Vanguard factor funds slow to catch on

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CULater
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Re: Vanguard factor funds slow to catch on

Post by CULater » Tue Apr 24, 2018 11:56 pm

Rick Ferri wrote:
Tue Apr 24, 2018 9:16 am
My view of how to use factor funds in a portfolio differs from most. I do a "barbell" approach. Start with VTI or similar very cheap total market fund and supplement it with the most value intensive, small-cap intensive, momentum intensive, quality intensive fund you can find and don't worry too much about the fee.

How much in each? It depends on each investor. The factor fund should range from 10% to 50% to have a meaningful effect (if it works). My preference is 75% total market, 25% factor fund. That's enough to gain a benefit if there is one without hurting me too much if there isn't.

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And what multi factor fund would that be, pray tell?
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Re: Vanguard factor funds slow to catch on

Post by jmk » Sat Jul 07, 2018 4:54 pm

fennewaldaj wrote:
Mon Apr 23, 2018 10:05 pm
Given the way these are constructed with positions all the way into the microcaps current shareholders would not want these funds to get too big correct? LIke maybe 1 billion in assets might be optimal but not 10 billion.
I'm worried about this too; and since Vanguard model is based on ever-growing assets to lower costs, will this become a problem?

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Re: Vanguard factor funds slow to catch on

Post by whodidntante » Sat Jul 07, 2018 5:01 pm

jmk wrote:
Sat Jul 07, 2018 4:54 pm
fennewaldaj wrote:
Mon Apr 23, 2018 10:05 pm
Given the way these are constructed with positions all the way into the microcaps current shareholders would not want these funds to get too big correct? LIke maybe 1 billion in assets might be optimal but not 10 billion.
I'm worried about this too; and since Vanguard model is based on ever-growing assets to lower costs, will this become a problem?
Vanguard doesn't seem too interested in pushing these funds on the masses. Similar to how they have VIOV Vanguard S&P Small-Cap 600 Value ETF, but you need a flashlight and a compass to find it on their website.

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Re: Vanguard factor funds slow to catch on

Post by jhfenton » Sat Jul 07, 2018 6:44 pm

whodidntante wrote:
Sat Jul 07, 2018 5:01 pm
jmk wrote:
Sat Jul 07, 2018 4:54 pm
fennewaldaj wrote:
Mon Apr 23, 2018 10:05 pm
Given the way these are constructed with positions all the way into the microcaps current shareholders would not want these funds to get too big correct? LIke maybe 1 billion in assets might be optimal but not 10 billion.
I'm worried about this too; and since Vanguard model is based on ever-growing assets to lower costs, will this become a problem?
Vanguard doesn't seem too interested in pushing these funds on the masses. Similar to how they have VIOV Vanguard S&P Small-Cap 600 Value ETF, but you need a flashlight and a compass to find it on their website.
+1 Vanguard is doing absolutely no retail promotion for these. You can't even find them on their investor website unless you know they exist and search by ticker. It makes sense that advisors would be conservative in moving clients into brand spanking new funds', especially multi-cap funds that don't fit neatly into pre-existing slots in portfolios.

The article that inspired this thread was silly.

I posted the data below in my factor funds thread a few days ago. Between the ETF and the Admiral Shares, Multifactor will probably pass $100 MM in the next month or so. At this point, all of the funds have seen units created except Quality Factor. Until Quality has new shares created, its impossible to know how many of the original 100,000 shares have been sold and how many are still held by Vanguard.
jhfenton wrote:
Fri Jul 06, 2018 9:23 am
The last four weeks finally saw the first shares created for the Liquidity Factor ETF. Multifactor and Value are still growing slowly, but steadily. Trading is still quite light for all but Multifactor. Some days, Value still trades less than 1,000 shares.

Quality is the sole factor ETF with no shares created since it launched with 100,000 shares.

VFMF - $49.56 MM (+100,000 shares) (plus $32.2 MM in VFMFX as of 5/31/18)
VFVA - $33.43 MM (+50,000 shares)
VFMO - $20.36 MM
VFMV - $12.26 MM (+25,000 shares)
VFLQ - $12.12 MM (+50,000 shares)
VFQY - $8.15 MM
Back in March, I posted this in the other thread, estimating that the funds could grow into the single-digit billions without running into problems with their smallest holdings. Looking at the portfolio now, I don't see any reason to revise my opinion. It's not as if the funds are all microcaps or small caps.
jhfenton wrote:
Mon Mar 12, 2018 7:20 am
fennewaldaj wrote:
Sun Mar 11, 2018 6:12 pm
I would think that these funds could get pretty big as is. Current small cap value fund has ~ 30 billion. This value factor fund has a similar amount of names and a larger average market cap.
I also see no reason they couldn't scale the VFVA portfolio up from $8 Million to $8 Billion. Positions 601-785 range from $5,302 to $2,820 currently. Multiply that by 1,000 and you have $2.8MM to $5.3MM positions. The $2.8 MM would be 1.1% of Cloudpeak ($245 MM market cap). The $5.3 MM would be 0.7% of Comtech Telecom ($724 MM market cap). The outlier would be Vitamine Shoppe with a market cap of $95 MM and a current position size of $4,383. That would translate into the $8 Billion fund owning 4.5% of Vitamin Shoppe. Almost everything else would be under 2%.

At $30 Billion, owning the fund's current smallest positions in their current proportions would be problematic. They would own 7.5% of a lot of the smaller companies and 16.9% of Vitamin Shoppe (definitely an outlier).

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Re: Vanguard factor funds slow to catch on

Post by BetaTracker » Sat Jul 07, 2018 7:09 pm

The ETF.com article and data referenced to kickoff this post -- and to catch our attention -- is almost three months old! When talking about fund flows, that can be a little offsetting.
Much was written at the time when Vanguard first introduced these funds about how little info they were offering in terms of factor-sizing data. Regardless, as with any actively managed funds we're going to have to wait to see. Maybe they'll turn out to be good portfolio diversifiers, maybe they won't. Got to be patient with a new product that Vanguard itself is labeling as active ...
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Re: Vanguard factor funds slow to catch on

Post by nisiprius » Sat Jul 07, 2018 7:46 pm

Rick Ferri wrote:
Tue Apr 24, 2018 3:05 pm
bschultheis wrote:
Tue Apr 24, 2018 1:33 pm
I just love all this factor / smart beta stuff. Makes my life so much easier, because it gets investors to focus on irrelevant things, thinking that these things actually matters in the big picture of reaching financial goals. Bill
+1
Don't try this at home.
I don't know how Vanguard is pitching these things to advisors, but their presentation to ordinary investors is rather reminiscent of "kids, don't try this at home:"
Vanguard factor-based funds

While these funds attempt to take advantage of specific stock characteristics, they're definitely not for the faint of heart.


What are "factor based" funds?

Factor-based funds are a form of active management. They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.

But they come with significantly more risk than you'd experience investing in the broader stock market.

A few things to think about before you invest
Factor funds are high-risk investments that should be used only by investors who:
  • Fully understand the risks and potential benefits of each factor.
  • Can financially and emotionally handle higher degrees of risk.
  • Consider these funds to be long-term investments.
  • Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.
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Re: Vanguard factor funds slow to catch on

Post by nisiprius » Sat Jul 07, 2018 7:51 pm

And here's another observation. Unless I'm missing something, these ETFS are literally hidden from view on the "investor" website. Can anyone find a combination of filters that shows them in their Vanguard ETF list?
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Re: Vanguard factor funds slow to catch on

Post by drk » Sat Jul 07, 2018 8:08 pm

nisiprius wrote:
Sat Jul 07, 2018 7:51 pm
And here's another observation. Unless I'm missing something, these ETFS are literally hidden from view on the "investor" website. Can anyone find a combination of filters that shows them in their Vanguard ETF list?
I cheated and went to a different search function, but I found them.

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Re: Vanguard factor funds slow to catch on

Post by jhfenton » Sat Jul 07, 2018 8:29 pm

nisiprius wrote:
Sat Jul 07, 2018 7:51 pm
And here's another observation. Unless I'm missing something, these ETFS are literally hidden from view on the "investor" website. Can anyone find a combination of filters that shows them in their Vanguard ETF list?
No. They don't seem to be listed in any way on the "Browse a list of all Vanguard ETFs" page. (Nor is the Multifactor Admiral Shares fund on the mutual fund list.)

They do have a Vanguard factor-based funds page, but the best I can tell, it is not linked anywhere yet.

They also include them in the results the Mutual Fund and ETF Screener (which is what I believe drk was trying to link to), but that includes most funds on the market from most fund companies.

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Re: Vanguard factor funds slow to catch on

Post by watchnerd » Fri Oct 12, 2018 11:06 pm

So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
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Re: Vanguard factor funds slow to catch on

Post by HEDGEFUNDIE » Sat Oct 13, 2018 12:55 am

watchnerd wrote:
Fri Oct 12, 2018 11:06 pm
So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
VFMF is much heavier in small caps than TSM, small caps have had a hot run and were kneecapped in this downturn.

We should probably wait at least a year before passing judgment on these funds.

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Re: Vanguard factor funds slow to catch on

Post by watchnerd » Sat Oct 13, 2018 1:01 am

HEDGEFUNDIE wrote:
Sat Oct 13, 2018 12:55 am
watchnerd wrote:
Fri Oct 12, 2018 11:06 pm
So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
VFMF is much heavier in small caps than TSM, small caps have had a hot run and were kneecapped in this downturn.

We should probably wait at least a year before passing judgment on these funds.
I have to admit I'm skeptical of some of the criteria when I look at the top holdings of VFMF. Some real dogs in there.

Or should I say 'deep value'?

It's pretty heavy into financials, too.
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Re: Vanguard factor funds slow to catch on

Post by NYCwriter » Sat Oct 13, 2018 4:01 am

HEDGEFUNDIE wrote:
Sat Oct 13, 2018 12:55 am
watchnerd wrote:
Fri Oct 12, 2018 11:06 pm
So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
VFMF is much heavier in small caps than TSM, small caps have had a hot run and were kneecapped in this downturn.

We should probably wait at least a year before passing judgment on these funds.

True on the small/med caps, but a quick glance suggests that the damage is distributed. It's heavier on financials, consumer, and energy. Every quant analyst mentioned energy and financials this year, so this is not surprising. And there is an emphasis on value. But companies are often cheap for a reason....

Looking at 3-5 years makes more sense.

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Re: Vanguard factor funds slow to catch on

Post by nisiprius » Sat Oct 13, 2018 8:17 am

This is just some random snark I had lying around... it isn't a "factor fund," but the Vanguard Managed Payout Fund, which now has a full decade of history behind it, takes a "modern" approach: high stock allocation, risk supposedly mitigated by use of uncorrelated assets, factors, alts. The composition has changed a bit every few years, but the current portfolio ticks off a lot of boxes:

Vanguard Total International Stock Index Fund Investor Shares 25.00%
Vanguard Total Bond Market II Index Fund Investor Shares** 13.70%
Vanguard Total Stock Market Index Fund Investor Shares 12.60%
Vanguard Alternative Strategies Fund** 12.50%
Commodities 7.60%
Vanguard Global Minimum Volatility Fund Investor Shares 7.60%
Vanguard Total International Bond Index Fund Investor Shares 6.10%
Vanguard Value Index Fund Investor Shares 5.00%
Vanguard Market Neutral Fund Investor Shares 5.00%
Vanguard Emerging Markets Stock Index Fund Investor Shares 4.90%

By my count, about 62% of the portfolio is in Vanguard-traditional, long-only, factor-free index funds. (Note that it actually overweights international over US stocks (25 + 7.6/2 + 4.9) / (25 + 12.6 + 7.6 + 5 + 4.9) = 61% international. What can I say?)

But, for the rest. There are alts. There are commodities. There is a "minimum volatility" factor fund. There's a value index factor fund. There's a market neutral fund. Two of them, Vanguard Alternative Strategies and Vanguard Market Neutral, are long-short funds.

Presumably, this "modern" and university-endowment-fund-like strategy was supposed to support the initial goals of a 5% withdrawal rate with both withdrawals and remaining portfolio capital holding real value. (They had to cut that to 4%).

So, they've had ten years of doing it the newfangled modren way. And while May 2008 was slightly into the financial crisis, you'd have to say it's been long enough to include a "full business cycle." And I'd have to say the results to date look fairly, what's the word I'm searching for, bad.

Compared to the most boring of all funds, Vanguard Balanced Index (60% Total Stock, 40% Total Bond, long-only, no alts, no factors), and to Wellesley Income Fund (musty old approach to retirement income), the portfolio they used for Managed Payout had meaningfully less return and meaningfully higher risk (by standard deviation and maximum drawdown), and meaningfully lower risk-adjusted return.

Portfolio 1, blue, Managed Payout.
Portfolio 2, red, Balanced Index.
Portfolio 3, yellow, Wellesley.

Source
Image
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Re: Vanguard factor funds slow to catch on

Post by 2pedals » Sat Oct 13, 2018 9:36 am

nisiprius wrote:
Sat Oct 13, 2018 8:17 am
This is just some random snark I had lying around...
Thank you nisiprius

Very interesting and informative post. That fund looks a lot like how a professional investment advisor would have placed their money for clients, for a large fee of course.

Indeed, it pours a little bit more toxin into already poisoned waters.
Last edited by 2pedals on Sat Oct 13, 2018 9:43 am, edited 1 time in total.

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Re: Vanguard factor funds slow to catch on

Post by watchnerd » Sat Oct 13, 2018 9:41 am

NYCwriter wrote:
Sat Oct 13, 2018 4:01 am
HEDGEFUNDIE wrote:
Sat Oct 13, 2018 12:55 am
watchnerd wrote:
Fri Oct 12, 2018 11:06 pm
So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
VFMF is much heavier in small caps than TSM, small caps have had a hot run and were kneecapped in this downturn.

We should probably wait at least a year before passing judgment on these funds.

True on the small/med caps, but a quick glance suggests that the damage is distributed. It's heavier on financials, consumer, and energy. Every quant analyst mentioned energy and financials this year, so this is not surprising. And there is an emphasis on value. But companies are often cheap for a reason....

Looking at 3-5 years makes more sense.
Why does 3-5 years give me a better idea of its worth?

If those 3-5 years correlate with small, financial, consumer, etc, all that tells me is that its cyclical.

And if I want cyclical industry exposure, there are simpler, cheaper ways to get it.
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Re: Vanguard factor funds slow to catch on

Post by AE81 » Sat Oct 13, 2018 11:02 am

nisiprius wrote:
Sat Oct 13, 2018 8:17 am
This is just some random snark I had lying around... it isn't a "factor fund," but the Vanguard Managed Payout Fund, which now has a full decade of history behind it, takes a "modern" approach: high stock allocation, risk supposedly mitigated by use of uncorrelated assets, factors, alts. The composition has changed a bit every few years, but the current portfolio ticks off a lot of boxes:

Vanguard Total International Stock Index Fund Investor Shares 25.00%
Vanguard Total Bond Market II Index Fund Investor Shares** 13.70%
Vanguard Total Stock Market Index Fund Investor Shares 12.60%
Vanguard Alternative Strategies Fund** 12.50%
Commodities 7.60%
Vanguard Global Minimum Volatility Fund Investor Shares 7.60%
Vanguard Total International Bond Index Fund Investor Shares 6.10%
Vanguard Value Index Fund Investor Shares 5.00%
Vanguard Market Neutral Fund Investor Shares 5.00%
Vanguard Emerging Markets Stock Index Fund Investor Shares 4.90%

By my count, about 62% of the portfolio is in Vanguard-traditional, long-only, factor-free index funds. (Note that it actually overweights international over US stocks (25 + 7.6/2 + 4.9) / (25 + 12.6 + 7.6 + 5 + 4.9) = 61% international. What can I say?)

But, for the rest. There are alts. There are commodities. There is a "minimum volatility" factor fund. There's a value index factor fund. There's a market neutral fund. Two of them, Vanguard Alternative Strategies and Vanguard Market Neutral, are long-short funds.

Presumably, this "modern" and university-endowment-fund-like strategy was supposed to support the initial goals of a 5% withdrawal rate with both withdrawals and remaining portfolio capital holding real value. (They had to cut that to 4%).

So, they've had ten years of doing it the newfangled modren way. And while May 2008 was slightly into the financial crisis, you'd have to say it's been long enough to include a "full business cycle." And I'd have to say the results to date look fairly, what's the word I'm searching for, bad.

Compared to the most boring of all funds, Vanguard Balanced Index (60% Total Stock, 40% Total Bond, long-only, no alts, no factors), and to Wellesley Income Fund (musty old approach to retirement income), the portfolio they used for Managed Payout had meaningfully less return and meaningfully higher risk (by standard deviation and maximum drawdown), and meaningfully lower risk-adjusted return.

Portfolio 1, blue, Managed Payout.
Portfolio 2, red, Balanced Index.
Portfolio 3, yellow, Wellesley.

Source
Image
I suspect much of Managed Payout’s underperformance is due to the international holdings. Adding Lifestrategy Moderate Growth to the chart might show that.

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Re: Vanguard factor funds slow to catch on

Post by watchnerd » Sat Oct 13, 2018 11:07 am

AE81 wrote:
Sat Oct 13, 2018 11:02 am

I suspect much of Managed Payout’s underperformance is due to the international holdings. Adding Lifestrategy Moderate Growth to the chart might show that.
It might be true, but it's also post hoc sample selection bias.
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Re: Vanguard factor funds slow to catch on

Post by AE81 » Sat Oct 13, 2018 5:04 pm

watchnerd wrote:
Sat Oct 13, 2018 11:07 am
AE81 wrote:
Sat Oct 13, 2018 11:02 am

I suspect much of Managed Payout’s underperformance is due to the international holdings. Adding Lifestrategy Moderate Growth to the chart might show that.
It might be true, but it's also post hoc sample selection bias.
My point was that market neutral, alternatives, and commodities didn’t seem to help nor hurt relative to a “conventional” stock/bond portfolio with similar global equity exposure.

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Re: Vanguard factor funds slow to catch on

Post by NYCwriter » Sat Oct 13, 2018 9:16 pm

watchnerd wrote:
Sat Oct 13, 2018 9:41 am
NYCwriter wrote:
Sat Oct 13, 2018 4:01 am
HEDGEFUNDIE wrote:
Sat Oct 13, 2018 12:55 am
watchnerd wrote:
Fri Oct 12, 2018 11:06 pm
So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
VFMF is much heavier in small caps than TSM, small caps have had a hot run and were kneecapped in this downturn.

We should probably wait at least a year before passing judgment on these funds.

True on the small/med caps, but a quick glance suggests that the damage is distributed. It's heavier on financials, consumer, and energy. Every quant analyst mentioned energy and financials this year, so this is not surprising. And there is an emphasis on value. But companies are often cheap for a reason....

Looking at 3-5 years makes more sense.
Why does 3-5 years give me a better idea of its worth?

If those 3-5 years correlate with small, financial, consumer, etc, all that tells me is that its cyclical.

And if I want cyclical industry exposure, there are simpler, cheaper ways to get it.
It uses metrics to determine holdings. It's no more cyclical than, say, a value fund. Whether its factors produce any return or lower volatility is another matter, but basing an assessment on 5 months seems equally flawed. A market-value weighted fund uses capitalization. That's a single-factor fund.

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Re: Vanguard factor funds slow to catch on

Post by watchnerd » Sat Oct 13, 2018 9:20 pm

NYCwriter wrote:
Sat Oct 13, 2018 9:16 pm
watchnerd wrote:
Sat Oct 13, 2018 9:41 am
NYCwriter wrote:
Sat Oct 13, 2018 4:01 am
HEDGEFUNDIE wrote:
Sat Oct 13, 2018 12:55 am
watchnerd wrote:
Fri Oct 12, 2018 11:06 pm
So the multi-factor fund didn't seem to do any better in the recent correction than the standard TSM fund.

What's the point of these again if they don't either give better return or reduce risk?
VFMF is much heavier in small caps than TSM, small caps have had a hot run and were kneecapped in this downturn.

We should probably wait at least a year before passing judgment on these funds.

True on the small/med caps, but a quick glance suggests that the damage is distributed. It's heavier on financials, consumer, and energy. Every quant analyst mentioned energy and financials this year, so this is not surprising. And there is an emphasis on value. But companies are often cheap for a reason....

Looking at 3-5 years makes more sense.
Why does 3-5 years give me a better idea of its worth?

If those 3-5 years correlate with small, financial, consumer, etc, all that tells me is that its cyclical.

And if I want cyclical industry exposure, there are simpler, cheaper ways to get it.
It uses metrics to determine holdings. It's no more cyclical than, say, a value fund. Whether its factors produce any return or lower volatility is another matter, but basing an assessment on 5 months seems equally flawed. A market-value weighted fund uses capitalization. That's a single-factor fund.
Sounds like it a better fit for institutions.

I don't think most individual investors have timeframes where they can wait 5 years....and even then, it sounds like 'early returns'.

After all, people are still debating if the value premium still exists after the last 20 years of returns..... :shock:
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Re: Vanguard factor funds slow to catch on

Post by vineviz » Sat Oct 13, 2018 9:29 pm

watchnerd wrote:
Sat Oct 13, 2018 9:20 pm
Sounds like it a better fit for institutions.

I don't think most individual investors have timeframes where they can wait 5 years....and even then, it sounds like 'early returns'.
Vanguard's multifactor fund is tailor made for individual investors, albeit sophisticated ones or investors using a financial advisor.

It's got all the hallmark of a terrific core domestic equity holding: low expenses, broad market cap range, decent factor exposure, etc.
"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: Vanguard factor funds slow to catch on

Post by watchnerd » Sat Oct 13, 2018 9:31 pm

vineviz wrote:
Sat Oct 13, 2018 9:29 pm
watchnerd wrote:
Sat Oct 13, 2018 9:20 pm
Sounds like it a better fit for institutions.

I don't think most individual investors have timeframes where they can wait 5 years....and even then, it sounds like 'early returns'.
Vanguard's multifactor fund is tailor made for individual investors, albeit sophisticated ones or investors using a financial advisor.

It's got all the hallmark of a terrific core domestic equity holding: low expenses, broad market cap range, decent factor exposure, etc.
Well, it's not as cheap as TSM.

And it requires you believe in factor-based investing as being superior to holding the entire market.

And it's actively managed, so there is a human element, as well.

How many Bogleheads are willing to swap out TSM and move to it, cross their fingers, and hope it outperforms TSM, given the (slightly) higher costs?
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Re: Vanguard factor funds slow to catch on

Post by MJW » Sat Oct 13, 2018 11:29 pm

vineviz wrote:
Sat Oct 13, 2018 9:29 pm
Vanguard's multifactor fund is tailor made for individual investors, albeit sophisticated ones or investors using a financial advisor.

It's got all the hallmark of a terrific core domestic equity holding: low expenses, broad market cap range, decent factor exposure, etc.
Why sophisticated?

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Re: Vanguard factor funds slow to catch on

Post by HEDGEFUNDIE » Sun Oct 14, 2018 12:51 am

watchnerd wrote:
Sat Oct 13, 2018 9:31 pm
vineviz wrote:
Sat Oct 13, 2018 9:29 pm
watchnerd wrote:
Sat Oct 13, 2018 9:20 pm
Sounds like it a better fit for institutions.

I don't think most individual investors have timeframes where they can wait 5 years....and even then, it sounds like 'early returns'.
Vanguard's multifactor fund is tailor made for individual investors, albeit sophisticated ones or investors using a financial advisor.

It's got all the hallmark of a terrific core domestic equity holding: low expenses, broad market cap range, decent factor exposure, etc.
Well, it's not as cheap as TSM.

And it requires you believe in factor-based investing as being superior to holding the entire market.

And it's actively managed, so there is a human element, as well.

How many Bogleheads are willing to swap out TSM and move to it, cross their fingers, and hope it outperforms TSM, given the (slightly) higher costs?
How many Bogleheads tilt to small value? Or Wellington / Wellesley?

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Re: Vanguard factor funds slow to catch on

Post by NYCwriter » Sun Oct 14, 2018 1:28 am

vineviz wrote:
Sat Oct 13, 2018 9:29 pm
watchnerd wrote:
Sat Oct 13, 2018 9:20 pm
Sounds like it a better fit for institutions.

I don't think most individual investors have timeframes where they can wait 5 years....and even then, it sounds like 'early returns'.
Vanguard's multifactor fund is tailor made for individual investors, albeit sophisticated ones or investors using a financial advisor.

It's got all the hallmark of a terrific core domestic equity holding: low expenses, broad market cap range, decent factor exposure, etc.
Nah, I don't think it requires any sophistication or advice to purchase an ETF. :D Look, the way I see it, if someone picks the SP600 over a broad small cap ETF, they're basing the decision on the idea that quality, selection, size are going to contribute to performance.

The research on factor investing is mixed, as most smart-beta funds were designed around a particular style that might outperform in some periods but not in others. So "multiple" factor investing is designed to offer better overall results. Whether it will or not still remains to be seen.

With 1T in some form of factor funds, Vanguard is going to offer them.

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Re: Vanguard factor funds slow to catch on

Post by vineviz » Sun Oct 14, 2018 5:25 am

watchnerd wrote:
Sat Oct 13, 2018 9:31 pm

Well, it's not as cheap as TSM.

And it requires you believe in factor-based investing as being superior to holding the entire market.

And it's actively managed, so there is a human element, as well.

How many Bogleheads are willing to swap out TSM and move to it, cross their fingers, and hope it outperforms TSM, given the (slightly) higher costs?
As I said, probably a better fit for more active and/or sophisticated investors.
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Re: Vanguard factor funds slow to catch on

Post by nisiprius » Sun Oct 14, 2018 6:55 am

watchnerd wrote:
Sat Oct 13, 2018 11:07 am
AE81 wrote:
Sat Oct 13, 2018 11:02 am
I suspect much of Managed Payout’s underperformance is due to the international holdings. Adding Lifestrategy Moderate Growth to the chart might show that.
It might be true, but it's also post hoc sample selection bias.
I try to provide links to the source to make it easy for anyone to do their own experiments, but, OK. The answer is both yes and no.

First of all, I didn't put a gun to their heads and say "please overweight international stocks." They're responsible for the whole package, and high international allocations are, I think, part and parcel of the same kinds of advice that also suggest you should have some alts and factors and such.

Second of all, while it's true that the outperformance of LifeStrategy Moderate is a lot less the outperformance than of Balanced Index or Wellesley, it still underperformed LifeStrategy Moderate in return--and also had more risk (standard deviation and maximum drawdown) and lower risk-adjusted return:

Source
Image

But, yes, the big problem with any backward comparison like that is knowing what to compare it to without being polluted by 20/20 hindsight.

So let's ask, in 2008, what other Vanguard funds would an investor wanting retirement income have been looking at? Vanguard at the time had three others. Wellesley, by far the biggest, was the one I looked at. The other two are Vanguard LifeStrategy Income and Vanguard Target Retirement Income. The results are kind of interesting (and less clear). In this case, Managed Payout's portfolio did outperform the others, but at the cost of taking much more risk and, as a result, getting much lower risk-adjusted return measurements. To put it bluntly, any idea that using alts and factors and such was going to give any important amount risk reduction--

Image

didn't pan out. Managed Payout showed all the risk that would have been expected from its high stock allocation.

PV data for Managed Payout, Lifestrategy Income, Target Retirement Income
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Re: Vanguard factor funds slow to catch on

Post by typical.investor » Sun Oct 14, 2018 7:25 am

nisiprius wrote:
Sun Oct 14, 2018 6:55 am

First of all, I didn't put a gun to their heads and say "please overweight international stocks." They're responsible for the whole package, and high international allocations are, I think, part and parcel of the same kinds of advice that also suggest you should have some alts and factors and such.
So you what, put a gun to their dogs head? Just kidding. That's scary.

Anyway, I think the actual balance is closer to market weight (i.e closer to a 50%-50% split) if M* is to be believed. US is short 178.04 and long 206.84, so net 28.80. International is short 3.89 and long 35.63 so net 31.74. Remaining is roughly bonds 20%, cash 10% and other 10%.

But even comparing the managed payout fund to a 30% US 30% international 40% bonds, it doesn't compare well.

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Re: Vanguard factor funds slow to catch on

Post by sperry8 » Mon Jan 14, 2019 9:04 am

Well, they seem to be marketing at least one of these multifactors to us now (VFLQ):

https://www.etf.com/sections/etf-indust ... hidden-gem

What would the benchmark be for that fund? Mid Cap? Can't even do a comparison on M* via the chart function - doesn't show. Hard to tell if I want to buy something if I can't compare it to its benchmark
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Re: Vanguard factor funds slow to catch on

Post by nisiprius » Mon Jan 14, 2019 9:23 am

sperry8 wrote:
Mon Jan 14, 2019 9:04 am
Well, they seem to be marketing at least one of these multifactors to us now (VFLQ):

https://www.etf.com/sections/etf-indust ... hidden-gem

What would the benchmark be for that fund? Mid Cap? Can't even do a comparison on M* via the chart function - doesn't show. Hard to tell if I want to buy something if I can't compare it to its benchmark
First, it is starting to occur to me that the big "advantage" of factor investing--from the point of view of those selling it--is the extent to which they are able to dodge benchmarking. We see this in an extreme case with funds like QSPIX, or Larry Swedroe's often-recommended Stone Ridge funds. At least some forum posters have expressed ideas like "DFA funds are their own benchmarks."

Funds used to "cheat" by using the Fama-French factors but benchmarking to the S&P 500. Morningstar, to their great credit, created their "style box" system and began comparing them to appropriate benchmarks... but the new "factor zoo" has enabled the funds to slip out of that kind of accountability.

Second, Vanguard being Good Guys, as expected they are upfront and have a seemingly reasonable benchmark choice, expressed in the semiannual report. Vanguard chose the Russell 3000 as their benchmark:

Image

Third, in this case, you can get Morningstar to indicate category averages and benchmarks for ETFs by using links that follow this model--I wish I could remember which forum member showed this to me. Since I think this is an "undocumented feature" I don't know if this is a valid expression of Morningstar's opinion... weird that they call it "mid-cap blend," use a mid-cap blend category average, but S&P 500 as the benchmark. Since Vanguard calls out the Russell 3000, I added Vanguard's own Russell 3000 ETF to the comparison. So far--means nothing with less than a year--it has outperformed the category average, but not either Morningstar or Vanguard's benchmark.

http://quotes.morningstar.com/chart/fund/chart?t=VFLQ

Image
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Re: Vanguard factor funds slow to catch on

Post by Random Walker » Mon Jan 14, 2019 10:20 am

nisiprius wrote:
Mon Jan 14, 2019 9:23 am
sperry8 wrote:
Mon Jan 14, 2019 9:04 am
Well, they seem to be marketing at least one of these multifactors to us now (VFLQ):

https://www.etf.com/sections/etf-indust ... hidden-gem

What would the benchmark be for that fund? Mid Cap? Can't even do a comparison on M* via the chart function - doesn't show. Hard to tell if I want to buy something if I can't compare it to its benchmark
First, it is starting to occur to me that the big "advantage" of factor investing--from the point of view of those selling it--is the extent to which they are able to dodge benchmarking. We see this in an extreme case with funds like QSPIX, or Larry Swedroe's often-recommended Stone Ridge funds. At least some forum posters have expressed ideas like "DFA funds are their own benchmarks."

Hi Nisi,
I’m going to disagree with you here, and as you know, I’m the one who has said “DFA funds are their own benchmarks.” Here’s my point. What really matters is that a fund targets a certain factor exposure and then ardently and passively sticks to its mandate formulaicly and passively. A fund with deeper exposure to a given factor than some benchmark will do better than the benchmark when the factor does well and worse than the benchmark when the factor does poorly. There is no attempt to “dodge benchmarking”; instead it’s an appreciation of the limited usefulness of comparison to a benchmark that is only partially meaningful. If size and value underperform over a given period, I want to see that my DFA fund with deeper exposures to those factors underperformed a more bland small value benchmark. Once again, passive adherence to a funds own internal mandate is more important than comparison to a partially meaningful benchmark. We can’t control how any factor will perform over a given time period, but we can control our exposure to the given factor.

Dave

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Re: Vanguard factor funds slow to catch on

Post by nedsaid » Mon Jan 14, 2019 12:24 pm

My take is that Vanguard knows what its core business is: ultra cheap index funds and cheap active funds. But they have branched out into such things as factors, Vanguard had its Growth index and Value index funds even when Mr. Bogle was still on the scene. It is a way of gaining institutional expertise, how could Vanguard compete with the other very large players if it lacked expertise in factors, market neutral, ETFs, etc? It is giving the customers what they want, competing in the marketplace, and staying up to date with modern products. Vanguard has really excelled in the ETF market even though their founder was not wild about ETFs.
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Re: Vanguard factor funds slow to catch on

Post by nisiprius » Mon Jan 14, 2019 12:43 pm

Random Walker wrote:
Mon Jan 14, 2019 10:20 am
...A fund with deeper exposure to a given factor than some benchmark will do better than the benchmark when the factor does well and worse than the benchmark when the factor does poorly. There is no attempt to “dodge benchmarking”; instead it’s an appreciation of the limited usefulness of comparison to a benchmark that is only partially meaningful.
The fund should be benchmarked to an index that tracks what the fund is supposed to accomplish. I have never suggested that e.g. a small-cap value fund should be benchmarked to the S&P 500. But there should be some objective standard to which an outside observer can judge how well a fund has done what it was supposed to do.

Now, the DFA Small Cap Value Portfolio, DFSVX says that it benchmarks to the Russell 2000 Value Index, and I think that's completely legitimate. This is from the annual report.

Image

Morningstar doesn't actually show that index, and not even their available "small value index" goes back as far as DFSVX, but it goes back to 1997 anyway, and we can look at it:

Source

Image

But I wouldn't say that fund is its own benchmark, I'd say the Russell 2000 Value Index is its benchmark, and we can see how it's done relative to the benchmark.
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Re: Vanguard factor funds slow to catch on

Post by dkturner » Mon Jan 14, 2019 1:11 pm

I’ve always been suspicious of the mischief associated with benchmarking too. Many years ago I decided to benchmark our equity holdings to the total market indices (U.S. and International - based on our relative allocations). I benchmark our fixed income holdings to the Barclays Aggregate Bond Index. It’s easy to check on relative risk by looking at Sharp ratios and standard deviations of the individual holdings.

I rationalize all of this by saying that I simply want to know how our portfolios are performing compared to the overall markets, weighted by asset class. Historically we have taken slightly more risk than the market portfolios, but have better total returns to show for taking this additional risk. I love John Bogle’s comment that: “one extra point of performance is priceless, one extra point of standard deviation is meaningless”.

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Re: Vanguard factor funds slow to catch on

Post by pkcrafter » Mon Jan 14, 2019 1:19 pm

Nice posts from two of our FAs, Rick Ferri and Bill Schultheis.

Bill -

https://soundmarkwealth.com/team/bill-schultheis/

My take - Factors? I don't need no stinkin' factors.

If factors are really good and investors can handle the tracking error, they will eventually incorporated into total market and I'll own some. Once and done! :happy
Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.
https://investor.vanguard.com/etf/factor-funds


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Re: Vanguard factor funds slow to catch on

Post by rkhusky » Mon Jan 14, 2019 2:09 pm

Random Walker wrote:
Mon Jan 14, 2019 10:20 am
Here’s my point. What really matters is that a fund targets a certain factor exposure and then ardently and passively sticks to its mandate formulaicly and passively. A fund with deeper exposure to a given factor than some benchmark will do better than the benchmark when the factor does well and worse than the benchmark when the factor does poorly. There is no attempt to “dodge benchmarking”; instead it’s an appreciation of the limited usefulness of comparison to a benchmark that is only partially meaningful. If size and value underperform over a given period, I want to see that my DFA fund with deeper exposures to those factors underperformed a more bland small value benchmark. Once again, passive adherence to a funds own internal mandate is more important than comparison to a partially meaningful benchmark. We can’t control how any factor will perform over a given time period, but we can control our exposure to the given factor.
+1

The way to benchmark a factor fund is to perform a factor analysis, for example using Portfolio Visualizer. Although I am not sure if that takes into account fees and expenses.

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