Thursday, March 9, 2017

2017 Credit Suisse Global Investment Returns Yearbook (and testing smart beta factors)

Both Abnormal Returns and the FT's John Authers direct us to the section of the Yearbook that addresses the various factors of returns that have been isolated and which apparently have grown from the Capital Asset Pricing Model to Fama-French's 3-factor model which adds company size and company price-to-book ratio to market risk, to Cahart's addition of monthly momentum to, if I am reading Authers correctly, "The total number of “smart beta” factors identified so far comes to 458."

Can that be right? Maybe he means Wall Street marketeer attempts at Fund differentiation. That can't be right can it?

Anyhoo, we'll start with Abnormal Returns, Feb. 21:

The 2017 Credit Suisse Global Investment Returns Yearbook is here!
It has become an annual tradition here at Abnormal Returns to make a big stinking deal out of the release of the 2017 edition of the Credit Suisse Global Investment Yearbook. See posts from 2016, 2015, 2014, 2013 and 2012. This year is a little bit different, however.

Credit Suisse is only publishing a summary edition of the yearbook online, for free. CS customers can get the full version, of course. That dampens our enthusiasm somewhat, but the yearbook is still a treasure trove of data for investors both novice and experienced.....

...Dimson, Staunton Marsh also dive into the factor investing debate. They focus on five factors, size, value, volatility and momentum, that seem to stand out in the long-term data....MORE
Mr. Authers delves a bit deeper into the factors  in his March 8 piece for the Financial Times:

FT A clinical test of the 5 most popular Smart Beta factors
If treated like new drugs, most would never be cleared for sale to the public
“Smart Beta” — the attempt to turn investment factors into indices that can be turned into cheap tracker funds or exchange traded funds — has become one of the investment industry’s biggest earners. But the rush to identify new anomalies that can be turned into indices, and then lay claim to them in the academic literature, is beginning to resemble the rush to patent new drugs. The total number of “smart beta” factors identified so far comes to 458....
Two highlights from the Authers piece:
...As for momentum, which can be measured in many ways, the team tested a strategy of identifying the best and worst performing quintiles of stocks over six months, waiting a month, and then buying the winners and shorting the losers. This approach was recalculated every six months. The results showed, as might be expected, that returns were very volatile, but that over time they would have accumulated impressively. (The most powerful winning factor in finance is, of course, compound interest)....
...As for the size factor, it endured a long period of failing to outperform as hoped — although the phenomenon that smaller companies behave differently from large ones remains intact. Since 2000, the global small company premium has been 0.45 per cent per month. This is disappointing compared with the findings when the small company effect was first identified some decades ago. As the academics put it, if the small company effect had only been discovered now, investors would have noted that small companies tended to do better, but it would not look like the major “free lunch” anomaly that it once appeared to be....

These two excerpts are reassuring on a personal level as they indicate I may not be a total raving loon for introducing a February post with:

Factors: The Problem With Small Cap Stocks (the effect probably isn't real)
I hate to argue with Fama-French, hate it hate it, hate it.
That said, I'm not sure it isn't just an artifact of the survivorship bias explained below.
Momentum is real though, for now....
Here's "Credit Suisse Global  Investment Returns Yearbook 2017 Summary Edition  – Dimson, Marsh, Staunton" (60 page PDF)

See also:
What a Long Strange Trip: From CAPM To Fama-French to Four (or more) Factor
Improving on the Four-factor (beta, size, value, momentum) Asset Pricing Model
"A new benchmark model for estimating expected stock returns"
Fama-French Have A Come-to-Buffett Moment
Rob Arnott's Research Affiliates: "Finding Smart Beta in the Factor Zoo"
"Two centuries of trend following"
"The Equation that Will Change Finance"

and many more. Use the 'search blog' box if interested.

I still feel shame for a prior characterization of the authors. From February 2015:

Lessons From the 2015 Credit Suisse Global Investment Returns Yearbook: Vice Pays
An area of profound interest to serious investors.
If you don't read the articles you won't know what I'm talking about when I go on a rant.
More importantly you won't know why the head of the Norwegian Pension Fund's strategy council (pictured below, right) recommended the fund not divest of hydrocarbon equities....

...First up, the London Business School press release, complete with pics of what I used to call the "Hot New Boy Band: Staunton, Marsh and Dimson":
New research on long term industry returns shows established industries often beat new technology

10 Feb 2015
Credit Suisse Global Investment Returns Yearbook 2015

Responsible investing research shows “sin” stocks have outperformed over the long-run, so principles have a price
Dimson Marsh and Staunton 482 x 271 pixels
The Credit Suisse Global Investment Returns Yearbook and Credit Suisse Global Investment Returns Sourcebook are published today....
Professor Dimson, I am so sorry for the "Hot new boy band" bit.