Lauretta wrote: ↑
Sun Apr 29, 2018 1:01 pm
...In more recent times RA have warned against factor investing:
How can "Smart Beta" Go Horribly Wrong?
Of course what RA write is done also with the aim of promoting their products. But this doesn't mean that what academics write is more trustworthy or 'disinterested'.
Notice the interesting inconsistency. Jason Hsu isn't an author of the this article, but he's mentioned eight times, and he's a partner in the firm of which author Rob Arnott is founder and chairman, so it is unlikely that Arnott doesn't know about his work.
Now, in the 2006 article, Cap-Weighted Portfolios are Suboptimal Portfolios,
Hsu says that cap-weighting is uniquely bad. You don't need to do anything particular, to beat cap-weighting, you just have to use... well, let's quote his words: "However, portfolios constructed from weights, which do not depend on prices, do not exhibit the same underperformance observed for cap-weighted portfolios."
Yet "Smart Beta" portfolios are an example of "portfolios constructed from weights which do not depend on," well, let's say, "prices alone
." So if "Smart Beta" portfolios can go horribly wrong, this (seems) inconsistent with the (apparent) claim that any departure from cap-weighting is better than cap-weighting.
A possible explanation might be found in a later
paper mentioned in the article, a paper by Arnott and
Hsu and two others... The Surprising Alpha From Malkiel’s Monkey and Upside-Down Strategies
. As I read it, this paper is saying much less intriguing than "cap-weighting is the worst strategy." They say
"value and small-cap exposures are naturally occurring portfolio characteristics, unless an investor constructs a portfolio to have a positive relationship between price and portfolio weights.
In other words, they say, most non-cap-weighted portfolios turn out to have small-cap value tilts, intentionally or not. (Malkiel's monkeys throwing darts at the stock listings incorporate a small-cap tilt because they are statistically doing equal weighting; the listing for Apple is printed in the same-sized type as the listing for News Corporation.) So instead of "anything is better than cap-weighting," we are just back to the old "small-cap value tilts are better than cap-weighting." They dodge the obvious by saying "We do not attempt to comment on the interesting debate regarding the nature of value and small-cap premiums," and also do not answer the question I always have: whether they are talking about superior risk-adjusted
return, or just about a premium which might well be no more than reward commensurate with extra risk.
Anyway, we are not left with "cap-weighting is worst." We're left with "small-cap value is best, cap-weighting is worse, and" (I suppose) "whatever strategies result in large-cap or growth tilts, intentional or not, are worst." Same-old same-old argument that's been going on for decades.
And meanwhile large-cap growth funds, indexed or active, continue merrily on their way, with plenty of people investing in them with seemingly not-terrible results.
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.