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In this quarter’s letter, we describe the more interesting, next stage of factor investing: alpha within factors. This simple idea describes what we’ve pursued at OSAM over the years, and what we continue to pursue through our research agenda today.
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We are excited to announce our second OSAM Research Partner and our search for more partners with some very specific skills.
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In this quarter's letter, we're going to share our thoughts on three key topics: the Value factor’s extended run of poor performance, the ways we believe asset managers can borrow concepts from the technology sector, and our current research agenda.
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The excess returns associated with Value and Momentum result from convergent and divergent processes, respectively. Value stocks are systematically underpriced and gradually converge on their fair value over time. Momentum stocks start out fairly valued or slightly overvalued, and go on to become more overvalued in the short-term, before reverting back. Both styles represent a market mistake that can be captured as alpha. In this piece, we're going to make all of these points more clear through a unified framework that we've developed to explain how factors work.
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Today we are announcing a new initiative: the OSAM Research Partners Program. Through the program, we will begin building formal relationships with the brightest and most curious people we can find to produce new research for the benefit of our investors and the broader community.
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Few professional managers understand the power of portfolio construction, fewer still can quantify the impact on performance. While students of markets are inundated with knowledge on investment selection, an understanding of portfolio construction is woefully inadequate. To understand how impactful, we need new frameworks that differentiate between skill in construction versus selection.
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The price-to-book ratio has a problem. Accounting distortions are causing record numbers of U.S. companies to report negative book value and more and more cheap companies to be defined as expensive growth companies (Veiled Value Stocks).
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Anyone overweight to non-U.S. allocations has suffered over the previous ten years. The current equity bull market has not been kind to non-U.S. allocations. The dramatic outperformance of U.S. stocks on the global equity stage has confounded allocators waiting for a turn, but history suggests these cycles are normal and revert over time.
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We highlight an alternative to private equity: microcap equities. While private equity offers potential advantages, it also requires taking distinct risks. In this paper, learn how microcap equities can help mitigate these risks and also provide strong performance by using proven themes for stock selection.
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“Traditional” asset allocation favors capacity-based frameworks that are overly-reliant on flawed market cap-weighted indexes. Also, that approach fails to make adjustments for investor risk tolerance or plan size. Investors who use a returns-based approach instead — adding Micro and Small Cap into the equities mix — can expect to see stronger returns and lower volatility.
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Many investors readily agree that alpha is scarce. It is hard to find, highly sought after, and requires skill to extract. The eclectic microcap universe provides a disparate group of continually evolving and devolving businesses with structural features that remain persistently attractive for investors.
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As the number of factor products increase, it’s important to understand how different portfolio construction methods can lead to very different investment results, even when using the same factors.
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While factor investing has caught on in public equity markets, it has been largely overlooked in real estate investing. Yet our research shows the public real estate market is a uniquely inefficient, and fertile ground for active, factor-based investing. Factor investing in REITs has a proven track record, in this paper, read how any allocation can benefit from this unique approach to REITs, whether used to increase liquidity, increase access, or broaden the list of real estate opportunities.
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OSAM Research Director Chris Meredith, CFA challenges and dispels the notion that investment factors are commodities. Factors that some view as generic are nuanced both in their definitions and implementation.
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Chris Meredith, OSAM's Director of Research & Portfolio Management, and Portfolio Manager Patrick O'Shaughnessy highlight an alternative to private equity: microcap equities. Private equity has become a central component of many institutional and high-net-worth investment portfolios over the past decade. But, while private equity offers potential advantages, it also requires taking distinct risks. In this paper, learn how microcap equities can help mitigate these risks and also provide strong performance by using proven themes for stock selection.
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Has an increase in shareholder transactions (primarily share repurchases) contributed to how price-to-book has gradually become ineffectual in recent years?
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This paper offers an examination of stocks with strong buybacks, trying to determine if they are thriving because of earnings or stock manipulation.
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The first part of 2016 has been one of the most difficult time periods for active management on record. To shed light on this challenging period we explore the profile of the stocks which have led the Russell 1000® benchmarks. Characteristics that historically do poorly are leading the market over this period. Further, the gap of value over growth indices so far this year is more a surge in stocks with terrible sales and earnings growth, and less a triumph of traditional cheap over expensive.
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Does the economic cycle have any bearing on investment success? Macro investment houses have constructed intricate frameworks to understand the “economic machine,” but economic data are notoriously prone to revisions, lags, and adjustments in measurement through time—none of which are suitable for timely and reliable investment signals. As factor investors, we believe that certain fundamental characteristics—not economic variables—drive stock returns. We’ve distilled the hundreds of investment factors into cohesive multi-factor themes that can serve as foundational building blocks for equity strategies. Among the litmus tests for those themes is persistence. This paper identifies investment themes that deliver persistent outperformance in multiple different economic environments.
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Read how to build investment strategies for alpha, not scale—and why we believe the asset management industry has gone in the opposite direction.
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Read why the Canadian market deserves consideration as a dedicated piece of an investor’s overall asset allocation. Canadian equities have a long history, dating back to 1861, and today it ranks as the world’s fourth largest stock market by market capitalization. Over the period from 1900 to 2014, adjusted for inflation, Canadian equities have returned 5.8 percent annualized, which compares favorably to the U.K’s return of 5.3 percent and slightly lags the U.S. return of 6.5 percent (see also “The Dangers of Indexing in Canada” linked below).
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Is there an undiscovered market where valuations are not systematically picked apart by Wall Street analysts, where huge changes in valuation often go unnoticed, and a stock’s price is very much at odds with its true value? Read this paper to learn more about the opportunity for consistent, long-term excess returns that awaits investors in the overlooked, undervalued and unappreciated, and uniquely-positioned microcap space.
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The Canadian market gets little attention and is rarely a dedicated piece of an overall asset allocation outside of Canada. However, for the past two decades, it has been one of the most consistent-performing developed markets in the world. Investing in Canada via market cap-weighted indexes can introduce unnecessary risks. This paper shows how active management can give investors an edge in the Canada market.
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Active management has two potential advantages versus an index. The first advantage is the one that most people think of: active stock selection. But this paper focuses instead on the second potential advantage: active stock elimination, or identifying stocks not to own in the portfolio. While owning strong performers is the most obvious source of excess returns versus a benchmark, the stocks that are in an index but not in an active portfolio often explain as much of the active portfolio’s relative returns.
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Much has been written on the role that buybacks can play in the overall market and whether or not they are implemented with the interests of investors under consideration. This paper focuses on (1) the pre-disposition of companies with high conviction in their own buyback programs to outperform the majority of companies engaged in low conviction buybacks and (2) how investors can use this to their advantage.
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With widespread inefficiencies and a greater dispersion of returns, the small cap space calls for an active management approach. This commentary, redefining inefficiency as opportunity, identifies the significant potentials for excess return in small cap equities and serves as a guide to navigate this often-overlooked area of the market. Read this whitepaper to learn how our disciplined, multi-factor strategy offers an alternative to traditional qualitative stock-picking methods.
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One effective strategy in the U.S. over the past several decades has been to buy stocks that are in the midst of repurchasing significant quantities of their shares—but just blindly following buybacks isn’t always a good strategy. This paper outlines a very brief history of buybacks, explores the reasons (good and bad) that companies buy back stock, and explains the huge advantage available to investors who incorporate buybacks into a total “shareholder yield” calculation to be used in their investment strategy, while at the same time avoiding companies that are buying back shares for the wrong reasons.
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Equity investing in the Canadian market poses unique liquidity and alpha capture challenges. Systematic stock selection based on multi-factor composites for value and momentum strikes a balance between absolute return, risk-adjusted return, and persistence of alpha in the most liquid part of the market. OSAM’s portfolio construction process balances alpha generation with market impact costs. This paper articulates the themes of value and momentum in stock selection and demonstrates their potential to result in significant long-term outperformance of Canadian benchmarks.
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Canadian equity indexes based on market-cap-weighted constructions are structurally flawed and result in unforeseen concentration risks. Systematically buying stocks based on their valuations and market momentum has proven to be an effective way of beating market-cap-weighted indexes in markets around the world. These two themes work especially well in the Canadian equity market. This paper outlines why these two themes work so well in Canada, and how to use them to build an investment strategy.
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Should investors pay higher fees to active managers in an attempt to beat the market? Or should they instead buy cheap passive index funds or exchange traded funds (ETFs)? The choice between the passive or active approach to investing can have a huge impact on long-term results. In this paper, we evaluate the arguments for each style, and argue for an approach that combines the strengths of both the passive and active approaches.
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Investor appetite for high-yielding companies continues to grow. However, there are those who believe high dividend payments are a poor indicator of a company’s future growth prospects and prefer to select stocks using “dividend growth” instead. Our research suggests that investors should focus on dividend yield rather than dividend growth rates.
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Though U.S. stocks with high dividend yields have become very popular with individual and professional investors, OSAM makes the case for shareholder yield, a factor the Research Team has long advocated, which has provided strong returns for U.S. stocks for more than 80 years. Shareholder yield is the sum of a company’s dividend yield plus its buyback yield (the percentage of shares outstanding that have been repurchased or issued over the last year).
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As guest contributors to The Street, Jim and Patrick O'Shaughnessy discuss how the fourth edition of What Works on Wall Street can reveal ways to improve return and reduce volatility.
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Jim O’Shaughnessy looks at historical returns for stocks and bonds in various inflationary environments, and what investors might expect going forward.
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In the face of so much grim economic news and uncertainty about the future, the OSAM Research Team reviews the historical implications of low economic growth, high unemployment, low consumer confidence and top marginal tax rates on future stock returns.
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The return of fear has created an opportunity for the long-term equity investor to buy stocks at a major discount. This commentary by the OSAM Research Team may persuade clients to stay calm and, if possible, add to the equity market.
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Jim O’Shaughnessy studies how rare the current market downturn has been—and why it may present a once in a lifetime buying opportunity.
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Jim O’Shaughnessy comments on what we might expect to happen in the coming 11 years. His analysis suggests that it is during this timeframe that we may find the silver lining that should give investors hope and encouragement.
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Read how to avoid the most common roadblocks to successful investing. Jim O’Shaughnessy's commentary explores the importance of knowing the facts and understanding history in order to overcome the seduction of rhetoric and emotion—common pitfalls that trip up many investors.
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BECOME A RESEARCH PARTNER
We are announcing a new initiative: the OSAM Research Partners Program. Through the program, we will begin building formal relationships with the brightest and most curious people we can find to produce new research for the benefit of our investors and the broader community.
LEARN MORE