Good reads from around the Web.

Are you lucky or skillful if you succeed at something? A pragmatic test – courtesy of author and banker Michael Mauboussin – is to see whether you can lose at the activity on purpose.

I’ve held a tennis racket on about 10 days of my life on Earth, and I’ve got the ball over the net and legally within the sidelines about as often.

Tennis clearly requires skill.

Flipping coins to win with heads but then trying to lose by getting tails?

Sheer luck.

I mention this because I’ve seen great evidence of my investing skill recently.

You remember how I bought a bunch of oil stocks outside of my ISA, so I could use any losses I generated to offset my capital gains tax bill?

Well, I’ve already generated losses! Enough to offset that surprise gain.

Go me – my little portfolio has lost 16% in just three weeks.

Talk about skill, eh?

[continue reading…]

The behemoth fund group Vanguard Asset Management has launched four new global factor investing ETFs, based on the value, liquidity, momentum, and low volatility return premiums.

My thanks to reader Snowman for tipping us off about these new ETFs.

I haven’t seen an official press release on Vanguard’s UK website, but the factor ETFs are already being talked about in the investing media.

They are also listed on Vanguard’s UK index fund and ETF page:

Vanguard’s four new factor ETFs listed on its website. Today.

Never mind the potential downsides – feel those low total expense ratios!

Here’s how Vanguard’s factsheets describe its new ETFs1:

Vanguard Global Liquidity Factor UCITS ETF

The Fund pursues an actively-managed investment strategy.

The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have low trading volumes and other measures of trading liquidity, including lower trading share and dollar volumes, based on percentage turnover, and price impact.

Vanguard Global Minimum Volatility UCITS ETF

The Fund employs an active management strategy and will seek to achieve its investment objective by investing primarily in equity securities that are included in the FTSE Global All Cap Index.

The Investment Manager’s quantitative model evaluates the securities in the Benchmark by reference to characteristics designed to measure their exposure to a variety of factors that drive a security’s volatility such as industry sector, liquidity, size, value and growth. The model also assesses the interaction between these factors and their impact on the overall volatility of the portfolio.

The Fund will generally seek to hedge most of its currency exposure back to the U.S. dollar to further reduce overall portfolio volatility.

Vanguard Global Momentum Factor UCITS ETF

The Fund pursues an actively-managed investment strategy.

The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have relatively strong recent past performance.

Past performance will be assessed in terms of both non risk-adjusted and risk adjusted return, over the shorter (approximately 6-months) and intermediate (approximately 12-months) periods prior to the acquisition of the securities by the Fund.

Vanguard Global Value Factor UCITS ETF

The Fund pursues an actively-managed investment strategy.

The Investment Manager’s quantitative model implements a rules-based active approach that aims to assess the factor exposures of securities, favouring equity securities which, when compared to other securities in the investment universe, have lower prices relative to their fundamental measures of value (which measures may include price-to-book or price-to-earnings ratio, estimated future earnings and operating cash flow).

Actively up and at ’em

What jumps out from these rather geeky descriptions is that they are all actively-managed ETFs, rather than index trackers.

This isn’t new territory for Vanguard. Despite its reputation among passive investors for cheap index tracking funds, the group has run active funds for decades. (Vanguard does emphasize low costs with its active products, too).

According to Alex Lomholt at Vanguard:

“Vanguard has chosen to take an active approach to managing these funds by using quantitative models to select stocks and build a portfolio that targets the desired factor whereas other managers may track an index to implement a factor-based strategy.

Investors need to be confident that the methodology chosen will deliver their desired factor exposure to meet long-term investment objectives.”

Of course, clued-up Monevator readers know that being confident that a product can deliver the exposure you want is one (important) thing.

But there’s no guarantee that even properly-implemented return premiums will outperform in the future.

Indeed none other than Vanguard’s founder Jack Bogle once said:

If you look at the long sweep of data going back into the ’20s – and, of course, data are suspect – but there are long periods, 20 years or so, when large do better than the small and when growth does better than value.

In the long run, it is correct, if you believe the data, that value does better than growth and that small does better than large.

But I’m of the school that says, if that is proven – and it is, I think, a little bit in the marketplace – if it is proven to be the case, then people will bid up the prices of value stocks and bid down the prices of growth stocks until they reach an equilibrium and then future returns will be the same.

So, I wonder first about the data; second, about trying to rely on something that happened in the past as a forecast of the future.

So, I don’t think you need to do it. It’s not going to be awful.

The fundamental thing: It’s all the same stocks; it’s just the different weights.

There is nothing awful about [factor-based funds].

But I would rather bet with the whole market and be guaranteed of my share of the return.

So who is right, Bogle – or for that matter our own contributor Lars Kroijer – or the academics who believe the factors will go on to beat the market in the future?

You pays your money and takes your choice – but at least you don’t pays so much money with Vanguard’s low-cost active ETFs, compared to say a factor-chasing hedge fund.

You can use the links at the top of the article for my co-blogger’s articles on the different risk factors, and on how they might give you an edge.

In addition, here’s some further reading:

• A quick introduction to the return premiums
• An good interview about factor investing [Video]
• Why the return premiums flatter to deceive
• Why Lars Kroijer believes you should stick with market cap trackers

1. My bold, and I’ve edited out the blurb about the investing universe, which in every case but low-volatility is primarily the FTSE Developed All Cap Index and the Russell 3000 Index. [↩]

According to author Jason Zweig, “No matter how cynical you are about Wall Street, you aren’t cynical enough.”

So he writes in the introduction to The Devil’s Financial Dictionary, his wonderful new A-Z of investing jargon rewritten with an eye for laughs and for education as a side effect.

I wish I’d written it, frankly. Almost as much as I wish I’d written The Great Gatsby, and I don’t even have the excuse of not being born 100 years ago with The Devil’s Financial Dictionary.

Here’s a taster of ten definitions by Zweig from chapters A to C – abridged and abbreviated by me – that seem especially relevant to passive investors.

ALPHA

Luck.
Technically, alpha is the excess return over a market index, adjusted for the risk that the portfolio manager incurred to achieve it. Used as a synonym for skill, alpha is in fact nearly always the result of random chance: “We bought Mongolian mortgage-backed securities when other investors had decided that the market for yurts would collapse,” said Ivana Butler, an analyst at the investment firm Bosch, Tosh & Mullarkey in Boston. “But an outbreak of botulism among camels and yaks sent the yurt market higher, driving up the price of our bonds. This is only the latest example of our alpha-generating research process that enables us to outperform.”

APOLOGY

In the real world, an admission of culpability and remorse for an action that harmed someone else, typically followed by an attempt to right the wrong and a commitment not to repeat it; on Wall Street, a declaration that other people did something wrong and that any resulting harm was beyond the bank’s control.

ASSET GATHERING

How brokers, financial advisers, and portfolio managers describe what they do when no one else is listening. In plain English it means: “Grabbing all the money we can with both hands from as many customers as possible so we can earn more fees for less work.”

BASIS POINT

One-hundredth of one percent, or one ten-thousandth of the total, a proportion so puny-sounding that no one ever begrudges paying a few basis points of his or her wealth to a hardworking Wall Streeter. “Our management fee is only 50 basis points,” said Phil D. Hopper, a portfolio manager at the investment firm of Tucker, Cash & Left in Grosse Point, Michigan. “That’s a bargain for the services we provide”. Asked why the licence plate on his Maserati in the firm’s parking lot read “50 BPS”, Mr. Hopper cleared his throat and replied, “That stands for 50 bauds per second, the speed of my first modem.”

BEAR MARKET

A phase of falling prices when you can no longer bear to think about what a fool you were for not selling your investments – which is generally a sign that you should think instead of buying more.

BEAT THE MARKET

To own or trade securities that perform better than a market average or benchmark – which, sooner or later, most securities will. However, they will tend either to stop beating the market as soon as you buy them or to begin doing so as soon as you sell them. Thus, the investors who obsess the most over beating the market are the most likely to end up being beaten by it.

BROKER

The comparative form of broke.
Also, used as a noun, a person who buys and sells stocks, bonds, funds, and other assets for people who are under the delusion that the broker is doing something other than guesswork. One early definition of a broker, attributed to the British lexicographer Samuel Johnson, is “a negotiator between two parties who contrives to cheat both.”

BUY AND HOLD

To hang on for the long term in an asset like stocks – thus infuriating most market ‘experts’ who advise frequent trading in and out in response to actual or imaginary risks and opportunities. At its best, buy and hold investing is stupefyingly boring. At its worst, during Bear Markets, it feels like a failure. Therefore critics are constantly declaring that “buy and hold is dead”. They never offer persuasive evidence, however, that any alternative has worked better over the long term. If buy and hold is dead, what is alive?

CAPITAL

The wealth of an individual, company, or nation, a word deriving from the Latin caput, or head – paradoxically the organ that many investors use the least in their effort to amass capital.

CLIENTS

Also known, on Wall Street, as muppets, flunkies, chumps, suckers, marks, targets, victims or ‘vics‘, dupes, baby seals, sheep, lambs, guppies, geese, pigeons, and ducks (as in “When the ducks quack, feed ’em.”)

Buy The Devil’s Dictionary

These ten edited entries are just a taster of the fun and wisdom on offer in The Devil’s Financial Dictionary.

I could go on, but unfortunately that would be plagiarism rather than a sincere attempt to highlight that this book is one for you.

In fact, buy two copies so you have a spare one for that special investor in your life’s Christmas stocking!

The Devil’s Financial Dictionary is available on Kindle as well as in a sexy red hardback from Amazon.