Interesting - I think itās a fair point really, most probably are just better of with a world index. For some factors to outperform others must underperform so in general it canāt win.
Based on the last decade or so the value premium isnāt really showing. Momentum has had an incredible run but I donāt think anyone would say with confidence that will persist so picking factors could be considered a bit of a crapshoot.
Iām still inclined to tilt towards value and small cap though.
I think the factor timing issue can be avoided using a multi-factor approach (overweight small cap, value, quality and momentum) however we still donāt really know if this strategy outperforms. Itās marginally underperformed across various timelines
Some interesting comments, I agree that it looks sensible to hold value as we see rates rise. I saw Banks were super cheap in September 2020 and they have given me the best return out of all of my investments since the vaccine announcement. Many companies in other sectors looked like value ātrapsā.
However Iām skeptical about the long term outlook of value even in such overpriced markets. My thoughts align with the points about the level of arbitrage and whether traditional value metrics are still fit for purpose.
Nice introductory video on factor investing by James Shack:
I think his conclusion is an important one. A global tracker fund will be the best option for the majority of investors. Will people really hold onto an underperforming factor fund for decades?
Agreed - for my Iām comfortable with ~20% in smallcap/value but Iād struggle to say I have the conviction to hold most of my portfolio in those funds.
Many Happy Returns (Ramin @ PensionCraftās podcast) recently discussed the Core - Satellite portfolio structure and that the main purpose of the satellites is to give you something to play with that prevents you from tampering with your core fund(s). I think factor funds might fit well as satellites in this structure.