Investing in the new and improved value factor(s)

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muffins14
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Re: Investing in the new and improved value factor(s)

Post by muffins14 »

garlandwhizzer wrote: Tue Oct 19, 2021 7:47 pm
Indexes are designed to create impressive results that will draw in investment dollars. It's not hard to do if you get to write all the rules. However, the so called "size premium" disappears completely in the real world when you subtract management fees, trading costs, trading frictions, and liquidity restraints of real funds. It is important also as a starting point to cut factor results in half up front because factor funds are typically long-only, having learned already that long/short is very expensive, difficult, and counterproductive especially in the SC space.

Garland Whizzer
I agree that it's good to be skeptical, but the results I was showing were for actual funds, not for long-short indices, or for indices at all. They were just an example of the actual DFA micro cap fund, which you were saying had no premium. Since there were a lot of definitive words just wanted to share the data that a quick search in portfolio visualizer showed that it did actually increase returns. After fees, I'm not sure, as I assume that's a per-person sort of thing. I know some folks had DFA in 401ks etc for free.

Hopefully in the future, fees will be lower with fees for things like IJS or the new Avantis funds, and only time will tell how the future looks. Our mileage may vary
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Nathan Drake
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

000 wrote: Tue Oct 19, 2021 9:51 pm
Nathan Drake wrote: Tue Oct 19, 2021 9:46 pm
000 wrote: Tue Oct 19, 2021 9:42 pm
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Real world results:
DFSVX vs VTSMX - 1% Premium since inception (period ending in largest Growth vs Value spread in history)
DISVX vs VGTSX - 2.5% Premium since inception (period ending in largest Growth vs Value spread in history)
DFEVX vs VEIEX - 2% Premium since inception (period ending in largest Growth vs Value spread in history)
You forgot the 1% AUM fee, vol-adjusted returns, etc.
Value factor is robust - works for many different formulations of "Value". There's no need to continually chase different funds. Pick a loading with low fees and forget about it.
This whole thread is about the new and improved value factors though.
The premiums are after fees have been deducted from each fund. Fees for Avantis are now MUCH lower than DFA, so captured premium should be more favorable.
You couldn't and still can't buy those DFA funds except through an advisor.
So?

Avantis is better. Lower cost for similar loadings.
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000
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Re: Investing in the new and improved value factor(s)

Post by 000 »

SCV is probably a reasonable enough buy especially right now but in the context of this thread my question for the factorheads is:

How should a passive individual investor navigate the changing world of factor research?

How should a passive individual investor determine that they bought the wrong kind of factor fund and also need a screen for X, Y, or Z?

How should a passive individual investor determine that they really should be adding exposure to a newly discovered factor?

How should a passive individual investor determine that one of their factors turns out not be 'real' according to new research?
Nathan Drake
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

000 wrote: Tue Oct 19, 2021 10:28 pm SCV is probably a reasonable enough buy especially right now but in the context of this thread my question for the factorheads is:

How should a passive individual investor navigate the changing world of factor research?

How should a passive individual investor determine that they bought the wrong kind of factor fund and also need a screen for X, Y, or Z?

How should a passive individual investor determine that they really should be adding exposure to a newly discovered factor?

How should a passive individual investor determine that one of their factors turns out not be 'real' according to new research?
They shouldn't. Simple.
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Re: Investing in the new and improved value factor(s)

Post by 000 »

Nathan Drake wrote: Tue Oct 19, 2021 10:30 pm They shouldn't. Simple.
So we're back to DFA funds then???
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

000 wrote: Tue Oct 19, 2021 10:38 pm
Nathan Drake wrote: Tue Oct 19, 2021 10:30 pm They shouldn't. Simple.
So we're back to DFA funds then???
Nope
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muffins14
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Re: Investing in the new and improved value factor(s)

Post by muffins14 »

000 wrote: Tue Oct 19, 2021 10:28 pm SCV is probably a reasonable enough buy especially right now but in the context of this thread my question for the factorheads is:

How should a passive individual investor navigate the changing world of factor research?

I don’t really do anything at all

How should a passive individual investor determine that they bought the wrong kind of factor fund and also need a screen for X, Y, or Z?

Again I don’t do anything here. I assume the screens that something like the S&P 600 value (like IJS), or RAFI fund are good enough

How should a passive individual investor determine that they really should be adding exposure to a newly discovered factor?

I don’t, again. I assume positive loading on market, size, value is enough, and not being negative on momentum.

How should a passive individual investor determine that one of their factors turns out not be 'real' according to new research?

this seems really rare. Like how size is explained by other factors, you mean? In that case it’s not like size isn’t “real” just that other variables explain it and project onto the size dimension/variable. So I guess I do nothing
Comments above in line.

My portfolio has about a 0.2 size and 0.4 value tilt. I use:

US small value: SLYV, FNDA, AVUV
international small value: AVDV, FNDC
Aside from that I have a mix of total market funds like VT, ITOT, IXUS, VWO, and some NTSX
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000
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Re: Investing in the new and improved value factor(s)

Post by 000 »

Nathan Drake wrote: Tue Oct 19, 2021 10:41 pm
000 wrote: Tue Oct 19, 2021 10:38 pm
Nathan Drake wrote: Tue Oct 19, 2021 10:30 pm They shouldn't. Simple.
So we're back to DFA funds then???
Nope
The OP started this thread to ask about new factor research - the same kind of research used to justify factor funds in the first place and that is behind new funds like Avantis - and you're saying that factor investors should simply ignore all new factor research once they've picked their funds?
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strakert
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Re: Investing in the new and improved value factor(s)

Post by strakert »

MotoTrojan wrote: Tue Oct 19, 2021 8:26 am I'd suggest you come join some of us (HML_Compounder there) on the RR forum where factors are discussed in-depth.
Thanks, will do. Any particular posts that you think answer the questions in this thread?
garlandwhizzer wrote: Tue Oct 19, 2021 7:47 pm However, the so called "size premium" disappears completely in the real world when you subtract management fees, trading costs, trading frictions, and liquidity restraints of real funds. It is important also as a starting point to cut factor results in half up front because factor funds are typically long-only, having learned already that long/short is very expensive, difficult, and counterproductive especially in the SC space.
Thanks for raising the red flags garlandwhizzer. I'm aware of these concerns about whether the factor funds can actually deliver the backtested index performance after transaction costs and fees. I'm ignoring them at the moment because it's easy to find the tracking error of funds claiming to follow these indices from historical results. For this thread I want to first understand what the indexes are actually offering since the way they're constructed does not match the academic definition of these factors, and it's not obvious to me what proportion of the academic factor premiums they should be expected to capture, even in theory.
000 wrote: Tue Oct 19, 2021 8:44 pm
Nathan Drake wrote: Tue Oct 19, 2021 8:25 pm
000 wrote: Tue Oct 19, 2021 8:22 pm IMHO if one wishes to be a value investor that is going to require more work than following Larry's twitter and jumping on the newest fund.

What work? You can just buy a DFA or Avantis fund and call it a day. These are smartly designed funds that limit frictional costs.
Value investing means buying what's a good value i.e. underpriced securities not passively buying random stuff.

My take is that factors may exist at least to some extent over some time frames and think investors seeking to harvest them should probably consider doing their own active management.
I'm too dumb and lazy to understand accounting fundamentals and calculate "true value" myself, and too skeptical to trust active managers to do it. So I'm not interested in value investing. I can understand the theory and math of factor investing, so let's focus on that.
Sorry nedsaid! But thanks for the explanations, they're very helpful for building a better mental model :)
000 wrote: Tue Oct 19, 2021 8:59 pm In the context of this thread, what is the difference between running from one definition of the value factor to the next, and running from one active manager to the next? We can create the same narrative that the new manager finally has things figured out.

If you're going to be a passive investor you shouldn't change to the new and improved value factor(s) as the thread title suggests; instead you should stay the course with the value factor that existed when you started, no?
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Value factor is robust - works for many different formulations of "Value". There's no need to continually chase different funds. Pick a loading with low fees and forget about it.
000, I agree, switching between indexes is no different than changing active funds. Choosing a "cutting edge" active fund that changes its (unpublished) methodology based on "latest research" is no different than choosing any other actively managed fund, including those outside of the factor investing universe. I'm not currently interested in active management, or in constantly staying up to date with factor research (too dumb, lazy and skeptical). That's why I'm looking for an index I can research once, buy and hold forever, and get on with my life.

Nathan, how can one pick a loading and forget about it, when the research claims that the think these funds are loading on, the HML factor, no longer offers a premium? Is there a tool that will let me calculate their loadings on the new and improved factor definitions which have been shown to be better? Or is there any research / tool that shows that new loadings should be similar to old loadings?

To get back to specific questions:
1. Is there's any research / evidence that the value factor, as defined by one of the currently investible indices, is robust to the proposed redefinitions of value?
2. Is there any research that runs the Fama-French regressions with the value factor, as defined by one of the currently investable indices, so I can understand what the theoretically achievable results are.

If the answer is no, and the only way to do it is to invest in a value-y factor-y fund with the belief that "fundamental value" will outperform, that's an active decision I'll have to think and differently about. This belief may very well be justified, but if the answer is no, I don't see how it can be justified based on theory/research/evidence?
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

strakert wrote: Tue Oct 19, 2021 10:46 pm
MotoTrojan wrote: Tue Oct 19, 2021 8:26 am I'd suggest you come join some of us (HML_Compounder there) on the RR forum where factors are discussed in-depth.
Thanks, will do. Any particular posts that you think answer the questions in this thread?
garlandwhizzer wrote: Tue Oct 19, 2021 7:47 pm However, the so called "size premium" disappears completely in the real world when you subtract management fees, trading costs, trading frictions, and liquidity restraints of real funds. It is important also as a starting point to cut factor results in half up front because factor funds are typically long-only, having learned already that long/short is very expensive, difficult, and counterproductive especially in the SC space.
Thanks for raising the red flags garlandwhizzer. I'm aware of these concerns about whether the factor funds can actually deliver the backtested index performance after transaction costs and fees. I'm ignoring them at the moment because it's easy to find the tracking error of funds claiming to follow these indices from historical results. For this thread I want to first understand what the indexes are actually offering since the way they're constructed does not match the academic definition of these factors, and it's not obvious to me what proportion of the academic factor premiums they should be expected to capture, even in theory.
000 wrote: Tue Oct 19, 2021 8:44 pm
Nathan Drake wrote: Tue Oct 19, 2021 8:25 pm
000 wrote: Tue Oct 19, 2021 8:22 pm IMHO if one wishes to be a value investor that is going to require more work than following Larry's twitter and jumping on the newest fund.

What work? You can just buy a DFA or Avantis fund and call it a day. These are smartly designed funds that limit frictional costs.
Value investing means buying what's a good value i.e. underpriced securities not passively buying random stuff.

My take is that factors may exist at least to some extent over some time frames and think investors seeking to harvest them should probably consider doing their own active management.
I'm too dumb and lazy to understand accounting fundamentals and calculate "true value" myself, and too skeptical to trust active managers to do it. So I'm not interested in value investing. I can understand the theory and math of factor investing, so let's focus on that.
Sorry nedsaid! But thanks for the explanations, they're very helpful for building a better mental model :)
000 wrote: Tue Oct 19, 2021 8:59 pm In the context of this thread, what is the difference between running from one definition of the value factor to the next, and running from one active manager to the next? We can create the same narrative that the new manager finally has things figured out.

If you're going to be a passive investor you shouldn't change to the new and improved value factor(s) as the thread title suggests; instead you should stay the course with the value factor that existed when you started, no?
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Value factor is robust - works for many different formulations of "Value". There's no need to continually chase different funds. Pick a loading with low fees and forget about it.
000, I agree, switching between indexes is no different than changing active funds. Choosing a "cutting edge" active fund that changes its (unpublished) methodology based on "latest research" is no different than choosing any other actively managed fund, including those outside of the factor investing universe. I'm not currently interested in active management, or in constantly staying up to date with factor research (too dumb, lazy and skeptical). That's why I'm looking for an index I can research once, buy and hold forever, and get on with my life.

Nathan, how can one pick a loading and forget about it, when the research claims that the think these funds are loading on, the HML factor, no longer offers a premium? Is there a tool that will let me calculate their loadings on the new and improved factor definitions which have been shown to be better? Or is there any research / tool that shows that new loadings should be similar to old loadings?

To get back to specific questions:
1. Is there's any research / evidence that the value factor, as defined by one of the currently investible indices, is robust to the proposed redefinitions of value?
2. Is there any research that runs the Fama-French regressions with the value factor, as defined by one of the currently investable indices, so I can understand what the theoretically achievable results are.

If the answer is no, and the only way to do it is to invest in a value-y factor-y fund with the belief that "fundamental value" will outperform, that's an active decision I'll have to think and differently about. This belief may very well be justified, but if the answer is no, I don't see how it can be justified based on theory/research/evidence?
There's no research that can claim that
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Re: Investing in the new and improved value factor(s)

Post by 000 »

muffins14 wrote: Tue Oct 19, 2021 10:42 pm Comments above in line.

My portfolio has about a 0.2 size and 0.4 value tilt. I use:

US small value: SLYV, FNDA, AVUV
international small value: AVDV, FNDC
Aside from that I have a mix of total market funds like VT, ITOT, IXUS, VWO, and some NTSX
Fair enough. I assume your reason for having multiple SCV funds is not changing research but lower ER or better implementation while keeping old funds around in taxable?
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

000 wrote: Tue Oct 19, 2021 10:44 pm
Nathan Drake wrote: Tue Oct 19, 2021 10:41 pm
000 wrote: Tue Oct 19, 2021 10:38 pm
Nathan Drake wrote: Tue Oct 19, 2021 10:30 pm They shouldn't. Simple.
So we're back to DFA funds then???
Nope
The OP started this thread to ask about new factor research - the same kind of research used to justify factor funds in the first place and that is behind new funds like Avantis - and you're saying that factor investors should simply ignore all new factor research once they've picked their funds?
The original research has shown robust measures of value working. You don't need anything new or fancy. The new and fancy research may mildly improve outcomes, but it is absolutely not necessary.
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Re: Investing in the new and improved value factor(s)

Post by nedsaid »

000 wrote: Tue Oct 19, 2021 10:28 pm SCV is probably a reasonable enough buy especially right now but in the context of this thread my question for the factorheads is:

How should a passive individual investor navigate the changing world of factor research?

How should a passive individual investor determine that they bought the wrong kind of factor fund and also need a screen for X, Y, or Z?

How should a passive individual investor determine that they really should be adding exposure to a newly discovered factor?

How should a passive individual investor determine that one of their factors turns out not be 'real' according to new research?
Here's the deal. I don't recommend factor tilting to new investors because it is complex and overwhelming for them, pretty much we are doing good to convince them to invest in the first place. I would only make recommendations regarding factor tilting to those interested in the Academic Research and to those who would make a long term commitment. When I weigh in on threads where folks are needing help with their portfolios, I give fairly standard Boglehead advice.

I have been Value oriented my entire investing career and got committed to Small/Value tilting in 2007. It was an extension of what I was already doing, I liked Value and I liked the Mid/Small Cap parts of the stock market. So I invested in the Vanguard Small Cap Value Index ETF and a Micro Cap Index ETF, I stuck with them even after reading articles critical of both. I have had REIT investments since the 1990's and a Timber REIT since I dunno 1989? So I liked Real Estate and Timberland even before I heard about the Academic Research.

So despite reading the latest and not so greatest Academic Research: I have decided to keep my REITs, keep my "bad" factor products, and keep my Value oriented individual stocks. I have tweaked my portfolio in response to new information but I have not made wholesale changes.

I like what Avantis is doing, have nothing but good things to say about them. I have decided to stick with Vanguard Small Cap Value Index ETF, iShares S&P 600 Small Cap Value Index ETF, and the Wisdom Tree International Small Cap Dividend ETF instead of switching over to the newer Avantis products. I did comparisons using Morningstar and decided that what I had was plenty well good enough. Sometimes close enough is close enough and good enough is good enough. By golly, I even kept the Micro Cap Index ETF and couldn't help but notice that it now has a 4 star Morningstar rating.
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Re: Investing in the new and improved value factor(s)

Post by nedsaid »

I am not sure that there are new and improved factors. Avantis has tweaked the definition of Book Value and is combining Value with other factors. Every shop is going to have its own proprietary formula for best capturing factor premiums but I am not sure that the factor landscape has changed as much as folks on this thread seem to think.

For one thing, there are different definitions of Value investing. It sort of gets back to the folks who buy stocks just because they are cheap versus the folks who want to buy a good or great company when it goes on sale. The difference between picking up cigar butts for the last few puffs vs. waiting patiently for a good deal on fine Cuban cigars. I have always believed that Quality matters and that some stocks are cheap for very good reasons. It isn't so much that everything is "new and improved" but that there are varying opinions as to what constitutes Value. With varying opinions comes varying benchmarks and measurements and strategies.

As I related earlier, we have to tweak our measurements because the world changes. As intangible assets become more important and as tangible assets such as Property, Plant, and Equipment decline in importance, we can't be shocked that Book Value also has declining relevance. Hardly shocking that Avantis would want to make changes to that metric. Big difference between an Industrial economy vs. a more service and information based economy. GE is not like Microsoft. So of course I don't want to use exactly the same measurements that I would have used during the 1970's.

Yet another reason for changing measurements is that Accounting Standards have changed over the years too. So the definition of earnings in the 1970's are somewhat different from today. That is a whole other discussion but we need to take that into account. Suffice to say that we take a more conservative approach today than we did back then. This is one reason that P/E ratios have crept up over time.

We do not live in a static world.
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Re: Investing in the new and improved value factor(s)

Post by strakert »

Nathan Drake wrote: Tue Oct 19, 2021 10:48 pm
strakert wrote: Tue Oct 19, 2021 10:46 pm
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Value factor is robust - works for many different formulations of "Value". There's no need to continually chase different funds. Pick a loading with low fees and forget about it.
Nathan, how can one pick a loading and forget about it, when the research claims that the think these funds are loading on, the HML factor, no longer offers a premium? Is there a tool that will let me calculate their loadings on the new and improved factor definitions which have been shown to be better? Or is there any research / tool that shows that new loadings should be similar to old loadings?
There's no research that can claim that
See Table 3 in Reports of Value’s Death May Be Greatly Exaggerated by Rob Arnott et a.

Image
My reading of this table is that the structural component of HML based value factor premium has disappeared in small-caps since 2007. This has nothing to do with revaluations. Am I missing something?
Nathan Drake wrote: Tue Oct 19, 2021 10:56 pm The original research has shown robust measures of value working.
Which paper(s) should I be reading to confirm this?
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Re: Investing in the new and improved value factor(s)

Post by nedsaid »

Duplicate post.
Last edited by nedsaid on Wed Oct 20, 2021 12:20 am, edited 1 time in total.
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Re: Investing in the new and improved value factor(s)

Post by nedsaid »

alex_686 wrote: Mon Oct 18, 2021 4:33 pm
I think that the Value factor is in trouble. In part because it is hard to handle intangible assets. Minor revisions will not solve the answer. Major revisions mean a whole new measuring stick.
Alex, you have put your finger on the limitations of accounting. Correctly reflecting reality on the Income Statement is easier than upon the Balance Sheet. The Balance Sheet still gives us a lot of useful information but we have to use Market Capitalization rather than Owner's Equity to determine the value of those intangible assets as well as the value of the business itself. Property, Plant, & Equipment as discussed early is also difficult for accountants to value for reasons discussed above in my other posts. For example, my deep suspicion is that the market value of the Empire State Building is vastly higher than what is carried on the books.

Value is in trouble if you use the old fashioned Book Value/Share approach as opposed to focusing on the value of the cash flows generated by the business. Value looks a lot better if you are using metrics such as Price/Earnings, Price/Cash Flow, and Price/Sales. In other words, taking an Income Statement approach as opposed to a Balance Sheet approach. The strength of the balance sheet is figured in to the market price of the stock but it is secondary in importance to the valuation of the cash flows.

Another way of viewing this is that the Accountants valued Microsoft at year end 2020 at approximately $15.40 per share or $118.3 Billion Shareholders Equity/7.683 Billion shares outstanding. Microsoft closed at $222.42 per share on 12/31/2020. $15.40 vs. $222.42. The accountants missed a whole lot. It looks like the accountants understated earnings by $207/share ever since Microsoft went public! No wonder why the P/E ratios appear so high, perhaps earnings have somehow been understated.

A skilled accountant can poke at the weaknesses of my arguments above but this illustrates that accounting has its limitations.

https://www.marketwatch.com/investing/s ... ance-sheet

https://www.macrotrends.net/stocks/char ... utstanding
Last edited by nedsaid on Wed Oct 20, 2021 12:33 am, edited 1 time in total.
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

strakert wrote: Wed Oct 20, 2021 12:11 am
Nathan Drake wrote: Tue Oct 19, 2021 10:48 pm
strakert wrote: Tue Oct 19, 2021 10:46 pm
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Value factor is robust - works for many different formulations of "Value". There's no need to continually chase different funds. Pick a loading with low fees and forget about it.
Nathan, how can one pick a loading and forget about it, when the research claims that the think these funds are loading on, the HML factor, no longer offers a premium? Is there a tool that will let me calculate their loadings on the new and improved factor definitions which have been shown to be better? Or is there any research / tool that shows that new loadings should be similar to old loadings?
There's no research that can claim that
See Table 3 in Reports of Value’s Death May Be Greatly Exaggerated by Rob Arnott et a.

Image
My reading of this table is that the structural component of HML based value factor premium has disappeared in small-caps since 2007. This has nothing to do with revaluations. Am I missing something?
Nathan Drake wrote: Tue Oct 19, 2021 10:56 pm The original research has shown robust measures of value working.
Which paper(s) should I be reading to confirm this?
13 years is not a long enough time to judge a factor's persistence
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Re: Investing in the new and improved value factor(s)

Post by Northern Flicker »

strakert wrote: Sun Oct 17, 2021 4:46 pm The value factor is dead.
The original HML value factor is redundant in the new Fama-French 5 factor model (subsumed by investment and profitability factors)...
If you look at the abstract of that Fama-French paper, I believe that the following sentences:
A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF 1993).
...
With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine.
should have been, with text changed in red for the before and after quotes:
A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performed better than the three-factor model of Fama and French (FF 1993).
...
With the addition of profitability and investment factors, the value factor of the FF three-factor model became redundant for describing average returns in the sample we examine.
It is easy to look back at a backtest and identify the concise set of factors that can explain the return. It is quite another matter to project into the future and obtain a predictive result.

Why weren't the quality factors identified in 1993?
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Re: Investing in the new and improved value factor(s)

Post by strakert »

nedsaid wrote: Tue Oct 19, 2021 11:35 pm For one thing, there are different definitions of Value investing. [...]

As I related earlier, we have to tweak our measurements because the world changes. As intangible assets become more important and as tangible assets such as Property, Plant, and Equipment decline in importance, we can't be shocked that Book Value also has declining relevance. Hardly shocking that Avantis would want to make changes to that metric. Big difference between an Industrial economy vs. a more service and information based economy. GE is not like Microsoft. So of course I don't want to use exactly the same measurements that I would have used during the 1970's.

Yet another reason for changing measurements is that Accounting Standards have changed over the years too. So the definition of earnings in the 1970's are somewhat different from today. That is a whole other discussion but we need to take that into account. Suffice to say that we take a more conservative approach today than we did back then. This is one reason that P/E ratios have crept up over time.

We do not live in a static world.
Nedsaid, I can believe that there's a true "Value Premium" to be captured in the markets. I'm glad some individuals and fund managers are able to capitalize on their deep understanding of companies, markets, consumers, economies etc. and generate excess returns through "Value Investing". I thank them for doing the research, taking the risk, and keeping the markets priced correctly. I similarly thank and wish good luck to investors who take an active bet and invest their money with these active managers. I don't doubt that many have been richly rewarded.

But I don't see what that has to do with investing in the "Value Factor", the one based on arbitrage pricing theory, factor models and the academic research. They may have the same name, they may even have the same underlying intuition, but the conclusions of factor investing research CAN NOT be transferred over and used as "supporting evidence" for "Value Investing" of the algorithmic kind. What has been "shown" are the results of a very specific mathematical model, applied to very specific combinations of very specific inputs, on a very specific dataset, with very specific assumptions. Changing any one of these will immediately invalidate the results, unless the experiments can be repeated or the change can be theoretically justified. That's just what "scientific method" implies.

It's fine if the actual "Factor Investing" products don't meet this bar. But in that case they're much more similar to active "Value Investing" attempts at capturing the "Value Premium" that they distance themselves from. They may still be good enough, even better, than the non-algorithmic approaches. But the claims of them being "scientifically researched, peer reviewed, evidence based, rational, and human judgement free" are just marketing.

So I'm asking if there are indeed any factor investing products that meet this bar - actual papers that either show factor regression results with their exact implementation details, or papers that show that their changes from previously published research are justified.
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strakert
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Re: Investing in the new and improved value factor(s)

Post by strakert »

Nathan Drake wrote: Wed Oct 20, 2021 12:19 am
strakert wrote: Wed Oct 20, 2021 12:11 am
Nathan Drake wrote: Tue Oct 19, 2021 10:48 pm
strakert wrote: Tue Oct 19, 2021 10:46 pm
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Value factor is robust - works for many different formulations of "Value". There's no need to continually chase different funds. Pick a loading with low fees and forget about it.
Nathan, how can one pick a loading and forget about it, when the research claims that the think these funds are loading on, the HML factor, no longer offers a premium? Is there a tool that will let me calculate their loadings on the new and improved factor definitions which have been shown to be better? Or is there any research / tool that shows that new loadings should be similar to old loadings?
There's no research that can claim that
See Table 3 in Reports of Value’s Death May Be Greatly Exaggerated by Rob Arnott et a.

Image
My reading of this table is that the structural component of HML based value factor premium has disappeared in small-caps since 2007. This has nothing to do with revaluations. Am I missing something?
Nathan Drake wrote: Tue Oct 19, 2021 10:56 pm The original research has shown robust measures of value working.
Which paper(s) should I be reading to confirm this?
13 years is not a long enough time to judge a factor's persistence
30 year results (roughly since original publication) in Table 1 in Resurrecting the Value Premium by Blitz et al.

Image

Their interpretation:
For the US, the HML value premium has amounted to less than 1% per annum over this period, with a very low insignificant t-statistic of 0.46. The big-cap HML component even displays a negative average return. The small-cap HML value premium still appears decent, at over 3% per annum, but the associated t-statistic of 1.45 falls well short of the conventional thresholds for statistical significance. For Developed-ex-US and Emerging Markets the point estimates for the value premium in the big-cap space are positive, but both are statistically indistinguishable from zero. The only significant HML performance is found in the Developed-ex-US and Emerging Markets small-cap space, with annualized premia of about 5% and 11%, respectively.
...
Altogether, it seems fair to conclude that if Fama and French would have had the current data at their disposal when they conducted their work in the early nineties, they might well have deemed the evidence in support of the value premium to be insufficiently convincing.
From The Value Premium by Fama-French (2020):
The average premium for Big Value drops from 0.36% per month (t = 2.91) to a puny 0.05% (t =0.24). The Small Value average premium is a hefty 0.58% (t = 3.19) for 1963-1991, versus 0.33% (t = 1.52) for 1991-2019. Market Value, which is mostly Big Value, produces a first-half average premium of 0.42% (t = 3.25), declining to 0.11% (t = 0.60) for the second half.
...
Comparing the first and second half-period averages, we don’t come close to rejecting the hypothesis that out-of-sample expected premiums are the
same as in-sample expected premiums. But the imprecision of the estimates implies that we also can’t reject a wide range of lower values for second half expected premiums.
As a frame of reference, Harvey et al argue that newly discovered factors should have a t-statistic of 3.0 to be considered significant, and even factors derived from theory should have t-statistics greater than 2.0.

This research methodology is new to me, so please let me know if I'm grossly misunderstanding something.
Last edited by strakert on Wed Oct 20, 2021 1:26 am, edited 1 time in total.
gips
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Re: Investing in the new and improved value factor(s)

Post by gips »

my assumption is that factor-based investing research which yields a superior risk-adjusted return will be arbed by tens of thousands market actors. i’m sure i’m not alone in this view, op i guess u disagree?
Nathan Drake
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Re: Investing in the new and improved value factor(s)

Post by Nathan Drake »

strakert wrote: Wed Oct 20, 2021 1:21 am
Nathan Drake wrote: Wed Oct 20, 2021 12:19 am
strakert wrote: Wed Oct 20, 2021 12:11 am
Nathan Drake wrote: Tue Oct 19, 2021 10:48 pm
strakert wrote: Tue Oct 19, 2021 10:46 pm
Nathan, how can one pick a loading and forget about it, when the research claims that the think these funds are loading on, the HML factor, no longer offers a premium? Is there a tool that will let me calculate their loadings on the new and improved factor definitions which have been shown to be better? Or is there any research / tool that shows that new loadings should be similar to old loadings?
There's no research that can claim that
See Table 3 in Reports of Value’s Death May Be Greatly Exaggerated by Rob Arnott et a.

Image
My reading of this table is that the structural component of HML based value factor premium has disappeared in small-caps since 2007. This has nothing to do with revaluations. Am I missing something?
Nathan Drake wrote: Tue Oct 19, 2021 10:56 pm The original research has shown robust measures of value working.
Which paper(s) should I be reading to confirm this?
13 years is not a long enough time to judge a factor's persistence
30 year results (roughly since original publication) in Table 1 in Resurrecting the Value Premium by Blitz et al.

Image

Their interpretation:
For the US, the HML value premium has amounted to less than 1% per annum over this period, with a very low insignificant t-statistic of 0.46. The big-cap HML component even displays a negative average return. The small-cap HML value premium still appears decent, at over 3% per annum, but the associated t-statistic of 1.45 falls well short of the conventional thresholds for statistical significance. For Developed-ex-US and Emerging Markets the point estimates for the value premium in the big-cap space are positive, but both are statistically indistinguishable from zero. The only significant HML performance is found in the Developed-ex-US and Emerging Markets small-cap space, with annualized premia of about 5% and 11%, respectively.
...
Altogether, it seems fair to conclude that if Fama and French would have had the current data at their disposal when they conducted their work in the early nineties, they might well have deemed the evidence in support of the value premium to be insufficiently convincing.
From The Value Premium by Fama-French (2020):
The average premium for Big Value drops from 0.36% per month (t = 2.91) to a puny 0.05% (t =0.24). The Small Value average premium is a hefty 0.58% (t = 3.19) for 1963-1991, versus 0.33% (t = 1.52) for 1991-2019. Market Value, which is mostly Big Value, produces a first-half average premium of 0.42% (t = 3.25), declining to 0.11% (t = 0.60) for the second half.
...
Comparing the first and second half-period averages, we don’t come close to rejecting the hypothesis that out-of-sample expected premiums are the
same as in-sample expected premiums. But the imprecision of the estimates implies that we also can’t reject a wide range of lower values for second half expected premiums.
This research methodology is new to me, so please let me know if I'm grossly misunderstanding something.
Looks like great premiums are alive and well. What is your concern?

Should we judge the market dead because of 1966-1982?
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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strakert
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Re: Investing in the new and improved value factor(s)

Post by strakert »

Nathan Drake wrote: Wed Oct 20, 2021 1:24 am Looks like great premiums are alive and well. What is your concern?
Not sure if you're saying I'm reading it wrong or if you are taking something different away from the numbers. If the former, would be helpful if you can explain. If the latter, to each his own I suppose, I don't intend to convince anyone of anything.
Nathan Drake wrote: Wed Oct 20, 2021 1:24 am Should we judge the market dead because of 1966-1982?
Non Sequitur. Market doesn't claim to generate excess returns over market returns with high statistical significance :)
YRT70
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Re: Investing in the new and improved value factor(s)

Post by YRT70 »

000 wrote: Tue Oct 19, 2021 10:28 pm
How should a passive individual investor determine that one of their factors turns out not be 'real' according to new research?
Perhaps interesting:
Q&A: What does it mean to say HML is redundant?
What does it mean to say HML is redundant?

EFF/KRF: There is some confusion about the interpretation of the evidence in Fama and French (2014, “A Five-Factor Model of Expected Returns”) that HML is redundant for explaining average U.S. stock returns for 1963-2013.

It doesn’t imply that there is no value premium. (Continues)
https://famafrench.dimensional.com/ques ... ndant.aspx
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Re: Investing in the new and improved value factor(s)

Post by Laurizas »

gips wrote: Wed Oct 20, 2021 1:23 am my assumption is that factor-based investing research which yields a superior risk-adjusted return will be arbed by tens of thousands market actors. i’m sure i’m not alone in this view, op i guess u disagree?
Rick Ferry did an interview with Jason Hsu, Ph.D., who is one of the world’s top thought leaders on factor investing and the co-creator of the fundamental indexing™ methodology. He has authored more than 40 peer-reviewed articles and won numerous research awards.

Below is an extract from their conversation
https://boglecenter.net/2021/05/28/bogl ... ranscript/
wrote:Rick Ferri: Like I said I really cut the cost of doing it and it was consistent. I mean when you’re following a strategy like you’re following and you have to follow a systematic methodology, you don’t get manager whims, don’t get in the way. I mean if you believe in the methodology and you look at the data and you say well it’s worked in the past and you know this is why it worked in the past and so we know that since it’s a quote-unquote “index”–that this is the methodology that’s going to be used in the future so we can rely on that–rather than relying on the manager to one day be a value manager and the next day they’re not so much a value manager because that’s just not where the momentum is at the time, that there was a lot of value to that. And I have to believe that that’s continuing to be that way.

Although it was a struggle, right? I mean after the financial crisis occurred value investing, fundamental indexing although a lot of assets were going that direction those factors didn’t perform well. I want to get into here a little bit that they’re not always going to perform well and that there is a 25 year–I don’t want to say cycle or something, a wave–to these things, and that people who are in it need to be patient.

Jason Hsu: Yeah Rick. I mean I think what we saw in 25 years, probably going out 30 years, there are really two things happening in the background that’s made it difficult to be a value investor, and given value is a big underpinning of the fundamental index methodology it’s been tough for value investors in fundamental index the last 30 years, and part of what’s driving that is market has become more efficient, right. If you think of value as an anomaly, meaning you can buy good quality assets cheap, right. That’s not supposed to happen, like good quality assets are supposed to be expensive and it’s also generally the risky stuff that’s supposed to be cheaper. So you’re generally supposed to see the value stocks as more expensive, not cheaper if they’re truly high quality, right. So a lot of value premium you could say was an anomaly, whatever reason it existed, but as the market gets more efficient it’s supposed to go away.

So I think part of the diminishing value premium is related to the US market becoming ever more institutional, ever more efficient, and any anomalies that’s been documented historically are arbed out or just less relevant. But you also have, I think, the last few years if you’re looking at reddit, you’re looking at Robinhood trading, you’re looking at prices for cryptocurrency and GameStop stocks. You also recognize the US market has the last few years became probably more inefficient. I think retail trading has gone from three percent to closer to thirty percent now and where exciting sexy growth has done much better because that’s where the retail sort of flows and retail trading have been concentrating on, so you got two things, right. One is the market becoming more efficiently priced which makes value work less well and then more recently the market sort of, you know, kind of gone to a bit of a tech bubble which has a further punished value. And you combine those two together it’s been tough to be to be a value investor.
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Re: Investing in the new and improved value factor(s)

Post by MotoTrojan »

Massdriver wrote: Tue Oct 19, 2021 7:53 pm

I figured that was you on RR given your cheerful but analytic posting style. I’ve read a lot of content on RR. Thanks for your contributions as usual! :sharebeer
Fun way to put my word-vomiting! :sharebeer
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Re: Investing in the new and improved value factor(s)

Post by muffins14 »

000 wrote: Tue Oct 19, 2021 10:51 pm
muffins14 wrote: Tue Oct 19, 2021 10:42 pm Comments above in line.

My portfolio has about a 0.2 size and 0.4 value tilt. I use:

US small value: SLYV, FNDA, AVUV
international small value: AVDV, FNDC
Aside from that I have a mix of total market funds like VT, ITOT, IXUS, VWO, and some NTSX
Fair enough. I assume your reason for having multiple SCV funds is not changing research but lower ER or better implementation while keeping old funds around in taxable?
More or less, yeah. I also generally would like lower dividends in taxable, which is why I have FNDA there but SLYV in tax-advantaged. I also treat FNDA/SLYV/AVUV and AVDV/FNDC as sets for tax-loss harvesting
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Re: Investing in the new and improved value factor(s)

Post by muffins14 »

strakert wrote: Wed Oct 20, 2021 1:50 am
Nathan Drake wrote: Wed Oct 20, 2021 1:24 am Looks like great premiums are alive and well. What is your concern?
Not sure if you're saying I'm reading it wrong or if you are taking something different away from the numbers. If the former, would be helpful if you can explain. If the latter, to each his own I suppose, I don't intend to convince anyone of anything.
Nathan Drake wrote: Wed Oct 20, 2021 1:24 am Should we judge the market dead because of 1966-1982?
Non Sequitur. Market doesn't claim to generate excess returns over market returns with high statistical significance :)
1) There is an expected equity premium that claims to generate excess returns above the risk free asset with high significance, which is the motivation for his post
2) there is a paper where Fama analyzed post-publication data and there was insufficient evidence to reject the hypothesis that factor premia are the same as they were pre-publication (e.g you infer they may indeed be same as they were before)
3) maybe instead of statistical significance you should think about the confidence interval. Even if something has a T-stat of, say 1.5, that doesn’t mean there is suddenly zero information. If I told you your returns would be on average 1% better than the market, but the distribution is such that there’s only a 7% chance the premium is negative, and a 50% chance it’s over 1%, you might take that bet
Crom laughs at your Four Winds
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Re: Investing in the new and improved value factor(s)

Post by Massdriver »

I believe muffins is referring to this paper: Fama, Eugene F. and French, Kenneth R., The Value Premium (January 1, 2020). Fama-Miller Working Paper No. 20-01 , Available at SSRN: https://ssrn.com/abstract=3525096 or http://dx.doi.org/10.2139/ssrn.3525096
Value premiums, which we define as value portfolio returns in excess of market portfolio returns, are on average much lower in the second half of the July 1963-June 2019 period. But the high volatility of monthly premiums prevents us from rejecting the hypothesis that expected premiums are the same in both halves of the sample.
Growth-value spreads are at historically high levels. When this happens, value usually outperforms going forward. It seems plausible to me that the value premium will show back up later this decade.

Image

Also, the value premium has shown up just fine in international developed markets. I'm not sure why this fact is continually glossed over.
Last edited by Massdriver on Wed Oct 20, 2021 9:44 am, edited 1 time in total.
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Re: Investing in the new and improved value factor(s)

Post by YRT70 »

Massdriver wrote: Wed Oct 20, 2021 9:08 am Also, the value premium has shown up just fine in international developed markets. I'm not sure why this fact is continually glossed over.
+1. I was about to post this.
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Re: Investing in the new and improved value factor(s)

Post by nedsaid »

strakert wrote: Wed Oct 20, 2021 12:55 am
nedsaid wrote: Tue Oct 19, 2021 11:35 pm For one thing, there are different definitions of Value investing. [...]

As I related earlier, we have to tweak our measurements because the world changes. As intangible assets become more important and as tangible assets such as Property, Plant, and Equipment decline in importance, we can't be shocked that Book Value also has declining relevance. Hardly shocking that Avantis would want to make changes to that metric. Big difference between an Industrial economy vs. a more service and information based economy. GE is not like Microsoft. So of course I don't want to use exactly the same measurements that I would have used during the 1970's.

Yet another reason for changing measurements is that Accounting Standards have changed over the years too. So the definition of earnings in the 1970's are somewhat different from today. That is a whole other discussion but we need to take that into account. Suffice to say that we take a more conservative approach today than we did back then. This is one reason that P/E ratios have crept up over time.

We do not live in a static world.
Nedsaid, I can believe that there's a true "Value Premium" to be captured in the markets. I'm glad some individuals and fund managers are able to capitalize on their deep understanding of companies, markets, consumers, economies etc. and generate excess returns through "Value Investing". I thank them for doing the research, taking the risk, and keeping the markets priced correctly. I similarly thank and wish good luck to investors who take an active bet and invest their money with these active managers. I don't doubt that many have been richly rewarded.

But I don't see what that has to do with investing in the "Value Factor", the one based on arbitrage pricing theory, factor models and the academic research. They may have the same name, they may even have the same underlying intuition, but the conclusions of factor investing research CAN NOT be transferred over and used as "supporting evidence" for "Value Investing" of the algorithmic kind. What has been "shown" are the results of a very specific mathematical model, applied to very specific combinations of very specific inputs, on a very specific dataset, with very specific assumptions. Changing any one of these will immediately invalidate the results, unless the experiments can be repeated or the change can be theoretically justified. That's just what "scientific method" implies.

It's fine if the actual "Factor Investing" products don't meet this bar. But in that case they're much more similar to active "Value Investing" attempts at capturing the "Value Premium" that they distance themselves from. They may still be good enough, even better, than the non-algorithmic approaches. But the claims of them being "scientifically researched, peer reviewed, evidence based, rational, and human judgement free" are just marketing.

So I'm asking if there are indeed any factor investing products that meet this bar - actual papers that either show factor regression results with their exact implementation details, or papers that show that their changes from previously published research are justified.
My gosh, wasn't Book Value one of the main inputs for the factor models that you cite? My point has everything to do with the discussion. That is that an important measurement for Value used by the models has decreased in importance over time, so Avantis tweaked the Book Value metric to better fit a more modern economy. If the inputs are flawed, you will get flawed results. Also earnings in 1970 are differently defined than earnings in 2021. Lots of things have changed, it would make sense to tweak both the metrics and the models. We take for granted comparability of data across decades when in fact the data isn't as comparable as we had believed. As I said, GE (old economy) isn't Microsoft (new economy).

Another point is that accounting is not precise. There are such things as accruals which sometimes are based upon judgements. I was an Accountant for a major Healthcare System and I remember discussion that there was reliable information that there would be a cut in reimbursement from the State, senior financial management decided to reserve against a strong possibility though not a certainty. Management made the judgement to make an accrual for an event that had not happened yet.

So here's the thing. The data that the accountants provide is imprecise. You feed imprecise data into factor models and you will get imprecise results even though the quants believe the results to be precise. Remember above that I said that at the end of 2020, that the accountants had a book value of Microsoft of $15.40 and the market valued Microsoft at $222.42 a share. I would say there is a gap between what the accountants said that Microsoft was worth and what the market said that Microsoft was worth. I might not be the sharpest tack in the drawer but a $207 difference in valuation for a $222 stock just maybe might show a hint of imprecision. It's like dude, where did the $207 go?
Last edited by nedsaid on Wed Oct 20, 2021 1:58 pm, edited 1 time in total.
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strakert
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Re: Investing in the new and improved value factor(s)

Post by strakert »

Found a few papers that seem to address my questions re: index construction and regressions, at least for MSCI's approach which seems to be similar to Research Affiliate's Fundamental Indexing approach and doesn't restrict value to small caps:
MSCI - Efficient Replication of Factor Returns (2009)
MSCI - The Fundamentals of Fundamental Factor Models (2010)
MSCI - Capturing the Value Premium (2011)
MSCI - Factor Indexes in Perspective: Insights from 40 Years of Data (2014)
State Street - Peering Under the Hood of Rules-Based Portfolio Construction: The Impact of Security Selection and Weighting Decisions (2017)

Also found this undergraduate thesis comparing performance of actual US Factor ETF against academic factor definitions (long-only and long-short):
Factor Investing in Practice: Performance and Risk Exposure of U.S. Factor ETFs

Will read and report back if/how they answer my questions.
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Re: Investing in the new and improved value factor(s)

Post by comeinvest »

000 wrote: Tue Oct 19, 2021 9:42 pm
Nathan Drake wrote: Tue Oct 19, 2021 9:16 pm Real world results:
DFSVX vs VTSMX - 1% Premium since inception (period ending in largest Growth vs Value spread in history)
DISVX vs VGTSX - 2.5% Premium since inception (period ending in largest Growth vs Value spread in history)
DFEVX vs VEIEX - 2% Premium since inception (period ending in largest Growth vs Value spread in history)
You forgot the 1% AUM fee, vol-adjusted returns, etc.
On a risk-adjusted basis, U.S. value didn't win, but DM and EM won.
However, U.S. SCV wins in the 1999- period. 1994- looks more like a fair comparison, as there was a huge underperformance of SCV in 1998. Unfortunately DM and EM don't go back as far as U.S.

Fund - CAGR - max drawdown - Sharpe ratio - Sortino ratio
DFSVX 11.28% -61.18% 0.52 0.76
VTSMX 10.34% -50.89% 0.58 0.84
https://www.portfoliovisualizer.com/bac ... ion2_2=100
DISVX 7.73% -57.69% 0.40 0.58
VGTSX 5.23% -58.50% 0.27 0.38
https://www.portfoliovisualizer.com/bac ... ion2_2=100
DFEVX 10.46% -64.51% 0.47 0.72
VEIEX 8.54% -62.70% 0.41 0.61
https://www.portfoliovisualizer.com/bac ... ion2_2=100
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