More than a year after they first started work on it, a new research paper from Chief Investment Officer Jared Kizer and Investment Strategist Sean Grover is set to hit the stands in the fall issue of The Journal of Portfolio Management.
Titled “An Analysis of the Expense Ratio Pricing of SMB, HML and UMD Exposure in U.S. Equity Mutual Funds,” the paper examines how much investors are paying for exposure to certain investment factors, specifically size, value and momentum. By way of background, an investment factor is essentially a characteristic (or set of characteristics) common across a broad set of securities that both explains performance and provides a premium above market returns. The paper focuses on a complex topic, one that up until this point has had very little written about it. But, at its most basic level, the question Kizer and Grover seek to answer can best be summed up this way: Is your mutual fund giving you what you’re paying for?
Kizer and Grover take a moment to discuss their findings, their writing process and their experience navigating the rigors of publishing original research in a peer-reviewed academic journal with Nick Ledden, Buckingham’s external marketing editor.
Based solely on your journal article’s title, it seems like you’ve chosen a very complex topic to address. Why did you decide to do this research in particular, and why choose this subject?
Sean Grover: When deciding on a project, we wanted to make sure a few different elements were in place, like an interesting research question, manageable data and analysis work, and the ability to contribute to the existing literature. As practitioners, we also want to do research that will benefit our firm and our clients. We thought this project, which examines how funds are priced, met those requirements and was worth taking on.
For those of us without advanced degrees in finance, can you summarize the paper’s conclusions in a couple of sentences? What do you hope readers take away from it, and why is that important to clients in particular and investors in general?
Jared Kizer: The paper is trying to answer the important question of what additional, incremental fund expense ratio investors are paying to access size, value and momentum tilts. It’s important because Sean and I believe these costs should continue to trend down over time given that many firms are capable of implementing small-cap and value strategies — meaning we believe pricing should become more commodity-like over time.
Tell us a little bit about your writing process. What does it take to create something like this?
SG: The research paper writing process is likely a bit different than I think most people would assume. The analysis work generally goes the fastest, and then the first draft flows pretty easily. Auxiliary analysis work comes next, and this is to check the robustness of results and provide answers to anticipated questions from journal referees and readers. Then a lot of time is spent editing and polishing the work in preparation for journal submission. The bulk of time from genesis to publishing is taken up after submission to a journal, when authors have to first wait on and then answer many questions and edits from journal referees. This can be tedious but it’s very important on the road to journal acceptance. Last comes a lot of joint editorial work with the journal editor and finally a nice sense of accomplishment when you see your name and work in print.
Did your results more or less match what you expected to find in the data, or was what you found a surprise?
JK: They basically matched what we expected to find. Investors are paying incrementally more for size and value tilts than they are paying for overall equity market exposure.
Which did you enjoy more: the analysis and crunching the numbers or the writing process? Why?
SG: Personally, I enjoy the analysis portion of research projects. This ranges from data gathering to writing programs in statistical software for estimating regressions. But I also understand the importance of clearly articulating the research problem and results so that journal editors and readers will be able to understand the work.
JK: Writing well is difficult, so I’ve always enjoyed the number crunching side more than writing. I also enjoy working with data and automating calculation routines, which you get to do on a more advanced research project.
Have you worked together previously? How did you divvy up the workload for this project? I’m sure everything went flawlessly, right?
SG: Interestingly, this was the first project on which I began working after starting my position at Buckingham and The BAM ALLIANCE. Jared had developed the research question and explained it to me on my second day. From there, I worked on preparing the data, estimating the regressions and composing the methodology portion of the paper. Following that, we collaborated through the remaining composition and much of the editorial and auxiliary analysis work. And yes, compared to many research projects, this one did go pretty seamlessly!
Educating investors is an important part of what you do, and it’s clear you take that endeavor very seriously. How did this project fit into that larger context?
JK: It’s important for investors (and maybe most importantly their financial advisors) to understand why expense ratios are set in the way that they are and how expenses compare across funds after adjusting for fund assets under management, what types of stocks they buy and other important factors. I think our piece makes an important contribution to an area that’s had very little exploration to this point.
SG: Educating advisors and clients is an important and significant portion of our team’s work. Education-oriented projects vary dramatically in size and complexity based on the subject and target audience. This one was definitely on the more difficult and complex side of what we do, but it fits well into one of our firm’s broader goals of being thought leaders in the industry and contributing to the academic and practitioner literature.
What’s your favorite financial book?
Jared Kizer: This is a tough one because there are so many great reads, but I’d have to say my all-time favorite was “Lords of Finance” by Liaquat Ahamed. I’m a big history buff so a book that combines early 20th century history with finance is a win-win.
Sean Grover: “Liar’s Poker” by Michael Lewis.
What’s your favorite non-financial book?
JK: As I just mentioned, I love history, particularly early and mid-20th century history. One of my favorite books is “The Rise and Fall of the Third Reich” by William Shirer, since it deals with that time period. I’ve always been fascinated by how a regime as evil as the Nazis gained so much power and such a significant political following.
SG: “The Great Gatsby” by F. Scott Fitzgerald.
Favorite weekend activity?
JK: It used to be paintball, but I’m getting too old for that. So, at this point, outside of just hanging out with Lezlie and the boys, it’s playing guitar, listening to music and watching the NBA.
SG: Watching my Denver Broncos.
Best music for working out?
JK: I love metal … what can I say.
Best working hours?
JK: Early morning without a doubt. On most days, I’m only about half as smart from 1 p.m. on.
SG: Early in the morning or late at night.
Favorite writing snack?
JK: Angie’s Salted Caramel Popcorn. If you don’t know about this stuff, correct that immediately.
SG: Coffee. And more coffee.
Your co-author’s most annoying habit?
JK: Sean is really, really good at math. I’ve always had to work at advanced math and statistics, and it seems like it comes much easier for Sean. So I’m a bit jealous/annoyed there.
SG: I can’t call it annoying, but Jared’s mind is always at work, and I’ve got to stay focused and on my toes to keep up.
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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
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