Of fundamental indexing Sauter says among other things;
Why does anyone think it's simple to come up with a formula that's going to be able to add a return above the market when active managers haven't been able to?While he has a point, WisdomTree has back tested their domestic funds back to 1964 and, well, the results are better than cap weighting. There are plenty of caveats to be sure but 40 years may not be a fluke.
It seems to me that people in the market cap weighting business could be in a bit of a pickle. First, what are they supposed to say about fundamental indexing? "Um, yeah, we think our way is inferior."
For the individual investor none of this matters. You have the luxury of having all sorts of methodologies in your account without having to be loyal to any of them. I would imagine that for some things, market cap weighting is better but for others you should probably use a fundamentally weighted product, if you use these things at all.
It is not intuitive to me that investing methods can't evolve which is my take on what the market cap crowd is saying. Yesterday I posited that the newer commodity ETFs might be a better way to go than the older ETFs (just a theory with no conclusion). In the last 35 years or so we have seen the options market, the Nasdaq and I believe most of the futures markets all created. So, again, the idea that things always stay the same is upside down.
As an administrative note, I had said I wanted to put labels on all of the past posts but there are over 2100 of them that I would have to do and I also think it screws up the various syndication feeds. We'll see how it goes.
7 comments:
On the subject of indexing:
Don't miss this week's John Mauldin's "Outside the Box" James Montier takes a shot at Market Indexing in a great piece called "CAPM is Crap"
OG
a reader sent this to me but i have not had a chance to read it yet.
I'm not sure what to think of single factor fundamental indexing. I own a couple Wisdom Tree funds because WT was the only way to easily access baskets of international value stocks.
I'd really like to see more multi-factor quant funds ala HFCGX. There are a number of documented market anomalies - I'm surprised more fund companies haven't packaged them into investment products.
James O'Shaughnessy's "What Works on Wall Street" is a nice reference book that backtests numerous criteria back to the early '50s.
If you look at the real time performance results of the Guru screener portfolios at AAII (or Validea.com), you would think funds based on these mechanical screens would be hot products.
Btw, I also wonder why somebody isn't trying to emulate DFA's methods and make their products available to the masses.
"Why does anyone think it's simple to come up with a formula that's going to be able to add a return above the market when active managers haven't been able to?"
Active managers would look a lot better with lower fees and without having to deal with inflows and outflows (somewhere recently I read some research on the impacts of inflows and outflows on performance)... Once this new fundamental indexing algorithm is known and enough people are exploiting it theory suggests that the effect will go away. So the backtesting means that it will probably work for a while, but not forever.
tomk i think d-i-yers can creat the same effect if they have enough time to devote
mOOm, great point hence my comments about evolution. I would add that the strategy of FI will lose popularity during the next bubble possible delaying FI's edge.
It seems that the Vanguard generation just want ETFs to match the market, and grade them accordingly. We, on the other hand, want to make money. This doesn't seem to enter into some peoples' consciousness.
> tomk i think d-i-yers can creat the same effect if they have enough time to devote
Roger, having enough time to devote is not really the problem. All you really need is a good stock screener. Guru screening criteria are easy to find.
The main problem for most individuals is having enough investment capital to efficiently manage 50-100 positions. Also, 50-100 positions will give you only one strategy. For example, if I decided to create a homemade version of the Cornerstone Growth strategy, I would have to own 50 positions but still wouldn't have a diversifed portfolio. Sure, I could own fewer stocks, but O'Shaunessy clearly illustrates how risk and volatility rises when using the same method and holding fewer positions.
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