In response to rumors of his demise, Mark Twain famously quipped, “the reports of my death are greatly exaggerated.” The same can be said for the recent declarations about the end of factor investing, particularly value investing.
Sam, no one right answer. If use sector neutral then have much less "tracking variance risk" --a deadly disease for many if not most individual investors. If do it then you might not have as much exposure to distressed sectors with higher expected returns.
My own view is to use sector neutrality and to make sure include profitability/quality along with value in construction, and of course momentum.
Note a problem with intangibles is valuing them. Sometimes intangibles become worth nothing, or far less than is on the books, and other times they are worth more. Dimensional looked at the issue
"Intangible assets have always been part of the economic landscape. In this study we examine the impact of internally developed intangibles on our ability to identify differences in expected stock returns in US, developed ex US, and emerging markets. Our research does not find compelling evidence that we should include estimates of internally developed intangibles in company fundamentals such as book equity. The estimation of internally developed intangibles contains a lot of noise. Perhaps due to this high level of noise, we find that estimated internally developed intangibles provide little additional information about future firm cash flows beyond what is contained in current cash flows. Moreover, capitalizing estimates of internally developed intangibles does not yield consistently higher value and profitability premiums, and adjusting for sector differences largely eliminates premium differences in each of the three regions."
What do you think this research suggests factor fund providers should do?
I know AQR sticks close to market cap sector weights on their long short equity fund but on the other hand long only value funds from Alpha Architect and Cambria have substantial deviation from market sector weights.
Does rise of intangibles mean it's better to try to pick value stocks within industries and stick to sector weights close to market or is it okay to over/under weight sectors based on valuation?
Bridgeway did some good work on this. For low intangible industries no effect, but yes effect in high intensity. But again, much of it due to multiple expansion/spread widening
How much of value underperformance is due to intangible assets that don't show up in accounting data?
Have you seen research from Sparkline Capital that suggests taking non-accounting data into account to form an "intangible value" factor outperformed while traditional value struggled?
Then again traditional value has done just fine at least the way Cambria or AQR uses the factor post 2018-2020 drawdown.
Sam, no one right answer. If use sector neutral then have much less "tracking variance risk" --a deadly disease for many if not most individual investors. If do it then you might not have as much exposure to distressed sectors with higher expected returns.
My own view is to use sector neutrality and to make sure include profitability/quality along with value in construction, and of course momentum.
Note a problem with intangibles is valuing them. Sometimes intangibles become worth nothing, or far less than is on the books, and other times they are worth more. Dimensional looked at the issue
"Intangible assets have always been part of the economic landscape. In this study we examine the impact of internally developed intangibles on our ability to identify differences in expected stock returns in US, developed ex US, and emerging markets. Our research does not find compelling evidence that we should include estimates of internally developed intangibles in company fundamentals such as book equity. The estimation of internally developed intangibles contains a lot of noise. Perhaps due to this high level of noise, we find that estimated internally developed intangibles provide little additional information about future firm cash flows beyond what is contained in current cash flows. Moreover, capitalizing estimates of internally developed intangibles does not yield consistently higher value and profitability premiums, and adjusting for sector differences largely eliminates premium differences in each of the three regions."
https://my.dimensional.com/asset/41673/internally-developed-intangibles-and-expected-stock-returns
It's interesting problem, how to value internally developed intangibles. With purchased intangibles at least you know the "market" value.
What do you think this research suggests factor fund providers should do?
I know AQR sticks close to market cap sector weights on their long short equity fund but on the other hand long only value funds from Alpha Architect and Cambria have substantial deviation from market sector weights.
Does rise of intangibles mean it's better to try to pick value stocks within industries and stick to sector weights close to market or is it okay to over/under weight sectors based on valuation?
Depends on the industry/sector
Bridgeway did some good work on this. For low intangible industries no effect, but yes effect in high intensity. But again, much of it due to multiple expansion/spread widening
Also industry neutralizing helped too
How much of value underperformance is due to intangible assets that don't show up in accounting data?
Have you seen research from Sparkline Capital that suggests taking non-accounting data into account to form an "intangible value" factor outperformed while traditional value struggled?
Then again traditional value has done just fine at least the way Cambria or AQR uses the factor post 2018-2020 drawdown.
BTW, love Sparkline (Kai Wu) research, I have written several articles based on Kai's research.