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Weekend reading: Fire in the hole

Good reads from around the Web.

Last weekend we saw [1] a graph illustrating how widely the returns from key Smart Beta investing styles [2] varied in 2016.

I argued this potential for rubbish short-to-medium term returns meant factor investing was “not easy”. Coincidentally I came across some more evidence this week in an excellent study from Research Affiliates.

The paper [3] takes the perspective of a portfolio manager, and shows how too-short time horizons can see those pursuing these likely winning strategies getting prematurely fired.

The reason is they go through periods where they don’t deliver. When an investor (or a pension committee or whatnot) sees this underperformance, they may ditch the manager.

The following graph sums it up. Notice how the strategy with the greatest record of adding returns (the Y-axis) also comes with the greatest chance of getting the boot!

In short: Traditional asset allocation makes for a safer career.

Source: Research Affiliates [3]

See the full paper [3] for all the details.

Don’t fire, but instead forget for a while

Some people pushed back at the notion that being, say, a value investor wasn’t easy. The returns-enhancing evidence is there, the volatility is known, so just get on with it.

We all like to believe we’re exceptional. But the fact is many years of underperformance will probably bring with it doubt and the gnashing of teeth. And often capitulation.

The paper suggests institutions counter this by reviewing their managers over longer time horizons. The greater the time period, the lower the chance of the weak returns that may prompt unwarranted sackings.

If we armchair investors want to pursue factor investing (and remember many experts such as Jack Bogle and Lars Kroijer [4] say don’t bother) then we’ll have to figure out the best way to handle these challenges for ourselves.

Have a good weekend!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: The Telegraph [23] reports the interest rate paid by the current top easy access savings account has soared to… 1.1%. I know, control yourselves. The Freedom Account [24] is available from RCI Bank, a division of Renault. Note that your savings are guaranteed by the French compensation scheme, the FGDR, not the UK version. The FGDR protects up to the equivalent of €100,000.

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 [25]

Passive investing

Active investing

A word from a broker

Other stuff worth reading

Book of the week: Being an investing drama junkie, I’m looking forward to Black Edge [48]. It tells of the FBI and SEC’s seven-year stab at trying to prove hedge fund manager Steve Cohen was trading on insider information. The book covers Cohen’s ascent from up-and-coming broker to hedge fund titan, and the aftermath of the investigation. Amazon is taking orders for the Kindle version [48] for digital dispatch on February 7th. The promo reads like a real-life Billions [49]!

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  1. 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”. [ [52]]
  2. Note the player button is subtly hidden in the top left of the page. [ [53]]