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Perspective

Uncorrelated Assets: An Important Dimension of an Optimal Portfolio

Recently, Dimensional Fund Advisors wrote critically on “liquid alts.” They make some good points, but they also draw some odd conclusions that if applied more generally would not be to their or our liking. Besides discussing their piece, below I also review the general rationale behind holding uncorrelated assets – in particular, equity “factors” held in a long-short manner.

Perspective

Volatility Laundering

While not alone, I have become one of the chief gadflies of the private equity industry. But I’m a selective gadfly. The illiquidity and non-marking that comes with private investments used to be acknowledged as a bug. These days, however, this same bug is sold as a feature – and sometimes, as in a recent Institutional Investor op-ed, brazenly so. My response in II covers what I think are the increasingly harmful ramifications of taking as reality the unrealistically smoothed returns that private strategies are all-too-happy to report.

Perspective

The Bubble Has Not Popped

This post updates our value spread with data through the end of 2022. The fourth quarter of 2022 saw value recover from the bout of temporary insanity that gripped some portion of the market over the summer, but the spread ends 2022 very much still in rarified territory – at the 94th percentile, to be precise. More excitingly for 2023, value’s returns in 2022 were extremely strong, and the spread only moved from roughly the 100th percentile to the 94th, which makes us very optimistic about the prospects of continued normalization in 2023 and beyond.

Journal Article

Fact, Fiction, and Factor Investing

Factor investing has been around for several decades, backed by an enormous body of literature, and yet it is still surrounded by much confusion and debate. We examine many of the claims about factor investing, referencing the academic literature and performing simple, yet powerful, analysis to address them.

Perspective

The Raisons d'être of Managed Futures

Managed Futures strategies have an implicit dual mandate, First, to deliver positive returns on average and second, to generate especially attractive returns during large equity market drawdowns. This is one of the big reasons managed futures strategies can be valuable in a portfolio. Unfortunately, by and large, the industry—intentionally or not—has been optimizing for one at the expense of the other by introducing carry and market beta exposure.

Perspective

Value Spreads Are Back to Tech Bubble Highs: Is Everyone Out There Cray-Cray?

This adds another three months of data to the May entry in our series of value spread updates. Over the past two months, some portion of the market went temporarily (I hope) insane, punishing value, as we measure it, to the point where the value spread has retraced most of its modest gains since the beginning of the year. The world doesn’t steadily move a little bit towards what we think is rational each day – painfully for us, it’s not a linear process. But this changes nothing about our belief in the outlook for value.

Perspective

We Are Not Just Value! Except, You Know, When We Are...

Our systematic stock selection process is far from just “value.” And yet from 2018-2020 for the bad and 2021-2022 for the good, our world has indeed been all about value. What gives? This post reviews our correlation to value, delving into a few periods when it became the dominant part of our process. We find that when value dominates, it has usually been in bubble periods of irrational losses for value (and in their more pleasant aftermaths).

Perspective

Value Investing Is Not All About Tech

It often seems like the world sees value investing as either implicitly or explicitly all about the technology sector vs. everything else. In reality, there are many different kinds of strategies and bets that are often labeled “value.” Our value bet is long and short extremely diversified portfolios of global stocks with a serious attempt not to bet on industries (like tech) – and we are very happy about that, both long-term strategically and tactically today.

Perspective

Still Crazy After All This YTD

Over these additional three months, value’s returns, as we measure them, have continued apace. Since February, the value spread has fallen slightly, though it remains near its tech bubble peak, at around a 95th percentile. Reminder — a massive valuation dislocation says very little about the timing of when it falls back to earth. But it’s nice to see it start and still leave the spread incredibly high.

Perspective

Everything and More

My colleague and former classmate Antti Ilmanen is at it again with his second book, Investing Amid Low Expected Returns. Very rarely does a sequel stand up to the original (see Jaws II), but that's certainly not the case here!