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Value tilt
Robert T
06-26-2007, 3:16 PM | Post #2404820
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bigragu.
Discipline to stay the course with a value tilt.
I strongly believe that further education increases commitment to particular asset allocation choices and increases the likelihood of staying the course. As Swensen highlights in his book - "lightly held position invite casual reversal".
On the value tilt, I find the Fama-French work (cost of capital story) convincing enough to believe that a value premium will persist over the long-term. It will clearly not always be positive and there will inevitably be periods when a value tilted portfolio will lag a total market portfolio (historically this has been up to 10 percentage points in a year for a similar portfolio value tilt to mine e.g. if the market return was 5%, my portfolio would return -5% in this case). So I should not be surprised by a lag in performance.
I find that the Fama-French five factor model more generally provides a useful framework for overall portfolio decisions as summarized in their Common Risks paper.
"If the five factors [Rm-Rf, HmL, SmB, Default, Term] capture the cross-section of average returns, they can be used to guide portfolio selection. The exposures of a candidate portfolio to the five risk factors can be estimated with a regression of the portfolio's past excess returns on the five explanatory factors. The regression slopes and the historical average premiums for the factors can then be used to estimate the (unconditional) expected return on the portfolio."
Common risk factors in the returns on stocks and bonds. Fama-French. Journal of Financial Economics 1992.
Using the 'historical factor premiums' as an estimate for expected returns as suggested by Fama-French in 1992 turned out to be a fairly useful suggestion - if we go by Eric's numbers from 1996 to date.
Robert
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Originally posted in thread: 59459
Topics
asset allocation
cost of capital
education
Gene Fama
historical
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