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?