If You Think You’re Diversified, Think Again

Diverging performance doesn’t necessarily signal true diversity, says Nomura quant strategist Joseph Mezrich. This according to a recent article in Barron’s. While selecting stock groups based on different characteristics should offer adequate diversification, the article argues that investors should be more focused on whether those different stock groups are reacting to the same underlying driver, which would point to a lack of diversity. Mezrich recently published a research report asserting that, based on this criterion,… Read More

Factor Portfolio Returns and Implementation Costs

A recent Advisor Perspectives article by BAM Alliance director of research Larry Swedroe discusses the degree to which implementation costs may affect factor premiums. Swedroe first offers a checklist of “criteria that should be met before you consider investing in a factor.” Besides demonstrating higher returns, he says a factor must be: Persistent, with returns holding over time and across different economic regimes; Persuasive, holding across counties, regions, sectors and asset classes; Robust, holding over… Read More

Cost of Smart Beta Leads to Distorted Investor Expectations

An article in CFA Institute reports that, although academic research has touted the benefits of “smart-beta,” investing, this research “largely ignores transaction costs that reduce returns significantly.” The article offers data reflecting the “flood” of academic papers on factor investing, “which provides the theoretical foundation of smart beta allocations,” but adds that creating factor portfolios in academia is “very different from building investable smart beta exchange-traded funds (ETFs).” This is due in large part to… Read More

Swedroe on What Makes Factors Last

In an article on ETF.com, BAM Alliance research director Larry Swedroe discussed issues related to factor investing, the potential problems with research around it, and the criteria he believes must be met to suggest that a factor will endure. According to Swedroe, a factor should first meet the following two conditions: Be a unique source of risk and return not explained by other well-documented factors already used in asset pricing models; Have delivered a premium… Read More

Study Raises Questions About Factor Significance

A new study has found that most of the market anomalies academics have identified are not statistically significant, says a recent Wall Street Journal article. After analyzing 447 anomalies (the biggest test of its kind conducted so far), the researchers concluded that more than eight out of ten “vanish when rigorous tests are applied,” according to the article. In their report, they warn that academics may manipulate statistics to come up with compelling findings, a… Read More