Tag Archives: paul-novell

The Future Of Beta – Slip Sliding Away…

Value, momentum, size, quality, volatility, etc., as factors in investing are quite popular. They’ve produced significant outsized returns relative to benchmarks. Now, we even have Smart Beta funds and ETFs popping up all over to make taking advantage of factors super easy. That brings up the critical question every investor interested in taking advantage of factors in their portfolio should ask – will the outperformance of factor investing continue in the future? Here I’ll take a look at a recent post from Alpha Architect that addresses this question. In short, investors should expect past outperformance to decrease in the future. Basically, there are two reasons why outperformance could go away; data mining (the factor is not real and just an artifact of the data) and arbitrage (basically investors becoming aware of the anomaly, investing in it in a big way, and thus it disappears). The Alpha Architect post references a study that looked at out of sample performance of factors. Below are the results. Basically, out of sample returns are lower than what the historical results had shown. The returns were about 40-70% of what they were in the past. Sobering. But as I’ve discussed on the blog in the past, some factors are better than others. In another post , a bunch of factors are analyzed and the only two sustainable ones are value and momentum. This is the reason all the strategies I use are primarily focused around these two factors. But one of the reasons that value and momentum work is that they come with periods of awful performance, absolute and relative, and drawdowns. All of which make them very difficult to stick with over the long term. And if history is a guide, investors should expect their relative outperformance to decrease going forward as more investors become aware of them. In a way, these factor strategies are even harder to stick with than just simple buying and holding of traditional index products. When you’re indexing at least you’re doing no worse than the index! There is no FOMO (Fear of Missing Out). If you’re not willing or able to tolerate underperformance, potentially for long periods of time, then you won’t be successful with factors. But I think the are a several things investors can do to increase their chances of success going forward. Reduce expectations: I always reduce potential outperformance by at least half when I look at implementing a strategy. Diversify: Use multiple strategies – buy and hold indexing, TAA, smart beta, individual stocks. There’s a very strong chance at least one of the strategies will be outperforming, thus increasing your chances of sticking with your program. It doesn’t and shouldn’t be all or nothing. Stick with what works – Value and momentum strategies have stood the test of time… at least so far. Dampen portfolio volatility with bonds. Reduce noise – There is a lot of noise in markets today. Investors need to work hard to tune it out. Try and go 1 month without looking at the market. Most investors I know can’t go a week. Have an investing process – Investing your money shouldn’t be haphazard and random. As with many things in life, having a system and process will help you achieve success. What are your goals? How does your portfolio match those goals? When do you rebalance? What strategies are you implementing and why? Do the same things at the same times on a regular schedule, etc… In summary, factor outperformance could very possibly decrease in the future. But they are still likely to be very powerful wealth building strategies if investors can stick with them and not expect the future to be exactly like the past.

Quant Strategies: Q1 2016 Performance

Here are the Q1 2016 total return and max drawdown numbers for the various quant strategies I track. For explanations of the various quant strategies see the portfolios page. All equity portfolios consist of 25 stocks and were formed at the end of 2015. No changes in the holdings since that time. In the table below, I list various quant strategies along with their YTD performance and drawdowns. Also, listed are various benchmark indices. Overall, the start of 2016 is working quite well for the various quant strategies. The utility strategy is leading the pack with a huge Q1. Only the microcap strategy is underperforming the relevant benchmarks. And that is after a great year in 2015. So not a big surprise. The staples value strategy continues to perform very well in almost every environment. I have been consistently surprised by this strategy. It’s probably due for a period of underperformance but not yet it seems. More aggressive versions of these strategies are also doing quite well. Ways to get more aggressive with these strategies are to run more concentrated portfolios, re-balance and check the portfolios more often, and in most portfolios the use of trailing stops enhances returns. A good stock and portfolio tool like portfolio123.com lets you do any of these quite easily. Also, for traders, the quant portfolios are fantastic idea generating lists for potential trades. I use them for this purpose every so often. In general, a great start to 2016 for quant strategies and much better than overall stock indexes and also the TAA strategies.

Tactical Asset Allocation – April 2016 Update

March was good month for risk assets. Let’s see if it continues in April. Here is the tactical asset allocation update for April 2016. Below are the updates for the AGG3, AGG6, and GTAA13 portfolios. The source data can be found here . These signals are valid after every trading day. So, while I maintain these month-end updates, this means that you can implement your portfolio changes on any day of the month, not just month end. FINVIZ will at times generate signals that are slightly different than Yahoo Finance. Note: I am not maintaining the Yahoo Finance versions any more. All portfolios now use FINVIZ data. Click to enlarge This month, AGG3 has one new holding with real estate, VNQ , back in the mix. AGG6 also has MTUM and VTV as new holdings. Approximate monthly and YTD performance is below. In a new change, global asset allocation is working well in 2016. Click to enlarge For the Antonacci dual momentum , GEM and GBM portfolios, GEM is back in SPY , and the bond portion of GBM is in MBB . I have changed the MBS tracking ETF to MBB, from VMBS , due to errors in FINVIZ. I also now compare the FINVIZ data to Yahoo Finance for the bond portion. The Antonacci tracking sheet is shareable, so you can see the portfolio details for yourself. The Bond 3 quant model , see spreadsheet , ranks the bond ETFs by 6-month return and uses the absolute 6-month return as a cash filter to be invested or not. The Bond 3 quant model is invested in IGOV , EMB , and VGLT . That’s it for this month. These portfolios signals are valid for the whole month of April. As always, post any questions you have in the comments.