What are the levers that managers can pull to drive return for any investment strategy? This piece boils it down to consistency, magnitude, and conviction, and finds that even the best managers have done a poor job at portfolio construction. Most would be better off equal-weighting their own portfolios.
The first of many hopefully...my good friend Steven Wood and I have been tossing around the idea of collaborating on some work in hopes it ups both of our research games. I often get asked whether or not factors go out of favor. This is a pretty good case study that yes, sometimes what worked in the past doesn't continue in the future.
Making money has been too easy since 2009. It’s about to get harder.
There are a hundred ways to evaluate whether an investment is cheap--discounted cash flows, competitor multiples, mean reversion, multiple of projected earnings--the list goes on...and on. What's cheap now form a factor perspective?
One of the things I’ve learned over the years is that there is a persistent dualism in conducting research balance—a between reliable preexisting findings and questioning preconceived notions.
Anyone overweight to non-U.S. allocations has suffered over the previous ten years. The current equity bull market has not been kind to non-U.S. allocations. At a recent conference I attended, the term ‘TINA: there is no alternative’ came up more than once in the context of allocating investor portfolios. It captures the collective sentiment that equities, despite a massive bull run and rising valuations, are one of few viable asset classes to park capital.
We are often asked how much should be allocated to microcap equities. As long-term investors that view the opportunity set through the lens of factors, our answer is usually some version of "probably more than you currently do." There is little empirical research specific to the intricacies of microcaps, and common benchmarks cast a shadow on the alpha that is readily apparent in active manager returns and factor spreads. This post attempts to provide an alternative framework for approaching and sizing strategic allocations to microcaps.
The final installment in this micro cap series touches on the massive factor spreads available in the micro cap space, structural biases that keep large investors out, and an argument for the persistence of factor returns.
Investing in micro caps poses a challenge for stock pickers. There's lots of noise in the data and, as we saw in the previous post, investing in micro caps requires expertise in many different types of investment situations—venture, growth, distressed, etc. This post attempts to cut through some of the noise inherent in micro caps to level the playing field.
For this post, I define the opportunity set of micro caps a bit differently than common benchmarks. I discuss some of the fundamental drivers of micro cap businesses and how their stage in the business life-cycle can distort fundamental metrics. Historically, 41% of the universe is in some sort of transition—evolving to new heights or devolving towards liquidation—which creates lots of noise in the data, and scares lots of investors away.