Value, momentum, portfolio strategy
Value, momentum, portfolio strategy
Contributor since: 2012
Do you want to see the correlation of January price returns and full-year price returns?
Both have their merits, and I own both - here is the discussion:
Thanks xr1000
Thanks - it was fun to write
Both are correct - 22' in the corner to fourteen feet from the baseline and 23'9" along the arc. I used 22' because the "corner three" is the more "efficient" shot, which has encouraged some offensive re-design. I should have clarified - thanks for reading.
As we move further from the market peak (both in level and timespan), I would be curious if others think that we have passed a cyclical peak or if this is a more normal correction in what remains a secular bull market.
3WallPaul - I agree with Briar and Augustus - I can not suggest that anybody pay 8.5% to lever - I am not forecasting higher returns than 8.5% annualized for the remainder of the business cycle given how far multiples have already expanded - IB is 1ml+1.5%, or 1.63% for even small account balances. Money saved is money earned.
Silent trader - you are looking at the outpeformance of the market into the tech bubble. Leveraging low volatility is the winning trade in this quarter-century dataset. That is the point of this series. Let's discuss if you are reaching a different conclusion.
ZMKG01 - I am using the S&P 500 Low Volatility TR Index (SP5LVIT on Bloomberg) and SP5HBIT for High Beta. I need to do some work on the index underpinning MTUM. When I looked at it previously, I could not determine how the index construction was conducted. If you have info, please pass along.
They reconstructed the index using the stated methodology back to 1990. I am sure that this was complicated, but as the index provider for the S&P 500 they readily had the historical constituents and price volatility needed to construct the index constitution quarterly.
Gastro4 - to see the long-term returns of SPHB and SPLV, look at the graph above. I would not buy-and-hold SPHB as it has underperformed the market on average with higher risk. This analysis does not take into account short-term capital gains. These types of switching strategies are best done in tax deferred accounts.
That probably depends on your personal preferences. I can see an investor allocating some of their small cap dollars and some of their low vol dollars to small cap low vol. Small caps outperformed small cap low vol by 10% (25% vs. 15%) in 2009. They are different risk factors. Small cap low vol has dominated small caps over the long-term study, but not in every market environment. Both probably have their place dependent on portfolio construction.
Lifetime results are pretty similar between 1mo and 3mo - see the last version of the monthly momentum articles...
I have not looked at the research. Please link and I will take a look.
Yes, I actually did some work on this in mid-2013. From my drafts folder...
"At the suggestion of readers of these past articles, this article again implements a wrinkle to the high beta and low volatility switching strategy. In this monthly switching strategy, a third leg to the trade was added: long Treasuries (TLT). If long Treasuries outperform low volatility equities in the trailing one month, then long Treasuries are owned for the next one month. If long Treasuries underperform low volatility equities, then the strategy owns either high beta equities or low volatility equities based on which of these two classes had outperformed. If high beta stocks and long Treasuries both outperform low volatility stocks, then this version of the strategy owns long Treasuries. As one might expect, high beta stocks and long Treasuries are negatively correlated (r=-0.21) and having both of these classes outperform low volatility equities in the same month happened on only roughly one-sixth of monthly observations. In this three legged trade, long Treasuries are owned 45% of the time, high beta stocks 31%, and low volatility equities 24%."
Unfortunately, I do not have the data handy at the time, but remember this strategy adding increased downside protection and lower variability to the switching strategy. I will dig this up over the next couple of weeks and update the data.
Below is a comparison of SPLV and USMV
I do not profess to understand the momentum factor tilt underpinning MTUM? Can anybody help us out?
Vincent - the holding and lookback period is taken from the academic research referenced and is commonly 1-6 months. Too short and it becomes noise with high trading costs. Too long and the momentum effect dissipates and is then swamped by the longer-term value effect.
Thanks Gastro4
S&P 500 Pure Value Total Return Index
I have something on SPHD planned - it is in the queue of ideas. Thanks for reading.
Your allocation is no longer 50/50 either because your stock portfolio fell by 50%. After the stock market correction, you have a more bond heavy portfolio. Many would respond by rebalancing - selling their bonds which have outperformed to buy stocks which have cratered.
I will look into it and try and pull in the underlying indices to get a longer track record - thanks
Galicianova and zkmg01: An equal risk allocation example - in the graph above, the authors of the referenced article compare a "risk parity" portfolio to a traditional 60% equity/40% fixed income balanced portfolio. Of course, in a 60%/40% portfolio, the investor would still have much more equity risk than 60% because of the higher riskiness of equities. To accomplish risk parity, one would have to increase the proportion of fixed income. We would expect a higher proportion of fixed income to lower expected returns. That assumes that we remain un-levered. The authors are suggesting that levering fixed income such that half of the riskiness of the portfolio is in fixed income and half is in equities would outperform. In this series, I am pointing out that investors traditionally eschew lower volatility fixed income in favor of higher risk, higher expected return equities, but are not being properly compensated for this higher risk portfolio as compared to levered fixed income. Let's discuss further if this explanation again falls short, and I will try and edit the article with an improved description.
TM - I sourced the index data via a Bloomberg terminal subscription. The S&P 500 Low Volatility Total Return Index is SP5LVIT INDEX.
Marc - here is an article on Leverage Aversion or Leverage Constraints
Thanks Hardog
TM - As you stated, the data set with the replicating ETFs is limited. I am using the underlying indices with data back to 1990, which covers three economic recessions. I view this as a more apt analysis.
Thanks for the comment Ginny
I understand what you are saying Craig, and yours is a perspective that many share. All dollars are worth the same, but you have mentally accounted for them separately. Many investors do the same, adding a large idiosyncratic "bet" to their otherwise diversified portfolio. I believe that these bets - like a slot machine or the Washington lottery - lead to lower risk-adjusted returns. I prefer the disciplined long-run approach, but understand why some would hope to reach the next "plateau" as you describe through a successful short-run bet that gets you their faster than my long-term approach. I must admit that on occasion I am tempted by short-term market opportunities that I believe could provide this short cut, but realize that the increased idiosyncratic risk of this bet could push me off my path.
If you are spending $1 to win a lottery of $1M, and the odds are lower than 1 in 1 million than the bet has a negative expected value. You might derive "value" from an entertainment standpoint, but it is not economic value.
You could use beta (analytically the covariance of a stock's return with market returns divided by variance of market return). The S&P Low Volatility Index use the trailing 1-yr price volatility of constituents.