Good reads from around the Web.
Whatever you call it – Smart Beta, factor investing, return premiums [1] like my co-blogger The Accumulator, or “alchemy” like a cynic – trying to get an edge from bespoke passive funds is proving popular.
We’ve got mixed feelings about the trend around here.
The Accumulator does tilt for the value and size factors, for instance.
But our visiting professor of passive investing, Lars Kroijer, says investing in anything but a global tracker is irrational [2].
The academic literature certainly looks encouraging. Some classes of shares – labelled value, small caps, quality, low volatility, illiquidity, momentum – have previously outperformed the market, for much-debated reasons.
Some say they’re higher risk. Some say they’re anomalies. Some say some of those factors are different manifestations of the same thing. If you’re confused, then there is an entry-level interview with a quant fund manager that explains the basics on Barrons [3] this week.
Whatever the reason for their historical outperformance though, new ETFs have made factor investing much easier.
Relatively cheap Smart Beta funds have taken factor investing from hedge funds to discount brokers. But even fans warn there are caveats.
Short-term: The Krypton factor
For one thing, the academic research flatters to deceive [4]. Getting the higher returns found in the labs from the comfort of your own home might be harder than it looks.
Also, the premiums don’t work all the time. They can go on the blink for years.
Value shares have been in the dustbin since the financial crisis, for example. Only recently [5] have they shown signs of their hoped-for vim and vigour.
In any single period, the divergences can be staggering. The following graph from the Financial Times [6] this week shows how different kinds of UK small cap shares have been doing:
Stocks in the data belong to the Numis Smaller Companies Index.
Source: FT [6]
It’s worth noting that you can’t easily buy into small cap versions of the factors charted in the graph in the UK. Just getting a vanilla small cap tracker is hard enough here.
The data is a result of academic number crunching. But the takeaway message is clear – and Professor Paul Marsh of the London Business School says the same divergence has been seen with larger companies, too.
Marketing for smart beta funds tends to point to long-term graphs. That might seem appropriate for long-term investors. But to get to the long-term, you have to stomach through a lot of short-terms.
For that reason, mixing factors in a portfolio would seem to make sense. If one factor is down in the dumps, another might thrive.
True – but how much mixing before you’ve just recreated a more costly global tracker fund [7]?
Exactly. No wonder index fund creator Jack Bogle is skeptical [8].
From the blogs
Making good use of the things that we find…
Passive investing
- The most powerful force in the universe – The Irrelevant Investor [9]
- What a lawyer learned about investing – Humble Dollar [10]
- A logical investment strategy revisited – DIY Investor (UK) [11]
- Too many cooks in the kitchen – The Evidence-based Investor [12]
- Interview with Bill McNabb, Vanguard CEO [Podcast] – T.E.B.I. [13]
Active investing
- Beware the Frightful Five – Smead Capital [14]
- Sell Netflix, Buy Blockbuster – The Irrelevant Investor [15]
- Is National Grid a low-risk dividend stock? [PDF] – UK Value Investor [16]
- Cracking the currency code – Musings on Markets [17]
- Riffing on thoughts from Charley Ellis – The Waiter’s Pad [18]
- Brain or machine? – Investing Caffeine [19]
- Accounts will only get you so far – The Value Perspective [20]
Other articles
- Four reasons to buy bonds in 2017 – Peter Lazaroff [21]
- An investing pet peeve – A Wealth of Common Sense [22]
- Principals for a successful retirement – JP Asset Management [23]
- Mentally ready for financial independence – Retirement Investing Today [24]
- Investing is the ultimate collection – Power Over Life [25]
- Eulogy to another great dad – Mr Money Mustache [26]
- The inspiration for Trump’s speech? [Twitter, video] – Timothy Burke [27]
Product of the week: The Telegraph [28] says Amazon’s new Platinum Mastercard [29] isn’t the most generous reward card around, and notes you can only spend the points you earn on the Amazon website. But let’s face it, Amazon sells everything anyway. There’s also no annual fee, and you get free money – well, a £10 gift card – on signing up [29].
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [30]
Passive investing
- The end of active investing? [Search result, wide-ranging piece] – FT [31]
- Vanguard cuts fees on LifeStrategy funds – Telegraph [32]
- Do It Yourself investors still shunning passive funds [Search result] – FT [33]
- Is the FTSE headed for a crash in 2017? – Guardian [34]
- Struggling hedge funds still expense bonuses, bar tabs – Reuters [35]
- How well does running Vanguard pay? – Bloomberg [36]
Active investing
- How the UK’s biggest fund lost £717m when market was up 22% – Telegraph [37]
- Merryn: Why I am not that into Warren Buffett [Search result] – FT [38]
- ETFs have replaced stocks as the most actively traded assets – Bloomberg [39]
- Another look at US asset valuations – Bloomberg [40]
- Where is it worth paying for a stock picker? – Telegraph [41]
A word from a broker
- Do the markets need rebalancing? – TD Direct Investing [42]
- Lloyds shares: Buy, sell, or hold? – Hargreaves Lansdown [43]
Other stuff worth reading
- Paying for care at home: Costs and case studies – Guardian [44]
- Stamp duty blamed for housing ‘gridlock’ as owners stay put – Telegraph [45]
- Five ways to make extra money from your home – ThisIsMoney [46]
- Mortgage rates are rising faster than savings rates – Telegraph [47]
- Owning a dog could cost you £33,000 – Guardian [48]
- Is early retirement great? Some find it hard work – New York Times [49]
- How Steve Jobs saved Apple and Nike with the same advice – Quartz [50]
- The hidden value of a good night’s sleep [Search result] – FT [51]
- UK in denial over Brexit, says Davos elite – ThisIsMoney [52]
- Trump’s speech: American carnage [Various front pages] – BBC [53]
Book of the week: Even those who still dispute there was more to Brexit than a clear-headed vote for national sovereignty seem to see what’s going on with the election of Donald Trump. Perhaps that’s why his sort-of biography Trump: The Art of the Deal [54] is a bestseller again. £4.99 on Kindle [55] and £9.99 in paperback [56], what else have we got to go on, bar his Twitter rants and Dr Strangelove [57]?
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [62]]