The Lemon Fool

What effect would a continuing rotation from growth to value have on index trackers following an index like such as MSCI World? This is a plausible scenario at the moment and i am not sure how it would play out. Do market cap indices have a growth style bias ? is this only the case after a period of growth? Would they capture a prolonged value rally or does market cap weighting bias then against value?

AWOL wrote:What effect would a continuing rotation from growth to value have on index trackers following an index like such as MSCI World? This is a plausible scenario at the moment and i am not sure how it would play out. Do market cap indices have a growth style bias ? is this only the case after a period of growth? Would they capture a prolonged value rally or does market cap weighting bias then against value?

Mkt cap trackers have a bias to momentum. That may encompass a growth tilt. But both are subjective. Virtually any other method of weighting would tilt the bias to value.

My challenge is that in the I am happy being style neutral as i don't think i have much predictive powers but i think it's plausible that growths rally is over and value may remain back in style for some time. I may need to ignore that i am just not sure i can afford to. I am 90% MSCI World 10% small cap. It's most likely that i will do nothing as that is my investing secret sauce however i worry that market cap weighting will struggle in the value era. Perhaps it will struggle with the transition then momentum will be driven by value stocks and market cap trackers will follow. My suspicion is that value declines as market cap grows so the bias is away from value and they won't do as well.

This is the wall of worry that my portfolio must climb. In the end i don't have enough confidence to move to a factor tilted fund. I tried momentum once and I couldn't trust the algorithm. This way i am no worse than the market.

If you look at style boxes on the World tracker you find it will show how about third each value, balances, growth.

In the last few months the growth bit has done badly and the value but less so, some of the value is now balanced and some of the growth starts to move into balanced and value. The index is reflexive.

I looked at some value indexes recently and quite a few tech names now feature in the top holdings. Eg Apple and Intel are the largest two holdings in one USA value index and Intel in the World index.

The time to have gone into value was a year ago, as it was 3 years ago , 5 , 7 or 10 years ago. It would have made sense to have done so on all the conventional arguments but it would not have worked out on any but the 1 year ago.

Best not to worry and ignore the commotion, if you switch to Value will it do better in the short term, when do you switch back ? What do we know that the market doesn’t ?

The edge as private individuals we have is lack of reporting or oversight. We can exploit the markets over enthusiasm/ pessimism and hold a position as long as we like.

The tide has turned against growth surprisingly quickly, give it a few more months of the same and opportunities may arise…

Hariseldon58 wrote:If you look at style boxes on the World tracker you find it will show how about third each value, balances, growth.

In the last few months the growth bit has done badly and the value but less so, some of the value is now balanced and some of the growth starts to move into balanced and value. The index is reflexive.

I looked at some value indexes recently and quite a few tech names now feature in the top holdings. Eg Apple and Intel are the largest two holdings in one USA value index and Intel in the World index.

The time to have gone into value was a year ago, as it was 3 years ago , 5 , 7 or 10 years ago. It would have made sense to have done so on all the conventional arguments but it would not have worked out on any but the 1 year ago.

Best not to worry and ignore the commotion, if you switch to Value will it do better in the short term, when do you switch back ? What do we know that the market doesn’t ?

The edge as private individuals we have is lack of reporting or oversight. We can exploit the markets over enthusiasm/ pessimism and hold a position as long as we like.

The tide has turned against growth surprisingly quickly, give it a few more months of the same and opportunities may arise…

Value has been out of favour since 2007 when the banking crisis hit and governments pumped money into the economy.
The current situation has been likened to the 2001 dot com bust with overlays of 1970's stagflation. Your guess is as good as mine as to how long that will take to resolve.

OhNoNotimAgain wrote:

Hariseldon58 wrote:If you look at style boxes on the World tracker you find it will show how about third each value, balances, growth.

In the last few months the growth bit has done badly and the value but less so, some of the value is now balanced and some of the growth starts to move into balanced and value. The index is reflexive.

I looked at some value indexes recently and quite a few tech names now feature in the top holdings. Eg Apple and Intel are the largest two holdings in one USA value index and Intel in the World index.

The time to have gone into value was a year ago, as it was 3 years ago , 5 , 7 or 10 years ago. It would have made sense to have done so on all the conventional arguments but it would not have worked out on any but the 1 year ago.

Best not to worry and ignore the commotion, if you switch to Value will it do better in the short term, when do you switch back ? What do we know that the market doesn’t ?

The edge as private individuals we have is lack of reporting or oversight. We can exploit the markets over enthusiasm/ pessimism and hold a position as long as we like.

The tide has turned against growth surprisingly quickly, give it a few more months of the same and opportunities may arise…

Value has been out of favour since 2007 when the banking crisis hit and governments pumped money into the economy.
The current situation has been likened to the 2001 dot com bust with overlays of 1970's stagflation. Your guess is as good as mine as to how long that will take to resolve.

The market cap approach is low effort and low cost, Value certainly has done well in the past but not for many years and quite agree with OhNoNotHim Again that the crystal ball is rather unclear at the moment.

Perhaps the situation is more akin to the US and the aftermath of the nifty fifty era ? mid 60’s to early 80’ when US markets had a zero real return but value did just fine in that period.

If I wanted to add an alternate to the market cap World Indexx there are a few options, from the Yield Approach ( proxy value) WQDS, VHYL and Value Index’s IWVL or WVAL and finally the RAFI fundamental index PSRW which would be my choice.

Hariseldon58 wrote:
The market cap approach is low effort and low cost,

Just because something is cheap and easy does not make it good.

As I have argued elsewhere allocating capital on the basis of price only, with no regard to what you are getting, is fundamentally dangerous. I can think of no other walk of life where applying such a simplistic rule is applied.

Indeed, but it makes it better than a comparable alternative that is higher cost. If you’re prepared to ‘have whatever everyone else is having’ (the market returns) then you’re not allocating your capital on price but on value for money which has been determined by lots of experts.

AWOL wrote:What effect would a continuing rotation from growth to value have on index trackers following an index like such as MSCI World? This is a plausible scenario at the moment and i am not sure how it would play out. Do market cap indices have a growth style bias ? is this only the case after a period of growth? Would they capture a prolonged value rally or does market cap weighting bias then against value?

Rotation to value just means value shares, on average, rise a bit relative to growth shares. If you are in a cap weighted tracker the underlying number of actual shares you have exposure to does not change, just the prices. Sit tight, leave it to the market to adjust as it wants to. You probably already have enough value shares.

OhNoNotimAgain wrote:

Hariseldon58 wrote:
The market cap approach is low effort and low cost,

Just because something is cheap and easy does not make it good.

As I have argued elsewhere allocating capital on the basis of price only, with no regard to what you are getting, is fundamentally dangerous. I can think of no other walk of life where applying such a simplistic rule is applied.

The market cap index fund is good, it outperforms most active funds, most of the time.

There are alternatives that you may wish to argue are even better.

Hariseldon58 wrote:
The market cap index fund is good, it outperforms most active funds, most of the time.

.

Evidence?

OhNoNotimAgain wrote:

Hariseldon58 wrote:
The market cap index fund is good, it outperforms most active funds, most of the time.

.

Evidence?

Just read the wonderful S&P Indices Versus Active (SPIVA) reports. This started as a USD active funds focused study but they now have reports covering GBP and EUR denominated funds too. https://www.spglobal.com/spdji/en/spiva ... va-europe/
https://www.spglobal.com/spdji/en/resea ... hts/spiva/

There is a great interview with the guy that did the European version on the Pensioncraft YouTube channel. The conclusions about the persistence of performanceb in particular are a real eye opener.

https://www.pensioncraft.com/active-vs- ... -mid-2018/

The market cap index fund is good, it outperforms most active funds, most of the time.

And as if that weren’t enough, you get a portfolio you can choose and manage all by yourself without another ticket clipper taking their slice of the action with advisor fees, DFM fees and the like.

Hariseldon58 wrote:
The market cap index fund is good, it outperforms most active funds, most of the time.

But now they don't outperform alternatively weighted index funds.

OhNoNotimAgain wrote:

Hariseldon58 wrote:
The market cap index fund is good, it outperforms most active funds, most of the time.

But now they don't outperform alternatively weighted index funds.

My original post that you quoted had a further line.. “There are alternatives that you may wish to argue are even better.”

Alternatively weighted indexes have generally had a poor run over the last 10+ years, the growth emphasis that builds momentum in the relatively expensive stocks has done very well, but has faltered recently. There have been signs as you say, that alternatively weighted indexes have been doing better recently and it may finally be time for mean reversion. If we think that the present environment bears some degree of resemblance to the markets post the ‘nifty fifty’ era in the late 60’s then we might see further relative outperformance.

Of late I have been adjusting my portfolio, added more TIPs, added some RAFI US 1000 , RAFI World 3000, some High Dividend All World, some iShares Value USA and State Street Europe Value, some regional choices, looking at some opportunities with REITs , some Infrastructure investments etc. ( I have retained a decent chunk of my previous Indexes)

The pendulum of mean reversion swings, I’d anticipate rolling back these changes at some point…

No one knows what will happen, we might see some combination of high inflation, moderate/low inflation, high interest rates and moderate/low interest rates, recession and modest/low growth. That gives quite a few combinations, I cannot estimate the likelihood of these but I can position a portfolio that diversifies to cover these possibilities.

My intention is to continue a 15 year retirement ( state pensions still awaited) for as long as it lasts. Failure is the inability to finance that lifestyle, success is a comfortable lifestyle. Any shortfall is bad, exceeding comfortable has modest benefits, a good run since a rocky start in 2007-2009 has allowed some spare capacity to diversify the assets that we have more widely.

Hariseldon58 wrote:Alternatively weighted indexes have generally had a poor run over the last 10+ years, .

Capital markets since the 2008 financial crash have been an aberration until the autumn of last year.

Ultra low interest rates, massive liquidity injections, virtually unlimited supply of labour from de-communised countries after the end of the cold war made it the Goldilocks economy. Those things have run their course and now been hit by Covid and the Ukraine war so capital and labour have moved sharply from a large surplus to being very tight. Ageing populations will make the demographics even worse.

Nothing is ever normal but the 15 years from 2007 were particularly abnormal.

Reality is returning and that means capital has to earn a return, generate cash and beat inflation. Not something people have worried about for the last decade and and half. And that has big implications for all capital markets, allocations to them, between them and within them.

OhNoNotimAgain wrote:Ultra low interest rates

Why were they low?

GS

OhNoNotimAgain wrote:

Hariseldon58 wrote:
The market cap index fund is good, it outperforms most active funds, most of the time.

But now they don't outperform alternatively weighted index funds.

This doesn't mean that this will persist or that alternatively weighted index funds will be a better investment. Alternative weightings tilt towards factors which will outperform for certain periods for example the Size Factor or the Value Factor. They work great until they don't and that could be for decades.