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Weekly Summary of Research Findings: 12/2/19 – 12/6/19

Below is a weekly summary of our research findings for 12/2/19 through 12/6/19. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

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Best Factor Model of U.S. Stock Returns?

Which equity factors from among those included in the most widely accepted factor models are really important? In their October 2019 paper entitled “Winners from Winners: A Tale of Risk Factors”, Siddhartha Chib, Lingxiao Zhao, Dashan Huang and Guofu Zhou examine what set of equity factors from among the 12 used in four models with wide acceptance best explain behaviors of U.S. stocks. Their starting point is therefore the following market, fundamental and behavioral factors:

They compare 4,095 subsets (models) of these 12 factors models based on: Bayesian posterior probability; out-of-sample return forecasting performance; gross Sharpe ratios of the optimal mean variance factor portfolio; and, ability to explain various stock return anomalies. Using monthly data for the selected factors during January 1974 through December 2018, with the first 10 (last 12) months reserved for Bayesian prior training (out-of-sample testing), they find that: Keep Reading

Exploiting Consensus Hedge Fund Conviction Stock Picks

Can investors exploit information about hedge fund stock holdings in SEC Form 13F filings? In their October 2019 paper entitled “Systematic 13F Hedge Fund Alpha”, Mobeen Iqbal, Farouk Jivraj and Luca Angelini investigate whether carefully culled “best ideas” of equity hedge funds produce significantly beat the S&P 500 Total Return (TR) Index. Using quarterly Form 13Fs for U.S. equity long-short, equity market neutral, equity long-only and equity event-driven hedge funds, they measure: individual hedge fund manager conviction regarding a stock based on size of position; and, hedge fund manager consensus regarding a stock based on the number of funds holding it. Using proprietary data, they identify hedge funds exhibiting long-term investment approaches. They then 47 days after the end of each quarter (to ensure availability of Form 13Fs), reform a portfolio from among long-term hedge funds holding at least five stocks, as follows:

  1. Exploit conviction by identifying all stocks comprising at least 7.5% of a fund portfolio.
  2. Exploit consensus by buying the equal-weighted top 50 of these stocks in terms of number of hedge managers holding them. 

Using processed quarterly data from hedge fund Form 13Fs, the specified proprietary data on hedge fund investment approaches and returns for associated stocks during the first quarter of 2004 through the second quarter of 2019, they find that:

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Stick to the Plan, or Adjust?

When a retirement portfolio veers from its planned path, is it better to count on reversion-to-path or adjust the plan? In his March 2019 paper entitled “Managing to Target: Dynamic Adjustments for Accumulation Strategies”, Javier Estrada employs a simple retirement portfolio model to compare outcomes for sticking to the plan (S2P) with 13 dynamic strategies of three types:

  1. Five effective but impractical (EBI) dynamic contribution strategies. EBI1 at the end of each year contributes to or withdraws from the portfolio so that it stays exactly on track. EBI2, EBI3, EBI4 and EBI5 are similar but limit annual adjustments to no more than 5%, 10%, 15% and 20% above or below the prior-year contribution, respectively.
  2. Five feasible but limited (FBL) dynamic contribution strategies. FBL1, FBL2, FBL3, FBL4 and FBL5 also at end of each year contribute to or withdraw from the portfolio to help keep it on track, but limit changes to no more than 5%, 10%, 15%, 20% and 50% (FBL5) above or below the initial plan contribution, respectively.
  3. Three dynamic asset allocation (AA) strategies that every five years make portfolio asset allocations more aggressive (conservative) when the portfolio is below (above) plan. AA1, AA2 and AA3 limit changes in asset class allocations to 10%, 20% and 30%, respectively, compared to allocations five years ago.

His model portfolio consists of 39 annual contributions over 40 years, with 5% annualized real return (the historical average for 60% stocks and 40% bonds) and target value $1 million at retirement. He evaluates portfolio performance over 80 possible 40-year periods over 118 years. Using annual real (based on the U.S. Consumer Price Index) total returns for the S&P 500 Index and 10-year U.S. Treasury notes during 1900 through 2017, he finds that:

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Ways to Beat the Stock Market?

Who beats the stock market and why? In his October 2019 paper entitled “The Five Investor Camps That Try to Beat the Stock Market”, William Ziemba discusses how different categories of investors succeed. For investors pursuing active strategies, he addresses broadly the means of getting an edge and betting well. Based on his academic work and practical experience, he concludes that: Keep Reading

Using P/E10 Thresholds to Time the U.S. Stock Market

A subscriber requested verification of a fundamental U.S. stock market timing strategy with rebalancing/reallocation of a stocks-bonds portfolio based on Shiller cyclically adjusted price-to-earnings ratio (P/E10 or CAPE) thresholds, as follows:

  1. If P/E10 > 22, hold 40% stocks and 60% bonds.
  2. If 14 < P/E10 < 22, hold 60% stocks and 40% bonds.
  3. If P/E10 < 14, hold 80% stocks and 20% bonds.

The benchmark is an annually rebalanced 60% stocks-40% bonds portfolio (60-40). To assess reasonableness of the P/E10 thresholds chosen, we use P/E10 monthly levels since 1881 and S&P 500 Index monthly returns since 1927. To verify and assess robustness of the specified strategy (P/E10 Timing), we apply it to SPDR S&P 5oo (SPY) since inception in 1993 as stocks and Vanguard Long-Term Treasury Investor Shares (VUSTX) as bonds, with monthly rebalancing/reallocation based on P/E10. We consider gross average monthly and annual returns, standard deviations of monthly and annual returns, compound annual growth rate (CAGR), maximum drawdown (MaxDD), and monthly and annual Sharpe ratio as strategy performance metrics. We use monthly and annual average monthly yield on 3-month U.S. Treasury bills (T-bill) to calculate Sharpe ratios. As an additional benchmark, we include a simple technical strategy that is in SPY when prior-month S&P 500 Index is above its 10-month simple moving average and VUSTX when it is below (SPY SMA10). Using the specified inputs, allowing a P/E10 Timing test of nearly 27 years, we find that: Keep Reading

SACEMS, SACEVS and Trading Calendar Updates

We have updated monthly allocations and performance data for the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS). We have also updated performance data for the Combined Value-Momentum Strategy.

We have updated the Trading Calendar to incorporate data for November 2019.

Weekly Summary of Research Findings: 11/25/19 – 11/29/19

Below is a weekly summary of our research findings for 11/25/19 through 11/29/19. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Preliminary SACEMS and SACEVS Allocation Updates

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for December 2019. For SACEMS, the top four positions are in close competition, so the top three may change by the early close. For SACEVS, allocations are unlikely to change.

GDP Growth and Stock Market Returns

The U.S. Bureau of Economic Analysis (BEA) each quarter estimates economic growth via changes in Gross Domestic Product (GDP) and its Personal Consumption Expenditures (PCE), Private Domestic Investment (PDI) and government spending components. BEA releases advance, preliminary and final data about one, two and three months after quarter ends, respectively. Do these estimates of economic growth usefully predict stock market returns? To investigate, we relate economic growth metrics to S&P 500 Index returns. Using quarterly and annual seasonally adjusted nominal GDP data from BEA National Income and Product Accounts Table 1.1.5 as available during January 1929 through September 2019 (nearly 90 years) and contemporaneous levels of the S&P 500 Index, we find that:

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