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The Chorus of Criticism of Passive Investing

Critiques of Passive investing According to Bank of America Merrill Lynch, passive investing now accounts for 45% of all US assets (up from 25% a decade ago), with equity passive funds amounting to c.$3 trillion at present.Our attention has recently been drawn to another high-profile investor, Michael Burry (article here), who believes that Passive investing is responsible for creating (another) bubble in asset prices, comparing it to the sub-prime mortgage bubble in that “price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.” He follows other notable investors, s…

Can CAPE provide cover for Investors?

Evidence Based Investing | September 9, 2020

[Note that this analysis will concentrate primarily on US Indices, as there is more available data, but it will inevitably apply to other markets as they tend to mimic the returns etc. of US markets].

Samuel Adams Joins EBI

Evidence Based Investing | September 9, 2020

EBI Portfolios is delighted to announce the appointment of Samuel Adams (CEO, Vert Asset Management) as a Non-Executive Director, joining the company’s board in September 2020. Sam has a wealth of experience as a senior manager in the financial services sector, and particular expertise in ESG investments and presenting ESG solutions to advisers and investors alike.“We’re very excited to have Sam join the team at EBI” Craig Burgess, CEO, EBI Portfolios, “Our views on passive, factor-based and ESG investing are aligned, and we look forward to bringing Sam’s experience in this space back to the UK market.”“ESG investing is becoming a larger and larger part of our proposition at EBI, and Sam will be joining the team to aid in increasing the ESG elements of our portfolios, as well as liaising with our network of advisers; sharing best practice and advise on how to present an ESG solution to investors.”Previously, Sam started Dimensional’s Financial Advisor business in the UK & Eur…

Long-run Factor Premium Returns

Evidence Based Investing, Factor Based Investing | July 1, 2020

For most people, a long-term investment approach works best. Recent stock market volatility demonstrates the futility of attempting to time the market. Over time, a handful of key equity factors including Size, Value and Momentum, have risen to prominence as drivers of portfolio returns in excess of returns available from passively tracking the stock market index (see our guide below for a reminder of the terminology). These excess return premiums, or factors, embody specific characteristics and those factors combine to explain past returns in excess of the market return.

ESG Scoring

ESG Investing | May 29, 2020

Comparing ESG Scores Spring 2020 was a landmark quarter for Environmental, Social and Governance (ESG) fund sales with 76% of European fund inflows allocated to ESG tilted choices. This is way ahead of the US experience suggesting a divergence of investor preferences, with Europe leading the ESG charge.Yet securing analytical evidence for outperformance between funds claiming an ESG characteristic is more of a nuanced story. There are some studies showing outperformance whilst others show the opposite. With claims of ESG compliance mushrooming, it is worth probing the strength of the link between ESG performance, typically measured using scoring systems, and the equity performance.Over recent decades, there have been more than 2,000 empirical studies and several review studies on the relation betw…

Value A Sideshow To Expensive Stocks

Evidence Based Investing, Factor Based Investing | May 13, 2020

April was supposed to be the month that the underperforming Value and Small cap factor premiums rebounded from their painful COVID-19 crash. After all, that is exactly what famously happened after the TMT crash in 2000 when traditional Value stocks enjoyed a recovery after long periods of underperformance (1). And sure enough global small cap stocks registered an impressive bounce during April, rising 23.9% from lows in March against a 17.2% move in the overall market. That’s something, perhaps not overwhelming, whilst Value just tailed the market benchmark. Most Value investors, and many (but not all) Small cap investors, know that they have to take a long view and swim against the tide of take-downs and negative opinion which can at times seem overwhelming.

Solving The Dividends Puzzle

Evidence Based Investing | May 1, 2020

Dividends are being cut at a pace unimaginable a few weeks ago. Company boards in every country are scrambling to conserve cash, comply with strings attached to state subsidies and performing pivots, if not pirouettes, between the short and long-term interests of a gaggle of stakeholders ranging from employees, investors, bankers and underfunded pension funds. Among energy companies for example, Shell have just cut their dividend whilst BP are holding out. Dividends in this environment can hardly be viewed as anything other than a highly discretionary signal from company managements to their stakeholders.Some of our clients are worried about dividends too.

Is Inflation Set to Explode?

Market Commentary | April 26, 2020

In March 2018 it appeared that global growth would exert pressure on interest rates, forcing the rate of inflation ever higher, making bonds a weaker investment prospect. Things have not worked out quite as market participants then might have expected.The Fed’s policy changes and quantitative tightening in 2018, combined with the high existing global debt levels snuffed out any inflationary impulse. Following the COVID-19 fuelled stockmarket crash bond yields all over the world are now 1% or less.

Willpower and Self Control in Volatile Markets

Evidence Based Investing | April 17, 2020

Lockdown during the 2020 crisis has brought out the best and worst of people. Surprisingly, most people have complied with the lockdown albeit without much enthusiasm. Meanwhile a minority, not just rebellious teenagers, discard self-control and are tempted to breach the regulations, risking fines. Saving with stock market investments for any objective is just as difficult because it needs willpower, self-control and discipline to stay with your plan to achieve what may seem like an abstract and faraway objective. Life is teeming with examples of how willpower is tough to maintain. Gym memberships and diet clubs such as Weight Watchers, alcoholics anonymous and substance abuse clinics are typical ways people reach out for help with problems of self-control.

Oil in Intensive Care

Market Commentary | April 9, 2020

The first Quarter of 2020 was the poorest equity market performance since 2008 for the S&P 500, but that was not the weakest asset class.The oil market had a truly dreadful 3 months, falling by a massive 66%, its worst ever quarterly return. The refusal of Russia to agree to cuts in oil output levels by OPEC+, the OPEC nations plus Russia, led to Saudi Arabia discounting their oil prices and gearing up oil production to force prices lower.