Value Indexing: Don’t Chase Performance

In a recent interview conducted by Alex Bryan of Morningstar, Research Affiliates’ John West, head of client strategies, discussed a different approach to value investing in which holdings are weighted based on fundamental metrics such as book value and sales rather than market capitalization. West shared insights concerning the motivation behind the process and how it comprises a value approach: The motivation, West says, came from the tech bubble during which cap weighting of overpriced stocks forced investors to “go along for the ride.” When the reverse happens, says West, you have a maximum weighting for underperforming securities, resulting in […]

Interest Rate Sensitivity and Low-Vol Investing

Interest rates have a significant impact on security prices, according to an article by Morningstar’s Alex Bryan, CFA, the firm’s Director of Passive Strategies Research, North America. Bryan writes that, unlike bonds, which have a finite life and fixed cash flow, the impact of rates is more difficult to anticipate for equities. He explains his theory that firms that are “more sensitive to the business cycle tend to experience greater cash flow growth during economic expansions” and, therefore, should do better in a rising rate environment. Bryan discusses his research that shows high-dividend-yielding stocks, those stocks in more defensive industries, […]

Valuations Matter in Factor Strategies

It’s a familiar investment conundrum: when a strategy outperforms and more investors pile in, it can get more expensive and therefore be less likely to outperform going forward. This is discussed as it relates specifically to factor investing in a recent Morningstar article. Alex Bryan, CFA, director of passive strategies research (North America) for Morningstar, poses the question: “What if the apparent performance edge is not sustainable and investors are just relapsing into counterproductive performance-chasing?” He offers support for related research results published by Rob Arnott and his colleagues at Research Affiliates. Arnott, says Bryan, “argues that valuations matter, and […]

Growth and Performance in Emerging Markets

Although it seems counterintuitive, evidence suggests that there is a negative correlation between economic growth (GDP) in emerging markets and stock market performance, says a recent Morningstar article. Alex Bryan, Morningstar’s director of passive strategies research (North America) explains that while emerging markets will “likely continue to grow faster than developed markets for the foreseeable future,” these gains might not extend to investors. Using real GDP data from the World Bank and the gross return version of MSCI country indices, Bryan found that across 41 countries (for the period from 1988 to 2015), higher economic growth did not translate into […]

Adding Momentum to Your Portfolio

The tendency of recent market performance to persist, an effect known as momentum, has been pervasive even though it is a “blatant violation” of what you would expect in an efficient market. This according to Alex Bryan, director of passive strategies research for Morningstar, in a recent interview. Bryan explains that extensive research has uncovered three theories behind this: Behavioral biases. Investors may underreact to new information because they “anchor” their investment strategies to old information. This can cause market prices to react more slowly than they should. Investors are reluctant to sell stocks that have decreased in value. Instead, […]