volatility of mechanical value strategies?

[racemize]

I've decided to also look at mechanical value funds (preferably fully invested ones, which I assume they mostly are) in my cash allocation analysis, to add to market and individual studies.  We've had a few discussions of these before.  Can those familiar with those point me to a few of the best?  I'd also be interested in ones that perform well, but are also volatile.  For the analysis, I need the annual returns over a fairly long span (preferably greater than 10 years, if possible). 

 

Maybe one or two in low P/E, P/B types.  Magic formula comes to mind, but that one is still fairly untested and it isn't clear if it works well yet, as I recall.

[matjone]

The Tweedy Browne paper had some stuff like that.  Also, you can run your own backtests on portfolio123, but you have to pay for it.

 

I've seen some papers on this stuff.  I think Oppenheimer did one on net nets.  I think you could find several more if you go to a library with access to JSTOR.

[frommi]

I would buy the book http://greenbackd.com/2012/12/26/quantitative-value-a-practitioners-guide-to-automating-intelligent-investment-and-eliminating-behavioral-errors/ it gives some really great insight about that with sharpe and sortino ratios for a lot of ratios.

 

But for your case a nice overview over mechanical strategies with returns per year of the last 13 years:

http://www.oldschoolvalue.com/stock-screener.php

 

[Otsog]

Sorry, not a fund, but one of the studies Greenblatt mentioned in his fundamental/value-indexing book.

 

http://www.researchaffiliates.com/Our%20Ideas/Insights/Papers/Documents/FAJ_Mar_Apr_2005_Fundamental_Indexation.pdf

 

The Fundamental indexes exhibit volatility and beta similar to those of the cap-weighted Reference portfolio and the S&P 500, except for the dividend-weighted index, which, as might be expected, had significantly lower return volatility and CAPM beta. The dividend-weighted index is dominated by mature companies with less risk and lower perceived growth prospects than the whole group of companies.  Even so, perhaps surprisingly, it out-paced the higher-risk conventional cap-weighted indexes in returns.

 

http://i.imgur.com/JDtd59J.jpg

[DoddDisciple]

I've decided to also look at mechanical value funds (preferably fully invested ones, which I assume they mostly are) in my cash allocation analysis, to add to market and individual studies.  We've had a few discussions of these before.  Can those familiar with those point me to a few of the best?  I'd also be interested in ones that perform well, but are also volatile.  For the analysis, I need the annual returns over a fairly long span (preferably greater than 10 years, if possible). 

 

Maybe one or two in low P/E, P/B types.  Magic formula comes to mind, but that one is still fairly untested and it isn't clear if it works well yet, as I recall.

 

I've been investigating something similar for a while now. I am fully in cash, and want to ease into mechanical value strategies over the next 2-3 years.

 

In regards to funds, I don't think you're going to find what you're looking for. If you do or if anyone else has suggestions, I'd love to know. The fact of the matter is that the combination of value-focus, lowish cost, and small average market cap (say sub $250M) doesn't exist, at least as far as I can tell.

 

If you're willing to sacrifice in all 3 categories, you can find some. I know the Guggenheim Pure Value has done well lately. Actually, I've looked at most of the funds on this link: http://etfdb.com/index/benjamin-graham-small-cap-value-index---total-return/. Maybe something will interest you.

 

Perritt and Bridgeway have some of the smallest average market cap funds in existence that I'm aware of. Pinnacle Value is the most Graham-like fund I've ever come across, but they've been 50% or more in cash for years.

 

Here's a good article on this: http://www.gurufocus.com/news/164674/are-there-any-good-ben-grahamstyle-mutual-funds.

 

If you want to expand this internationally, the options are even worse. Average market cap skyrockets, even for emerging market funds. There are some funds that target $1B market cap, but they are very country-specific, expensive (possibly loaded), and mostly growth focused (if you go off the Morningstar chart).

 

Greenblatt did have an international magic formula fund, which was nice in its setup since it looked at the whole world and invested based on the strategy. However, fees were high and its now closed.

 

Really, I'd prefer to toss 1% or more in fees and have someone else employ the strategies you're mentioning. It just doesn't seem possible unfortunately.

 

Here's one thing to consider on volatility. I think the way it's calculated for a fund or strategy is inherently flawed. It typically looks at investing and rebalancing at a single point in time each year. It's rare to see a blended measure of volatility where it looks at the range of volatility as you select a different starting date. Starting on say November 3rd may lead to wildly different results as starting on July 6th of the same year.

 

If you employ a strategy like say magic formula or net-nets, you can try to put your whole portfolio's orders in on the same day, but that's not really how most people invest. You get money over time and then invest it. It seems to me that developing baskets of these mechanical investments, and each operating on their own timetable in terms of rebalacing/selling, would actually lead to reduced volatility. Can you imagine how scary it would be to have to rebalance your whole portfolio in a 08/09 situation? However, if a 1/3 of your portfolio is being rebalanced and the rest is on a time table 2 years out for further examination, perspective and fortitude in sticking with the strategy may change.