit good. Cake great. Fruitcake -- Nasty Cr-p."

Jim Gaffigan (one of the last few clean comics)

source:
https://www.youtube.com/watch?v=-o-u4IwXkbE
(about 4:20 in, but watch the whole thing. really funny)

so now that we have the true quote, does fruitcake (or does fuitcake not) describe factor funds?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by AlexisAtEasternState » Fri Jul 05, 2019 9:55 pm

Happy to help. As you can tell from my post history, I am very interested in factor investing.
Dead Man Walking wrote:
Thu Jul 04, 2019 5:40 pm
The data in the S&P link was convincing. I am surprised that no US provider has an ETF that tracks the S&P 500 Quality, Value, and Momentum Multifactor Index. Invesco S&P 500 QVM ETF (PQVM) is available in Europe.
I think it is because iShares has first mover advantage with their multi factor ETFs targeting "quality, value, size and momentum" it would be hard to generate volume, and thus grow AUM, with a very similar product.
Dead Man Walking wrote:
Thu Jul 04, 2019 5:40 pm
The Vanguard link explains how they construct their single factor funds, but doesn’t explain how the multifactor fund is constructed. I may have missed it.
Agree Vanguard should provide greater/better documentation on the methodology. Maybe it's because they don't want retail investors in these products and institutional can just call and set up a meeting.

"Antonio Picca: Yes, and if I go into the details of how we build our multifactor strategy, we
have a combination, bottom-up combination, of value, momentum, and quality. As Frank
was mentioning before, we equally weight these three scores. Frank was talking about,
before, individual factors. But the multifactor is really the same approach. Instead of having
different ways of capturing the same factors, we are capturing three factors now.
So we compute an equally weighted average of these three factors, and we identify the
stocks that look more attractive within large-, mid-, and small-caps. Then you equally weight
these three buckets.
By doing this, we create an implicit tilt toward smaller, less liquid stocks. So if you end up
looking at this multifactor product through the lenses of our factor attribution model, you really
see that you get a similar exposure to value, momentum, quality, and liquidity, even though
the liquidity tilt is indirect."
Per transcript: https://advisors.vanguard.com/VGApp/iip ... ltiFctPdct
Dead Man Walking wrote:
Thu Jul 04, 2019 5:40 pm
The BlackRock US Equity Factor Rotation ETF (DYNF) sounds like a venture in crystal ball management! I am adding it to my Morningstar watch list.
I agree it is both a very interesting and active strategy. The Blackrock fund obviously run with input from Andrew Ang, head of Blackrock's factor based strategies, who wrote my all time favorite book on factor investing: Asset Management: A Systematic Approach to Factor Investing, Oxford University Press, 2014.

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by lazyday » Mon Jul 08, 2019 8:25 am

Forester wrote:
Wed Jul 03, 2019 3:58 am
The issue is that only the cheapest 5% of stocks outperform over the long term. The cheapest 6% to 10% match the market (Carlisle, Deep Value 2014).
Do you remember if the book showed this to be true over different time periods or different countries? If the backtest was over a long or short period?

Does anyone else believe this to be true?

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by bogledogle87 » Thu Jul 11, 2019 10:56 am

I was lured into this the mutual fund version (VFMFX) shortly after it's hot start during the first few months of it's existence. I spent countless hours researching factors and multi-factor approaches and became convinced it would be a suitable replacement for my VTSAX position. Recognizing the risks (I thought), I jumped right in hoping to that long term alpha risk premium.

I did not think I would be affected by under-performance, but boy was I wrong. After 8 months or so, I could not figure out why this fund was so severely under performing the market. Its value, momentum, quality, and size factors on their own did not seem like they would contribute to the level of under-performance I was seeing.

Then I discovered a single piece of data on the fund that changed my mind completely on this fund. 58% Turnover. The prospectus seemed to indicate that the proprietary screening and advanced stock selection model used to provide the factor exposures would reduce both volatility to the broad market and overall turnover long term. I was expecting maybe 10% turnover, but never 58%. I feel like this much turnover could absolutely be an explanation for the performance.

The high turnover opened my eyes to the fact that I did not even own half of the same portfolio than when I started. My risks perhaps were not rooted these well-researched factor exposures after all - but more than anything else - the manager's decision-making

I was putting too much faith in a brand new fund with a complex management algorithm I did not understand that led to entirely too much turnover than I was comfortable with. I learned a very expensive lesson about performance chasing, flashy buzzwords, and my own risk tolerance. This fund may very well outperform the broad market someday, but it was not worth the second-guessing stress on my part in trying to understand how it was operating.

I am now 100% VTWAX for the ultimate simple and market-neutral approach to passive equity investing.
VTWAX and chill

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Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by lazyday » Thu Jul 11, 2019 12:39 pm

bogledogle87 wrote:
Thu Jul 11, 2019 10:56 am
I was expecting maybe 10% turnover, but never 58%. I feel like this much turnover could absolutely be an explanation for the performance.
Vanguard seems to have a reputation for good management of trading costs. While I've been wary of trading costs in some funds from other companies (like EM Small or EM Value), I’d be a little surprised if it's been a big problem for this Vanguard fund.

Investing without following an index seems to offer significant benefits for a fund like this. Of course, the downside is that when the fund does poorly, it can be hard to know why. And if the fund isn’t index hugging, then there should be times where it underperforms.

I’d be reluctant to buy a fund like this from most managers, but have enough faith in Vanguard that I would be happy to own it if I wanted the asset class and factor exposure. Since I’m avoiding US equity, I don’t use the fund.
I am now 100% VTWAX for the ultimate simple and market-neutral approach to passive equity investing.

I think that's a very reasonable way to go.

HippoSir
Posts: 27
Joined: Tue Jul 03, 2018 2:56 pm

Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by HippoSir » Thu Jul 11, 2019 12:59 pm

bogledogle87 wrote:
Thu Jul 11, 2019 10:56 am
The high turnover opened my eyes to the fact that I did not even own half of the same portfolio than when I started. My risks perhaps were not rooted these well-researched factor exposures after all - but more than anything else - the manager's decision-making
I'm curious if this is just a feeling or do you have data to back up this argument? ~60% turnover isn't very high for a multifactor fund, it's an unfortunate reality of maintaining a factor exposure. Historically Vanguard has done a good job of controlling trading cost, and I'd expect them to continue that track record with these funds. As discussed above, the impact of the factors VFMF/VFMFX are exposed to has been largely negative in the time period the fund has existed. So, I'd argue that you are getting the factor exposures you paid for, they're just negative in the current market cycle.

Note that on the page where Vanguard lists these funds, they very prominently state:

Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.

I would very much agree that if you are not prepared for this reality (and the fact that factor funds may never do anything but underperform), it's best to stick with total market.

GRP
Posts: 98
Joined: Wed Nov 22, 2017 5:35 pm

Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by GRP » Thu Jul 11, 2019 1:12 pm

Looking at that thread title.... OP is a fellow computer programmer for sure. :)

bogledogle87
Posts: 112
Joined: Wed Sep 26, 2018 7:03 pm

Re: VFMF (Vanguard Multifactor) == Closet Value Index Fund

Post by bogledogle87 » Thu Jul 11, 2019 2:22 pm

HippoSir wrote:
Thu Jul 11, 2019 12:59 pm

I'm curious if this is just a feeling or do you have data to back up this argument? ~60% turnover isn't very high for a multifactor fund, it's an unfortunate reality of maintaining a factor exposure. Historically Vanguard has done a good job of controlling trading cost, and I'd expect them to continue that track record with these funds. As discussed above, the impact of the factors VFMF/VFMFX are exposed to has been largely negative in the time period the fund has existed. So, I'd argue that you are getting the factor exposures you paid for, they're just negative in the current market cycle.

Note that on the page where Vanguard lists these funds, they very prominently state:

Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.

I would very much agree that if you are not prepared for this reality (and the fact that factor funds may never do anything but underperform), it's best to stick with total market.
I will not be too proud to admit that this realization was emotionally-driven to a large extent for me. I love Vanguard for what they do and stand for, and don't have a reason to believe this fund is under-delivering on its factor exposures necessarily. I do not have any additional data points to would suggest anything is amiss.

However, I was alarmed at the combination of high activity and underperformance. Those two data points were enough for me - not to call this fund an objectively poor investment - but admit it was not right for me. Granted, if the fund had outperformed, I wouldn't bat an eye at the turnover. But admitting this is only further confirmation that I needed to remain neutral to the world market for the long haul. I clearly am not comfortable with performances I cannot explain.
VTWAX and chill

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