Kbg wrote:There's been quite a bit written about the value effect debating whether it will last/has been significantly reduced. I would probably put more faith in value vs. total market numbers in the post investable ETFs/indexes time periods. You REALLY need to be careful when interpreting value performance results due to a large overlap with value and the size factor...not to mention good old fashioned arbitrage.
A little dated, but the graph on page 1 tells you pretty much everything you need to know.
https://www.hvst.com/attachments/4138?download=true
Very interesting point. Was not aware of that. I'll need to look into recent Value performance to see if this holds up.
InsuranceGuy wrote:PP2 increases annualized volatility by ~1% over the PP which is compensated by the higher return (MaxDD stays the same).
PP3 on the other hand, while the longer term averages do look great, increases annualized volatility by ~3% over the PP and increases the MaxDD by ~5% so the additional return doesn't seem to compensate for the additional risk.
From a pure value perspective, value portfolios are typically negatively correlated with momentum based portfolios so it would be to your advantage to combine strategies.
You are correct that PP has an average down volatility of 2.1% across these 7-year periods, whereas PP2's is 2.4% and PP3's is 4.0%. I believe that the historical results show PP2, despite it's higher down volatility, is substantially offset by the up-side. PP3's downside risk does not seem to be offset enough to justify using it. I defined the downside risk threshold as anything that does not keep up with inflation in a given year.
What is interesting is that despite having a slightly higher down volatility, PP2 still manages to avoid the futility of PP's worst seven-year periods.
Aside from the excellent point on the "devaluing of value stocks" that Kbg made above, are there any other reasons to question whether PP2 is superior to PP1?
Thanks again for your insights.
InsuranceGuy wrote:From a pure value perspective, value portfolios are typically negatively correlated with momentum based portfolios so it would be to your advantage to combine strategies.
I'm afraid I am not quite sure of how to do a momentum-based strategy in practice (while maintaining tax-efficiency, etc.) given my lack of experience in that space, but thanks for the heads up. I've been reading up on it.