Using Portfolio Visualizer, you can compare a factor-tilted portfolio to a three-fund portfolio (Total U.S. Stock, Total International Stock, Total U.S. Bond).
Just as an example, let's try to replicate a portfolio modeled after DFA's most heavily factor-tilted funds. (This was pretty close to one a large U.S. wealth management firm recommended to our family in the past.) It was allocated between major asset classes to: U.S. Large Caps (7.5%); U.S. Large Value (7.5%); U.S. Small Cap (12%); U.S. Small Cap Value (12%); Int'l ex-U.S. Value (5%); Int'l ex-U.S. Small Caps (6%); Emerging Markets (10%); Total U.S. Bond Market (40%).
From Jan. 1995-July 2024 (the longest period available that included international value stocks), the factor-based portfolio had an average annual return of 7.76%. The Total Markets three-fund portfolio returned an average annual 7.51%. For an average return boost of 0.25% in this hypothetical factor-tilted portfolio, you'd have to weather:
-- Not an insignificant amount of increased volatility (10.11% vs. 9.49% standard deviation).
-- Underperformance in 13 of the past 14 years.
-- Underperformance over the last 3, 5 and 10-year rolling periods.
-- The maximum drawdown of the factor-tilted portfolio during this lengthy period was nearly 2% greater.
-- Nearly identical Sharpe and Sortino ratios.
Possibly worth noting: A portfolio less dramatically tilted to small caps and value might've been a better example to use for most people. However, this also would've produced a smaller average annualized return difference between the factor-tilted and three-fund Total Stock Market approach. Also, even though this was a fairly significant period (29-plus years), results tended to be much more noisy when reviewed over shorter periods. So, if a factor-tilt is applied, it seems trying to figure out just how it's doing at any given point would be highly subjective and rather non-productive in terms of generating the highest return over time.
Just as an example, let's try to replicate a portfolio modeled after DFA's most heavily factor-tilted funds. (This was pretty close to one a large U.S. wealth management firm recommended to our family in the past.) It was allocated between major asset classes to: U.S. Large Caps (7.5%); U.S. Large Value (7.5%); U.S. Small Cap (12%); U.S. Small Cap Value (12%); Int'l ex-U.S. Value (5%); Int'l ex-U.S. Small Caps (6%); Emerging Markets (10%); Total U.S. Bond Market (40%).
From Jan. 1995-July 2024 (the longest period available that included international value stocks), the factor-based portfolio had an average annual return of 7.76%. The Total Markets three-fund portfolio returned an average annual 7.51%. For an average return boost of 0.25% in this hypothetical factor-tilted portfolio, you'd have to weather:
-- Not an insignificant amount of increased volatility (10.11% vs. 9.49% standard deviation).
-- Underperformance in 13 of the past 14 years.
-- Underperformance over the last 3, 5 and 10-year rolling periods.
-- The maximum drawdown of the factor-tilted portfolio during this lengthy period was nearly 2% greater.
-- Nearly identical Sharpe and Sortino ratios.
Possibly worth noting: A portfolio less dramatically tilted to small caps and value might've been a better example to use for most people. However, this also would've produced a smaller average annualized return difference between the factor-tilted and three-fund Total Stock Market approach. Also, even though this was a fairly significant period (29-plus years), results tended to be much more noisy when reviewed over shorter periods. So, if a factor-tilt is applied, it seems trying to figure out just how it's doing at any given point would be highly subjective and rather non-productive in terms of generating the highest return over time.
Statistics: Posted by BetaTracker — Sun Aug 11, 2024 4:59 am
