It was a particularly hot summer weekend day in St. Louis, too hot to be outside. So I decided to use the time going through the collection of articles I keep for future use. I save these articles, to be resurrected at a later date, in an effort to hold forecasting pundits and active managers…
Smart investors begin their journey by developing an investment plan, or investment policy statement, that includes an asset allocation table. After the plan has been prepared, the next step is to select proper investment vehicles for providing the appropriate exposure to the desired asset classes. A common error among investors who follow a “passive” investment…
For the decade from 2004-2013, the momentum premium—as measured by the Fama-French momentum factor—experienced a negative compound return of -1.2 percent per year. (This number was calculated using the monthly momentum premium figures from the Fama-French data series. Note that returns on factors are generally expressed as annual averages, not annualized returns, and during this decade…
Earlier this week, we took a look at some of the historical evidence on the persistence of the Fama-French momentum factor. Today we’ll examine the momentum premium’s out-of-sample record, as well as its uses in portfolio diversification. The authors of the 2013 study, “212 Years of Price Momentum,” concluded that the most recent decade-long underperformance…
My column from July 14 on the persistence of the small-value premium resulted in some interesting discussions on the subject. I thought it would be informative to share one of them. One reader pointed out that in the past 20 years, midcap value stocks had outperformed small-value stocks. For the period from July 1994 to June 2014,…
The evidence is overwhelming that most actively managed funds underperform their appropriate benchmarks, especially after taxes. However, not all actively managed funds underperform, just a large majority of them. Those who believe in active management as the winning strategy believe they can identify the small minority of actively managed funds that will outperform. The only-somewhat logical way…
The first half of this year again brought hedge funds little relief from their historically poor performance. Hedge funds began 2014 coming off their fifth-straight year of trailing U.S. stocks by some significant margins. And based on data through June 30, it doesn’t look like this year is shaping up to be much better. The latest data…
The metric most commonly used to categorize value stocks and to construct portfolios is the one employed by the Fama-French three-factor model—book-to-market (BtM) ratio. Russell Indexes only uses BtM to determine value as well. However, other metrics also show a value premium. Today we’ll take a look at the historical evidence on the premiums provided…
“For some months now, Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company, has been railing about the efficient market hypothesis.” So began a June 6, 2009, New York Times article by Joe Nocera. He went on to note: “While Grantham was an early advocate of index funds for unsophisticated investors…
Vanguard Group founder John Bogle created the first index funds available to individual investors in 1976, and ever since then he’s been a tireless champion of their use. Given that passive ETFs can provide advantages—such as lower costs and greater tax efficiency—over index mutual funds, you might think that Bogle would be a big proponent…
It’s been well documented that small value stocks have provided some of the highest returns to investor portfolios over time. The following table provides annualized returns for various equity classes over the 87-year period from January 1927 to December 2013. The data is based on theFama-French data series and excludes utilities. Equity Class Annualized Return 1927-2013…
The low-interest-rate environment we’ve been experiencing for six years now has led to the increased popularity of high-dividend investment strategies. But the popularity of a strategy, however, can sow the seeds of poor future returns. This occurs because cash flows impact valuations, and valuations are the best predictor of future returns. Given the growing popularity…
Two of the most studied capital market phenomena are the value effect, where value stocks outperform growth stocks; and the momentum effect, where recent relative performance predicts near-term returns. Clifford Asness, Tobias Moskowitz and Lasse Pedersen add to the body of literature on this topic with their paper, “Value and Momentum Everywhere.” The study, which…
I recently read “The Hour Between Dog and Wolf” by John Coates, and it’s one of the best books on human behavior and finance I’ve ever come across. It could literally help investors get protection from their greatest enemies: themselves. By way of background, Coates is a senior research fellow in neuroscience and finance at the…
The Wall Street Journal reported that, as of June 10, speculators (emphasis mine) held a near-record bet worth $35.7 billion that oil prices would rise on the New York Mercantile Exchange. In the debate about whether investors should consider including a portfolio allocation to commodities, one of the main arguments against doing so has been the huge amount of…