Small Cap Value heads Rejoice !!!

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MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

RovenSkyfall wrote: Tue May 04, 2021 11:21 am
MotoTrojan wrote: Tue May 04, 2021 10:22 am Adding momentum helps, but overall volatility and drawdown for most of their portfolios is still higher than S&P500.

Wes Gray uses his 4 ETFs at 150% leverage but with a -50% short on global beta (so net 100%), plus adds trend-following; that is a pretty interesting approach I think. Not sure I would want the trend, but the 150/-50 alone would be interesting.
Whats the point of the -50% short?

Can you link the post where people are doing a 2x or 3x version? Want to make sure they have seen those probability curves. 2x or 3x SCV is even riskier than HFEA which fits somewhere around 1.6 based on beta and those probability curves.
To maintain a net 100% equity (beta) exposure. The -50% short is on global beta (think they use S&P500 and EAFE indices for the short) so for that additional 50% in the AlphaA ETFs w/ the 50% short they are only gaining exposure to the difference between that portfolio, and the global stock market. So the market could go down, but if the ETFs do better than the market plus interest, that is still a gain.

They do the same thing with the trend following approach; VMOT ETF for example is always invested in QVAL/IVAL/QMOM/IMOM (at risk-parity weights) and then hedges using the S&P500/EAFE (believe those are the indices but same idea) shorts at 25% or 50% each (4 levels of hedging) when called for. This way even when it is fully-hedged (no market beta exposure) you still will have exposure to the value and momentum factors 100% of the time, just sometimes in a L/S format.

I don't recall the thread but there is a thread of everyone's portfolio which you can skim and you'll see a good bit of leverage.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

thenextguy wrote: Tue May 04, 2021 11:28 am Value is actually holding up fairly well today.
Indeed. Def a value over momentum type of day. Those brave QMOM/IMOM holders are getting crushed. QVAL is in the green.
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RovenSkyfall
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

MotoTrojan wrote: Tue May 04, 2021 12:47 pm
To maintain a net 100% equity (beta) exposure. The -50% short is on global beta (think they use S&P500 and EAFE indices for the short) so for that additional 50% in the AlphaA ETFs w/ the 50% short they are only gaining exposure to the difference between that portfolio, and the global stock market. So the market could go down, but if the ETFs do better than the market plus interest, that is still a gain.
Oh I see, so trying to gain just the premium (but not accounting for fees and friction). That seems like it would have done poorly recently given SCVs underperformance and SP500 great performance...

It has been shown here that SCVs overperformance is usually limited to short-term large gains. A long term short position of the market doesnt make that much sense to me, but maybe I dont fully understand it.
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Re: Small Cap Value heads Rejoice !!!

Post by cos »

MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Got any links to particularly interesting threads?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

cos wrote: Tue May 04, 2021 3:51 pm
MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Got any links to particularly interesting threads?
This is a great thread.

https://community.rationalreminder.ca/t ... d-why/6264
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

RovenSkyfall wrote: Tue May 04, 2021 3:03 pm
MotoTrojan wrote: Tue May 04, 2021 12:47 pm
To maintain a net 100% equity (beta) exposure. The -50% short is on global beta (think they use S&P500 and EAFE indices for the short) so for that additional 50% in the AlphaA ETFs w/ the 50% short they are only gaining exposure to the difference between that portfolio, and the global stock market. So the market could go down, but if the ETFs do better than the market plus interest, that is still a gain.
Oh I see, so trying to gain just the premium (but not accounting for fees and friction). That seems like it would have done poorly recently given SCVs underperformance and SP500 great performance...

It has been shown here that SCVs overperformance is usually limited to short-term large gains. A long term short position of the market doesnt make that much sense to me, but maybe I dont fully understand it.
It doesn't matter how infrequent the outperformance of SCV is, the only thing that matters is the long-term CAGR. If SCV beats the market by 2% CAGR and you can short for 1% (made up number) then that is a 1% CAGR premium, whether the 2% SCV outperformance happens smoothly day-after-day or all in one final surge.

Also the allocation is closer to 60/40 value/momentum so not as bad of a performance drag as just doing this with SCV.
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Re: Small Cap Value heads Rejoice !!!

Post by willthrill81 »

MotoTrojan wrote: Tue May 04, 2021 5:22 pm
RovenSkyfall wrote: Tue May 04, 2021 3:03 pm
MotoTrojan wrote: Tue May 04, 2021 12:47 pm
To maintain a net 100% equity (beta) exposure. The -50% short is on global beta (think they use S&P500 and EAFE indices for the short) so for that additional 50% in the AlphaA ETFs w/ the 50% short they are only gaining exposure to the difference between that portfolio, and the global stock market. So the market could go down, but if the ETFs do better than the market plus interest, that is still a gain.
Oh I see, so trying to gain just the premium (but not accounting for fees and friction). That seems like it would have done poorly recently given SCVs underperformance and SP500 great performance...

It has been shown here that SCVs overperformance is usually limited to short-term large gains. A long term short position of the market doesnt make that much sense to me, but maybe I dont fully understand it.
It doesn't matter how infrequent the outperformance of SCV is, the only thing that matters is the long-term CAGR. If SCV beats the market by 2% CAGR and you can short for 1% (made up number) then that is a 1% CAGR premium, whether the 2% SCV outperformance happens smoothly day-after-day or all in one final surge.
It's not just CAGR though. The variability of the outperformance does have a real impact on investors. All else being equal, the more reliable a premium is, the more valuable it is.

But in this case, SCV has actually had significantly less variability than TSM. As discussed in this thread, the start date sensitivity (i.e., how consistent the 10 year average returns have been) of SCV since 1970 was 19.3 but was 33.1 for TSM. And this is quite logical because SCV is exposed to three factors (i.e., size, value, and market beta) whereas TSM is only exposed to one (i.e., market beta). This is also reflected in the safe withdrawal rates of portfolios using these assets. Since 1970, the 30 year SWR for a 60/40 portfolio with only U.S. TSM was 4.5%, whereas substituting U.S. TSM for SCV would have resulted in a 30 year SWR of 6.2%. That's more than a 30% increase in stable spending ability in the worst 30 year period since 1970, not a trivial difference.

A significant problem is that many believe that diversification is measured in terms of the number of stocks, bonds, etc. that an investor is exposed to, but the data are very clear that that perspective is false. You can achieve greater diversification with factor exposure, and yes, that means not owning the entire market. Sorry Jack, you were a great man who did great things for a great number of people, but you were just plain wrong about this.
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MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

willthrill81 wrote: Tue May 04, 2021 5:48 pm
MotoTrojan wrote: Tue May 04, 2021 5:22 pm
RovenSkyfall wrote: Tue May 04, 2021 3:03 pm
MotoTrojan wrote: Tue May 04, 2021 12:47 pm
To maintain a net 100% equity (beta) exposure. The -50% short is on global beta (think they use S&P500 and EAFE indices for the short) so for that additional 50% in the AlphaA ETFs w/ the 50% short they are only gaining exposure to the difference between that portfolio, and the global stock market. So the market could go down, but if the ETFs do better than the market plus interest, that is still a gain.
Oh I see, so trying to gain just the premium (but not accounting for fees and friction). That seems like it would have done poorly recently given SCVs underperformance and SP500 great performance...

It has been shown here that SCVs overperformance is usually limited to short-term large gains. A long term short position of the market doesnt make that much sense to me, but maybe I dont fully understand it.
It doesn't matter how infrequent the outperformance of SCV is, the only thing that matters is the long-term CAGR. If SCV beats the market by 2% CAGR and you can short for 1% (made up number) then that is a 1% CAGR premium, whether the 2% SCV outperformance happens smoothly day-after-day or all in one final surge.
It's not just CAGR though. The variability of the outperformance does have a real impact on investors. All else being equal, the more reliable a premium is, the more valuable it is.

But in this case, SCV has actually had significantly less variability than TSM. As discussed in this thread, the start date sensitivity (i.e., how consistent the 10 year average returns have been) of SCV since 1970 was 19.3 but was 33.1 for TSM. And this is quite logical because SCV is exposed to three factors (i.e., size, value, and market beta) whereas TSM is only exposed to one (i.e., market beta). This is also reflected in the safe withdrawal rates of portfolios using these assets. Since 1970, the 30 year SWR for a 60/40 portfolio with only U.S. TSM was 4.5%, whereas substituting U.S. TSM for SCV would have resulted in a 30 year SWR of 6.2%. That's more than a 30% increase in stable spending ability in the worst 30 year period since 1970, not a trivial difference.

A significant problem is that many believe that diversification is measured in terms of the number of stocks, bonds, etc. that an investor is exposed to, but the data are very clear that that perspective is false. You can achieve greater diversification with factor exposure, and yes, that means not owning the entire market. Sorry Jack, you were a great man who did great things for a great number of people, but you were just plain wrong about this.
I agree with all points, and behaviorally the variability of outperformance does matter, but in terms of raw ability to capture the premium in this case with a long/short, I was just making it clear that it didn't matter, as long as your CAGR of the premium is better than your borrowing cost.
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Re: Small Cap Value heads Rejoice !!!

Post by cos »

MotoTrojan wrote: Tue May 04, 2021 5:21 pm
cos wrote: Tue May 04, 2021 3:51 pm
MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Got any links to particularly interesting threads?
This is a great thread.

https://community.rationalreminder.ca/t ... d-why/6264
I finally finished reading through most of it! I'm now even further convinced that I need to find a way to incorporate internationally diversified small-cap value and momentum into my portfolio as soon as possible. I'm currently at 60/40 UPRO/TMF, and my IPS demands that I remain there until next year. I'm thinking I might switch to something like the following in January:

30% UPRO
20% TMF
10% AVUV
10% AVDV
10% AVEM
10% QMOM
10% IMOM
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

This was mentioned by Chris Pedersen yesterday, it shows expected returns for US momentum are currently below the market: https://interactive.researchaffiliates. ... tum-factor

Perhaps now is not a great time to get in? (I know that's market timing but perhaps it makes some sense regardless)
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Re: Small Cap Value heads Rejoice !!!

Post by cos »

YRT70 wrote: Wed May 05, 2021 3:59 am This was mentioned by Chris Pedersen yesterday, it shows expected returns for US momentum are currently below the market: https://interactive.researchaffiliates. ... tum-factor

Perhaps now is not a great time to get in? (I know that's market timing but perhaps it makes some sense regardless)
Factor timing is hard.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

cos wrote: Wed May 05, 2021 4:09 am
YRT70 wrote: Wed May 05, 2021 3:59 am This was mentioned by Chris Pedersen yesterday, it shows expected returns for US momentum are currently below the market: https://interactive.researchaffiliates. ... tum-factor

Perhaps now is not a great time to get in? (I know that's market timing but perhaps it makes some sense regardless)
Factor timing is hard.
I believe it is, but maybe it's time to: Sin a Little?
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RovenSkyfall
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

MotoTrojan wrote: Tue May 04, 2021 5:22 pm
RovenSkyfall wrote: Tue May 04, 2021 3:03 pm
MotoTrojan wrote: Tue May 04, 2021 12:47 pm
To maintain a net 100% equity (beta) exposure. The -50% short is on global beta (think they use S&P500 and EAFE indices for the short) so for that additional 50% in the AlphaA ETFs w/ the 50% short they are only gaining exposure to the difference between that portfolio, and the global stock market. So the market could go down, but if the ETFs do better than the market plus interest, that is still a gain.
Oh I see, so trying to gain just the premium (but not accounting for fees and friction). That seems like it would have done poorly recently given SCVs underperformance and SP500 great performance...

It has been shown here that SCVs overperformance is usually limited to short-term large gains. A long term short position of the market doesnt make that much sense to me, but maybe I dont fully understand it.
It doesn't matter how infrequent the outperformance of SCV is, the only thing that matters is the long-term CAGR. If SCV beats the market by 2% CAGR and you can short for 1% (made up number) then that is a 1% CAGR premium, whether the 2% SCV outperformance happens smoothly day-after-day or all in one final surge.

Also the allocation is closer to 60/40 value/momentum so not as bad of a performance drag as just doing this with SCV.
Most of the really smart people I trust (many who are no longer here) who have talked about the premium typically cut the academic premium in half for the expected future return.

The FF academic literature is long/short so maybe that is what they are trying to do, but from my understanding FF doesnt include transaction fees and friction costs.

Additionally, the academic literature uses the arithmetic mean. The arithmetic mean does not suffer as much as the geometric mean (CAGR) from long periods of underperformance. This means that one cannot take a 2% arithmetic mean premium and just subtract a 1% CAGR (geometic mean) loss from transaction fees. That 1% CAGR geometric mean loss is not equivalent to a 1% arithmetic mean premium (and is actually larger). I am happy to be corrected on this if I am misunderstanding.

All of this is also assuming that these investors have a CRRA of 1 and log utility if they are only focused on CAGR, which doesnt actually apply to most investors.

Regarding the SWR being better for SCV: I agree with you on what I have seen from Portfolio Charts. Although I would like this to be true, as I have a large % of SCV, I do question the validity of this. What would be interesting is to determine if that increased SWR is due to the difference between arithmetic means and geometric means. For example, MC and bootstrapping use unrelated periods of time (more of arithmetic mean) rather than geometric mean to determine SWR. Although the arithmetic means are used as the standard in most academic literature, we all know that is not how the future actually unfolds.
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Re: Small Cap Value heads Rejoice !!!

Post by Massdriver »

james22 wrote: Mon May 03, 2021 10:40 am We expect value to outperform growth over the next ten years by five to seven percentage points, annualized, and perhaps by an even wider margin over the next five years.

https://investornews.vanguard/why-u-s-v ... rm-growth/
Vanguard expects inflation to normalize and eventually exceed the Federal Reserve’s 2% target this year and next. Corporate profits should strengthen amid economic recovery from the pandemic. Still, their impact on the “fair value of value” may be modest. The ultimate driver of the coming rotation to value stocks, then, is apt to be a change in investors’ appetite for risk.
So the rotation will mostly be driven by risk appetite rather than a modest change in the fundamentals. That doesn't seem far fetched. Let's hope and see.
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Re: Small Cap Value heads Rejoice !!!

Post by XacTactX »

Hey folks, long time no see! I just found at interesting article and I thought some of you might like it. I'm not sure how useful it is since there are no index funds that follow the strategy, but it's good food for thought.

MSCI: The Theory of (Value) Relativity

Determining how cheap or expensive a stock is often involves using fundamental ratios such as book to price (B/P) and earnings to price (E/P). These ratios provide useful information, but judging a stock’s valuation requires context. This is often achieved by comparing a stock’s valuation ratios to those of its peers within a specified universe (cross-sectional) or to its own history (time-series).

The selection of the peer universe is important, and the cross-sectional comparison can be a simple ranking or some sort of standardization, such as z-scoring (measuring data points in relation to the mean).1 To eliminate some of the inherent differences between companies’ stocks and across sectors or geography, the standardization is often done within such groupings. For instance, as we discussed in “Bringing Value to the 21st Century,” sectors where companies invest heavily in research and development (R&D) may be deemed expensive, unfairly, because R&D is not considered an intangible asset when calculating B/P.

A time-series approach, on the other hand, is less vulnerable to such differences: They can, to some extent, be mitigated when a stock is compared to its own history.

Broken down by decade, we see that performance from 2011 to 2020 — value’s “lost decade” — was lower than in 2001 to 2010 for both approaches (see the exhibit below). Performance for the time-series approach, however, was more consistent across the two decades. This lower volatility enhanced its risk-adjusted returns.
SMLF | ISCF | EMGF | LendingClub | Cash
caklim00
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

cos wrote: Wed May 05, 2021 3:53 am
MotoTrojan wrote: Tue May 04, 2021 5:21 pm
cos wrote: Tue May 04, 2021 3:51 pm
MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Got any links to particularly interesting threads?
This is a great thread.

https://community.rationalreminder.ca/t ... d-why/6264
I finally finished reading through most of it! I'm now even further convinced that I need to find a way to incorporate internationally diversified small-cap value and momentum into my portfolio as soon as possible. I'm currently at 60/40 UPRO/TMF, and my IPS demands that I remain there until next year. I'm thinking I might switch to something like the following in January:

30% UPRO
20% TMF
10% AVUV
10% AVDV
10% AVEM
10% QMOM
10% IMOM
Interesting. Seems like a lot of people considering a targeted value and targeted momentum strategy now instead of multifactor. I'll admit thinking through the differences makes my head hurt. Given the size of my 401k/403b a portfolio that only focuses on value and momentum is not an option for me. There is neither option available. Only large vs small. Adding momentum in the mix would dilute my value exposure.
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Wed May 05, 2021 3:59 am This was mentioned by Chris Pedersen yesterday, it shows expected returns for US momentum are currently below the market: https://interactive.researchaffiliates. ... tum-factor

Perhaps now is not a great time to get in? (I know that's market timing but perhaps it makes some sense regardless)
I would be interested in how you can project returns for a strategy with 100%++ turnover. They expect value to outperform, what happens when that becomes momentum?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

cos wrote: Wed May 05, 2021 3:53 am
MotoTrojan wrote: Tue May 04, 2021 5:21 pm
cos wrote: Tue May 04, 2021 3:51 pm
MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Got any links to particularly interesting threads?
This is a great thread.

https://community.rationalreminder.ca/t ... d-why/6264
I finally finished reading through most of it! I'm now even further convinced that I need to find a way to incorporate internationally diversified small-cap value and momentum into my portfolio as soon as possible. I'm currently at 60/40 UPRO/TMF, and my IPS demands that I remain there until next year. I'm thinking I might switch to something like the following in January:

30% UPRO
20% TMF
10% AVUV
10% AVDV
10% AVEM
10% QMOM
10% IMOM
I personally wouldn't use the 3x ETFs but could be worse. EMGF may be of interest to you rather than AVEM, it is EM multi-factor so should target a bit of value and momentum there, giving you global coverage.

I am liking the following myself:
20% QVAL
20% AVUV
20% VFMO
20% IVAL
20% IMTM

Those Alpha Architect momentum products are great if you have the conviction but man is the volatility intense. Look at QMOM this year (or this week)...
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

An interesting article addressing the question of whether to concentrate or diversify for factors.

https://alphaarchitect.com/2021/04/16/h ... -outcomes/

There was also a nice follow up post on the RR Forum on something similar to what I was saying before re:leverage.

https://community.rationalreminder.ca/t ... venskyfall
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Re: Small Cap Value heads Rejoice !!!

Post by cos »

MotoTrojan wrote: Thu May 06, 2021 9:43 pm I personally wouldn't use the 3x ETFs but could be worse. EMGF may be of interest to you rather than AVEM, it is EM multi-factor so should target a bit of value and momentum there, giving you global coverage.

I am liking the following myself:
20% QVAL
20% AVUV
20% VFMO
20% IVAL
20% IMTM

Those Alpha Architect momentum products are great if you have the conviction but man is the volatility intense. Look at QMOM this year (or this week)...
Mmm, EMGF looks quite nice! It definitely looks a lot better than the other multifactor funds that iShares offers. And unfortunately, my accounts are still too small for more efficient forms of leverage. On that note, for reasons I've discussed elsewhere, I've actually started considering the following instead:

TAXABLE (1.1x MARGIN LEVERAGE):
60% UPRO
40% TMF

TAX-ADVANTAGED:
50% UMDD
10% AVUV
10% AVDV
10% AVEM
10% QMOM
10% IMOM

I thought this looked pretty clean, but the way you achieve 60/40 US/international and 60/40 value/momentum is looking even cleaner! My only concern is that you seem a little underweight on US momentum, a little overweight on international momentum, and lacking entirely in emerging markets exposure. How do you justify these conditions? Or are they simply unimportant to you? Also, why not AVDV instead of IVAL?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

cos wrote: Fri May 07, 2021 7:46 pm
My only concern is that you seem a little underweight on US momentum, a little overweight on international momentum,
While the funds are 33% momentum tilt in US and 50% ex-US, VFMO gets a good bit more momentum exposure than IMTM so I don't think this is far off. Furthermore I personally believe IVAL is a stronger tilt than US sides QVAL/AVUV split.

cos wrote: Fri May 07, 2021 7:46 pm
and lacking entirely in emerging markets exposure. How do you justify these conditions?
This is a tougher one but here is my internal thoughts: I don't have a strong reason to overweight EM relative to my overall international, so that would put me at about 10% EM, which just doesn't quite seem like enough to move the needle. Between my 100% factor tilted portfolio and use of concentrated funds, I am already giving up on holding every stock, and in some cases tilting strongly into regions (IVAL has been 45-55% Japan lately), so I prefer to look more so at my overall diversification which I feel is sufficient, even if it has no EM. So for now I take simplicity and good-enough.

This IMTM holding is currently 50/50 IMTM/VTIAX due to 401k constraints, and I have considered moving whatever excess non-momentum ex-US spills into my 401k in EM for some diversification, but again just chose to keep it simple and hold it's closest neighbor, VTIAX.
cos wrote: Fri May 07, 2021 7:46 pm
Also, why not AVDV instead of IVAL?
I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B, and I am onboard with the concentrated value approach, along with their emphasis on quality companies, and believe it will outperform the Avantis/DFA SCV offerings in the long-term (just as it's net 2% costs index has).

I split the 40% value portion into QVAL/AVUV to provide some additional diversification and small-cap exposure though, while also allowing the allocation to better fit into my 401k constraints (currently the entire 20% AVUV stake is actually in VSIAX, allowing QVAL/IVAL to remain fully-invested); I favor getting my value allocations (outside of AVUV vs. VSIAX) fully invested prior to momentum, as I have most conviction in value.
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Re: Small Cap Value heads Rejoice !!!

Post by Anon9001 »

I found these two images to be very interesting. If you are owning a factor fund which owns 950 stocks only 54% of the fund is different from market. Thanks RovenSkyfall for the article. Considering this low active share of diversified factor funds concentrated factor funds are probably better to invest in if one can handle high tracking error. Except Low Beta factor which seems according to Alpha Architect to benefit by having more stocks.
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Re: Small Cap Value heads Rejoice !!!

Post by Jebediah »

MotoTrojan wrote: Sat May 08, 2021 1:22 pm
I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B, and I am onboard with the concentrated value approach, along with their emphasis on quality companies, and believe it will outperform the Avantis/DFA SCV offerings in the long-term (just as it's net 2% costs index has).
Also like AA in theory but something is off with their implementation. A 50/50 QVAL/QMOM port has -5.92 alpha since inception.
muffins14
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Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

I’m not an expert at all, but couldn’t that negative alpha just be from omitted variables in the regression rather than poor implementation?

For example we know value has done poorly in the past 10 years, and if the value metrics used by AA dont perfectly correspond to the value feature from Fama and French, couldn’t that show up as negative alpha, since the poor returns can’t project perfectly onto the FF value dimension and have to go somewhere else in the regression?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Jebediah wrote: Sat May 08, 2021 4:43 pm
MotoTrojan wrote: Sat May 08, 2021 1:22 pm
I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B, and I am onboard with the concentrated value approach, along with their emphasis on quality companies, and believe it will outperform the Avantis/DFA SCV offerings in the long-term (just as it's net 2% costs index has).
Also like AA in theory but something is off with their implementation. A 50/50 QVAL/QMOM port has -5.92 alpha since inception.
The long-run alpha for the net index (2% CAGR removed for trading/expenses, conservative) is slightly positive, also depends on what factors you regress on (Fama French HmL isn't going to capture it well). I have seen several factor funds with short lives that have 2-3% negative alpha, it isn't uncommon for more diverse funds and isn't surprising at all for a 50-stock concentrated approach. I personally give more weight to the characteristics rather than the regressions.

With a 50 stock portfolio sometimes you'll have wildly positive and wildly negative alphas, that is the tracking error risk.

https://alphaarchitect.com/2017/10/31/f ... t-factors/
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

muffins14 wrote: Sat May 08, 2021 5:09 pm I’m not an expert at all, but couldn’t that negative alpha just be from omitted variables in the regression rather than poor implementation?

For example we know value has done poorly in the past 10 years, and if the value metrics used by AA dont perfectly correspond to the value feature from Fama and French, couldn’t that show up as negative alpha, since the poor returns can’t project perfectly onto the FF value dimension and have to go somewhere else in the regression?
Since fund inception the alpha has been strongly negative even when using the Alpha Architect factors, but that comes with the territory of concentration. Whenever AA HML (EBIT/EV) outperforms again I would wager the alpha will be positive for a concentrated approach. Looking at the raw data on a Fama French 6-factor (5 + MOM) I am showing QVAL Net Index Jan 1992 thru Jan 2021 w/ 1.13% alpha but the 36 month rolling alpha varies from +9% to -8.7%, with most of the negative years clustered around the last 5-6 years (when the fund came out).

Using AA's 5-factor for the same period was 0.41% alpha and 36-month rolling varied from 7.25% to -7%, so even with their preferred factors it is a wild ride in regression-land.
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Re: Small Cap Value heads Rejoice !!!

Post by bluerafters »

cos wrote: Fri May 07, 2021 7:46 pm
MotoTrojan wrote: Thu May 06, 2021 9:43 pm I personally wouldn't use the 3x ETFs but could be worse. EMGF may be of interest to you rather than AVEM, it is EM multi-factor so should target a bit of value and momentum there, giving you global coverage.

I am liking the following myself:
20% QVAL
20% AVUV
20% VFMO
20% IVAL
20% IMTM

Those Alpha Architect momentum products are great if you have the conviction but man is the volatility intense. Look at QMOM this year (or this week)...
Mmm, EMGF looks quite nice! It definitely looks a lot better than the other multifactor funds that iShares offers. And unfortunately, my accounts are still too small for more efficient forms of leverage. On that note, for reasons I've discussed elsewhere, I've actually started considering the following instead:

TAXABLE (1.1x MARGIN LEVERAGE):
60% UPRO
40% TMF

TAX-ADVANTAGED:
50% UMDD
10% AVUV
10% AVDV
10% AVEM
10% QMOM
10% IMOM

I thought this looked pretty clean, but the way you achieve 60/40 US/international and 60/40 value/momentum is looking even cleaner! My only concern is that you seem a little underweight on US momentum, a little overweight on international momentum, and lacking entirely in emerging markets exposure. How do you justify these conditions? Or are they simply unimportant to you? Also, why not AVDV instead of IVAL?
As posted elsewhere I settled on VTI/VIOV/VEA/VWO.

OT: I have such a burning desire to implement the UPRO/TQQQ variant. I've always wanted to try it and just leave it alone for 5 years.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Sat May 08, 2021 1:22 pm I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B
Correct me if I'm wrong but Avantis uses a blend of several metrics right? P/B is just one of them I thought.
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

YRT70 wrote: Sun May 09, 2021 7:14 am
MotoTrojan wrote: Sat May 08, 2021 1:22 pm I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B
Correct me if I'm wrong but Avantis uses a blend of several metrics right? P/B is just one of them I thought.
Avantis makes adjustments to P/B such as removing goodwill. THEN they filter by profitability such as P/CF and P/E. AA sort of combines value and profitability into an algorithm instead of a waterfall of filters. The AA approach is EBIT/TEV.

I prefer the Avantis approach for value. But I use AA for momentum
40% AVUV Advantis US Small Value | 7.5% VTI Vanguard Total Market | 23% AVDV Advantis Intl Small Value | 12% AVEM Advantis Emerging Markets | 7.5% VXUS Vanguard Global Ex-US | 5% QMOM AA quant Momentum | 5% Cash
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

FiveFactor wrote: Sun May 09, 2021 7:42 am
YRT70 wrote: Sun May 09, 2021 7:14 am
MotoTrojan wrote: Sat May 08, 2021 1:22 pm I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B
Correct me if I'm wrong but Avantis uses a blend of several metrics right? P/B is just one of them I thought.
Avantis makes adjustments to P/B such as removing goodwill. THEN they filter by profitability such as P/CF and P/E. AA sort of combines value and profitability into an algorithm instead of a waterfall of filters. The AA approach is EBIT/TEV.

I prefer the Avantis approach for value. But I use AA for momentum
Interesting. Thanks. You like AA momentum but only 5%... or are you thinking of getting more?

My portfolio is very similar a yours and I'm considering adding momentum soon (could be AA or VFMO).
FiveFactor
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

To the comments about some in the RR community using leverage…. If you have both a mortgage and an investment account, you too are using leverage
40% AVUV Advantis US Small Value | 7.5% VTI Vanguard Total Market | 23% AVDV Advantis Intl Small Value | 12% AVEM Advantis Emerging Markets | 7.5% VXUS Vanguard Global Ex-US | 5% QMOM AA quant Momentum | 5% Cash
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

YRT70 wrote: Sun May 09, 2021 7:49 am
FiveFactor wrote: Sun May 09, 2021 7:42 am
YRT70 wrote: Sun May 09, 2021 7:14 am
MotoTrojan wrote: Sat May 08, 2021 1:22 pm I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B
Correct me if I'm wrong but Avantis uses a blend of several metrics right? P/B is just one of them I thought.
Avantis makes adjustments to P/B such as removing goodwill. THEN they filter by profitability such as P/CF and P/E. AA sort of combines value and profitability into an algorithm instead of a waterfall of filters. The AA approach is EBIT/TEV.

I prefer the Avantis approach for value. But I use AA for momentum
Interesting. Thanks. You like AA momentum but only 5%... or are you thinking of getting more?

My portfolio is very similar a yours and I'm considering adding momentum soon (could be AA or VFMO).

I’m slowly moving to 10%. Then I am adding long term bonds. I think, and hope, I’ll never have to make another buy of small cap value again. It should be big enough to hit escape velocity

EDIT: VFMO is very solid. But you need more of it than you do QMOM for the same exposure. No bad choice here. I wanted more punch in a smaller package.
40% AVUV Advantis US Small Value | 7.5% VTI Vanguard Total Market | 23% AVDV Advantis Intl Small Value | 12% AVEM Advantis Emerging Markets | 7.5% VXUS Vanguard Global Ex-US | 5% QMOM AA quant Momentum | 5% Cash
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

FiveFactor wrote: Sun May 09, 2021 7:42 am
YRT70 wrote: Sun May 09, 2021 7:14 am
MotoTrojan wrote: Sat May 08, 2021 1:22 pm I actively chose Alpha Architect over Avantis as I strongly believe in their use of an earnings based multiple (EV/EBIT) rather than P/B
Correct me if I'm wrong but Avantis uses a blend of several metrics right? P/B is just one of them I thought.
Avantis makes adjustments to P/B such as removing goodwill. THEN they filter by profitability such as P/CF and P/E. AA sort of combines value and profitability into an algorithm instead of a waterfall of filters. The AA approach is EBIT/TEV.

I prefer the Avantis approach for value. But I use AA for momentum
I am not sure why you say AA combines value and profitability into an algorithm, unless you are simply stating that EBIT/EV tends to load well on quality too. Frankly I would say Avantis is more of a combined algorithm while AA is separate.

Avantis uses both P/B (value) and gross profitability to determine what to include and at what weight (they are not market-cap weighted, a big benefit over indexed products); it is a combined value+profitability approach.

AA uses some negative screens (bottom 10% in momentum, top 5% in P/E or P/CF, lowest 15% in liquidity, no financials, high beta, account red flags). Once that is complete they take the cheapest 100 stocks on EV/EBIT, with no additional algorithm, just a straight cut to the cheapest 100 stocks. Lastly they use their Financial Strength score to cut that in half to the top remaining 50 in quality.

https://alphaarchitect.com/2014/10/07/t ... hilosophy/

I prefer an earnings-based value metric over P/B (just more intuitive to me) but even beyond that I personally prefer the 2-step approach of AA cutting on value and THEN on quality, rather than combining them. Another example would be the famous Magic Formula, which also uses EBIT/EV and profitability but equal weights them into a composite rather than doing value, and then quality.

A few charts to compare them:

Here is EV/EBIT (AA choice metric) on one scale, and P/B (Avantis choice) on the other. As you can see, they both load nicely on their choice, and have a pretty wide dispersion in the opposing one, although AA is much more tightly tilted into it's bound (note that this gets even tighter closer to AA rebalance date, so on average it'll be even better).

Image

Now we will give Avantis a strong advantage by using P/B and gross profitability, the two metrics Avantis is directly targeting. As you can see AA actually seems to concentrate significantly higher on GP overall, and the names with the lowest P/B are the ones with the strongest GP.

Image

In summary, they are both fantastic products, but AA to me seems to be the bolder approach (as you'd expect with 50 stock concentration).
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

“AA uses some negative screens (bottom 10% in momentum, top 5% in P/E or P/CF, lowest 15% in liquidity, no financials, high beta, account red flags). Once that is complete they take the cheapest 100 stocks on EV/EBIT, with no additional algorithm, just a straight cut to the cheapest 100 stocks. Lastly they use their Financial Strength score to cut that in half to the top remaining 50 in quality.”

Exactly my point.
40% AVUV Advantis US Small Value | 7.5% VTI Vanguard Total Market | 23% AVDV Advantis Intl Small Value | 12% AVEM Advantis Emerging Markets | 7.5% VXUS Vanguard Global Ex-US | 5% QMOM AA quant Momentum | 5% Cash
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

EDIT: The previous plots were US based percentiles, here are EAFE, bit different picture more in-line with the US funds:

Image

Image
Last edited by MotoTrojan on Sun May 09, 2021 8:50 am, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

FiveFactor wrote: Sun May 09, 2021 8:43 am “AA uses some negative screens (bottom 10% in momentum, top 5% in P/E or P/CF, lowest 15% in liquidity, no financials, high beta, account red flags). Once that is complete they take the cheapest 100 stocks on EV/EBIT, with no additional algorithm, just a straight cut to the cheapest 100 stocks. Lastly they use their Financial Strength score to cut that in half to the top remaining 50 in quality.”

Exactly my point.
The negative screens are looking to trim a few percent off the universe, that is not the meat and potatoes of the the strategy. Furthermore Avantis also screens on liquidity and momentum so moot point.

The real comparison is AA cutting to 100 cheapest then cutting that in half on quality vs. Avantis using a composite of value & quality.
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

A better way to view AVUV vs QVAL & some others. I’m mobile to took a screenshot

Image

EDIT: Well I cannot figure out why I cannot post a screenshot. Oh well. There are dramatic differences in the QVAL and AVUV portfolio's when you dig into them. Avantis is classical value with profitability screens. AA is using its own definition of value which is really more about profitability than value. The net is:

QVAL is more a mid cap fund with limited classical exposure to value (p/b), and much higher ROA and ROE. Its more a play on profitability than value.

AVUV is much smaller (ave market cap 10x smaller than QVAL), much more valuey on P/B, and has better forecast growth rates. Its a traditional Small Cap Value play instead of a mid cap profitability play.
40% AVUV Advantis US Small Value | 7.5% VTI Vanguard Total Market | 23% AVDV Advantis Intl Small Value | 12% AVEM Advantis Emerging Markets | 7.5% VXUS Vanguard Global Ex-US | 5% QMOM AA quant Momentum | 5% Cash
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Re: Small Cap Value heads Rejoice !!!

Post by gtwhitegold »

I like their methodology, but the AA funds are too concentrated for me. If they held around 200 stocks then I would take them more seriously.
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Re: Small Cap Value heads Rejoice !!!

Post by Wade Garrett »

FiveFactor wrote: Sun May 09, 2021 8:58 am AA is using its own definition of value which is really more about profitability than value. The net is:
QVAL is more a mid cap fund with limited classical exposure to value (p/b), and much higher ROA and ROE. Its more a play on profitability than value.
I've seen Wes Gray refer to it as "cheap quality"
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

Wade Garrett wrote: Sun May 09, 2021 11:43 am
FiveFactor wrote: Sun May 09, 2021 8:58 am AA is using its own definition of value which is really more about profitability than value. The net is:
QVAL is more a mid cap fund with limited classical exposure to value (p/b), and much higher ROA and ROE. Its more a play on profitability than value.
I've seen Wes Gray refer to it as "cheap quality"
That makes sense. It’s what I observed. It’s also why I don’t like it for SV
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Re: Small Cap Value heads Rejoice !!!

Post by FiveFactor »

gtwhitegold wrote: Sun May 09, 2021 11:22 am I like their methodology, but the AA funds are too concentrated for me. If they held around 200 stocks then I would take them more seriously.
The concentration is actually a benefit on the momentum side IMO. Wes also has very clear rationale for the 50 stock selection. But like you I would not have my core portfolio made up of funds with 50 stocks in them.
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Re: Small Cap Value heads Rejoice !!!

Post by gtwhitegold »

FiveFactor wrote: Sun May 09, 2021 12:29 pm
gtwhitegold wrote: Sun May 09, 2021 11:22 am I like their methodology, but the AA funds are too concentrated for me. If they held around 200 stocks then I would take them more seriously.
The concentration is actually a benefit on the momentum side IMO. Wes also has very clear rationale for the 50 stock selection. But like you I would not have my core portfolio made up of funds with 50 stocks in them.
Same here. I also don't want to dabble in anything. If I'm not comfortable putting my whole allocation in a fund, then I don't plan on using it.

My portfolio is nearly as tilted as I want to be due to a large amount of it being in the TSP. Most of the money outside of the TSP and my Wife's 401k has been directed towards liquid alternatives and emerging markets. This sould change once I retire from the Military and will incrementally change over the next few years as we focus on growing our portfolios outside of the TSP.
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

Not necessarily significant but still interesting;
The broad Japanese small cap space is cheaper than the cheapest (& junkiest) partition of the US small cap space. Not normal.

MSCI Japan Small Cap Index:
▪️ Fwd P/E: 15.88
▪️ Div Yld: 1.98%

MSCI US Small Cap *****VALUE***** Index:
▪️ Fwd P/E: 18.26
▪️ Div Yld: 1.82%
@Jesse_Livermore https://twitter.com/jesse_livermore/sta ... 86915?s=21
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Re: Small Cap Value heads Rejoice !!!

Post by Wade Garrett »

Forester wrote: Mon May 10, 2021 12:39 am
The broad Japanese small cap space is cheaper than the cheapest (& junkiest) partition of the US small cap space. Not normal.
MSCI Japan Small Cap Index:
▪️ Fwd P/E: 15.88
▪️ Div Yld: 1.98%
MSCI US Small Cap *****VALUE***** Index:
▪️ Fwd P/E: 18.26
▪️ Div Yld: 1.82%
@Jesse_Livermore https://twitter.com/jesse_livermore/sta ... 86915?s=21
Jesse Livermore was on Jim O'Shaughnessy's podcast Infinite Loops a week or so ago and talked about this
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Re: Small Cap Value heads Rejoice !!!

Post by Anon9001 »

I just finished the Alpha-Architect article posted by RovenSkyfall and they showed diversification ie adding more stocks to a factor fund was only helpful for Low Beta factor due to means of Low Beta stocks being similar even when going from 50 to 950 Low Beta stocks. It is not helpful for Value and Momentum factors due to means of Momentum and Value stocks not being similar when going from 50 to 950 Momentum/Value stocks. A concentrated Value/Momentum factor fund has same chance of out-performing market as a diversified Value/Momentum fund. This means favouring owning concentrated Value/Momentum funds due to higher factor exposure they offer if one is capable of handling higher volatility and higher tracking error relative to market and owning Diversified Low Beta funds due to their chance of beating market going up as number of stocks increases.
Value:
Image

Momentum:
Image

Low Beta:
Image
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Re: Small Cap Value heads Rejoice !!!

Post by XacTactX »

I read that Alpha Architect article a week ago and I really enjoyed it. The data makes intuitive sense to me, since factors have a positive expected return, if you sort companies based on factor exposure and you hold a more concentrated portfolio you will have more exposure to factors and a higher expected return. I just wish the results of the Alpha Architect funds would match closer with this expectation so I could have peace of mind to follow the AA approach with QVAL and QMOM. I see the AA funds underperform more generic funds from Vanguard/iShares/Avantis and I hesitate to invest in them. I guess I have a weak stomach.

Moto, kudos for the thorough analysis that you're doing and posting on this forum. Your comments are really informative and helpful :sharebeer
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Re: Small Cap Value heads Rejoice !!!

Post by Wade Garrett »

XacTactX wrote: Mon May 10, 2021 10:24 am I just wish the results of the Alpha Architect funds would match closer with this expectation so I could have peace of mind to follow the AA approach with QVAL and QMOM. I see the AA funds underperform more generic funds from Vanguard/iShares/Avantis and I hesitate to invest in them. I guess I have a weak stomach.
QVAL's definition of "value" is different than most other value funds. It's as much quality/profitability as it is traditional value. I've seen Wes Gray refer to it as "cheap quality."
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Re: Small Cap Value heads Rejoice !!!

Post by Anon9001 »

XacTactX wrote: Mon May 10, 2021 10:24 am I read that Alpha Architect article a week ago and I really enjoyed it. The data makes intuitive sense to me, since factors have a positive expected return, if you sort companies based on factor exposure and you hold a more concentrated portfolio you will have more exposure to factors and a higher expected return.
The benefits of concentration depends on what factor you are talking about. If it is Value and Momentum than diversification as in increasing number of stocks does not give benefits in comparison to concentration due to means of Value and Momentum stocks being different when you go from 50 to 950 stocks. If it is Low Beta factor than there is a big benefit to diversification as probably of out-performing market over 10 years is 60% for 50 Low Beta stocks but 80% for 950 Low Beta stocks as the mean is same for Low Beta when you go from 50 to 950 stocks.
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

FiveFactor wrote: Sun May 09, 2021 7:54 am To the comments about some in the RR community using leverage…. If you have both a mortgage and an investment account, you too are using leverage
This is true to some extent, but the volatility is not leveraged up. The probability distribution curves are different from someone who has conventional leverage and someone with a morgage. You may find this article informative: https://www.gordoni.com/effective-altru ... -etfs.html
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

Anon9001 wrote: Mon May 10, 2021 11:44 am
XacTactX wrote: Mon May 10, 2021 10:24 am I read that Alpha Architect article a week ago and I really enjoyed it. The data makes intuitive sense to me, since factors have a positive expected return, if you sort companies based on factor exposure and you hold a more concentrated portfolio you will have more exposure to factors and a higher expected return.
The benefits of concentration depends on what factor you are talking about. If it is Value and Momentum than diversification as in increasing number of stocks does not give benefits in comparison to concentration due to means of Value and Momentum stocks being different when you go from 50 to 950 stocks. If it is Low Beta factor than there is a big benefit to diversification as probably of out-performing market over 10 years is 60% for 50 Low Beta stocks but 80% for 950 Low Beta stocks as the mean is same for Low Beta when you go from 50 to 950 stocks.
RZV from 2010 to 2020 would disagree. I firmly believe that while negative momentum hurt, it was missing out of the good performers directly a result of holding so few stocks.
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