14 January 2016

What to Make of 10-Year Small-Cap and Value Results




Ken French’s recently updated global factor data shows the global size and value premiums were basically flat for the past 10 years (the value premium was actually about –1 percent per year over this span). This long-term historical result has surprised many people and naturally led some to ask whether these premiums can be expected in the future. Figure 1 graphs the one-, three-, five-, 10-, 15- and 20-year average size and value premiums using the global data set.

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28 December 2015

Revisiting International Diversification




International diversification has come under attack over the last couple of years as both international developed and emerging markets have underperformed U.S. stocks. Figure 1 illustrates this underperformance by looking at the growth of $1,000 invested in U.S. and international developed market stocks over the period from January 2008 through November of this year.

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18 October 2015

An Analytical Evaluation of Rising Glidepath Claims




Last year, a piece by Michael Kitces and Wade Pfau made the claim that mechanically increasing the equity allocation during retirement — which they term a “rising glidepath” — could reduce the likelihood that a retiree outlives his or her assets and could decrease the magnitude of shortfall when capital market returns disappoint. Specifically, the paper stated:

“We find, surprisingly, that rising equity glidepaths in retirement … have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios.”

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30 September 2014

Additional Thoughts on the Rising Glidepath Approach




6 March 2014

Smart Beta Can Be Smart But Is Not New




I held off writing about smart beta strategies as long as I could. The world, after all, is awash in such pieces. I couldn’t ignore it any longer, though, because virtually every piece I’ve read that’s critical of smart beta misses one fundamental point: The term “smart beta” may be new (and has certainly been effective from a marketing perspective) but the underlying strategies themselves are not.

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4 March 2014

Do Corporate Bonds Add Value in Portfolios?




I frequently get asked about the merits of corporate bonds, both investment-grade (IG) and high-yield (HY), relative to government and municipal bonds. I don’t believe the risk-return profile for long-term investors (particularly taxable individual investors) is improved by owning IG or HY corporate bonds compared with simply owning a diversified portfolio of stocks and high-quality government bonds.

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6 January 2014

Bond Funds Aren’t Naturally Riskier Than Individual Bonds




In spending significant time talking to clients and wealth advisors about fixed income, one common misconception is that bond funds are more exposed to interest rate risk than laddered individual bond portfolios. The logic basically starts and ends with the observation that individual bonds can be held to maturity while bond funds don’t necessarily hold all bonds until they mature. Because all individual bonds can be held to maturity, as the logic goes, it doesn’t matter if their prices go up or down in the interim. This does indeed sound logical, but as it turns out, laddered individual bond portfolios and bond funds with similar-maturity bond holdings have almost identical exposure to interest rate risk. There simply isn’t much of a difference, yet the incorrect point of view is all too common within the industry and can lead investors to take excessive interest rate risk in individual bond portfolios without understanding the implications.

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5 December 2013

Do Private Equity Investments Outperform?




The initial academic work on the returns of private equity investments generally found underperformance relative to public market benchmarks like the S&P 500. More recent research, which apparently uses higher-quality data, is coming to the opposite conclusion. But is it really? Professor Ludovic Phalippou from the University of Oxford argues that while this recent research appears to be valid, the S&P 500 isn’t the right benchmark.

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12 September 2013

Is DFA’s New Research Flawed?




Folks have been lighting up my inbox with questions and comments about an Advisor Perspectives pieceby Michael Edesess (link included for the three of you who may not have seen the piece … you three may also not be aware that Miley Cyrus appeared on the MTV Video Music Awards … link not included).

The article is critical of DFA’s recent work on profitability. I’ll focus most of my comments on the contents of Edesess’s section entitled “How the DFA argument is flawed.”

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5 September 2013

Can the Size and Value Premiums Be Captured?




The debate about whether the size and value premiums have existed on paper was settled many years ago. The long-term historical data clearly shows robust size and value premiums. The average annual U.S. size and value premiums have been 3.6 and 4.8 percent, respectively, from 1927-2012. What has been more hotly debated, however, is whether these premiums could actually be captured in the real world net of transactions costs and fund expense ratios. In my opinion, even this debate is a bit silly at this point. If you examine the returns of intelligently built, low-cost mutual funds that have been designed specifically to capture these premiums, it’s clear they’ve been successful.

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