Episode 40: Five Factor Thinking: Using Factors to Spot Trends and Guide Decision Making

On today’s episode, Benjamin Felix and Cameron Passmore discuss a paper that Benjamin recently wrote called Factor Investing with ETF’s, which unpacks what factors are and why they are a useful tool in explaining performance.

Before discussing Benjamin’s paper, they take some interesting detours, discussing annuities and the newly launched ALDA, why annuities are underutilized and what makes them different from portfolios. Along with this, they also cover some questions that can be asked to measure past performance of funds as well as luck versus skill.

They share their insights into the Fama-French three factor model, how it evolved into a five-factor model and why they believe this to be a reliable way to read trends. For all this and a whole lot more, join us today!

 

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Key Points From This Episode:

• Seller’s Capital: a hedge fund with an interesting investment philosophy. [0:02:46.0]
• The four questions to ask if you see why past results were good. [0:07:00.0]
• What it would take for results to be statistically significant. [0:07:54.0]
• Growing evidence of poor skill level of hedge fund manager. [0:09:53.0]
• Good returns are not related good decision making. [0:11:27.2]
• Annuities are underutilized and why it makes sense to use them more. [0:17:00.3]
• Annuities versus portfolios. [0:18:58.3]
• Some figures from the Dimension paper which was written. [0:23:26.3]
• What factors are. [0:26:41.3]
• What can be learned from the Fama-French model. [0:30:41.3]
• What the five factor model can help with. [0:33:48.0]
• Some critiques of using the factors. [0:38:50.0]
• Benjamin provides examples of using factors for evidence. [0:40:10.0]
• And much more!

Tweetables:

[bctt tweet=”“If someone does well, were they lucky or were they skilled?”” username=”benjaminwfelix”] [bctt tweet=”“Small stocks had consistently higher risk adjusted returns than would be expected in their market beta.” ” username=”benjaminwfelix”] [bctt tweet=”“It always comes back to the factors explained in return.”” username=”CameronPassmore”] [bctt tweet=”“If you believe in factors you got to believe the whole way.”” username=”CameronPassmore”]

 

Links From Today’s Episode:

Rational Reminder Website — https://rationalreminder.ca/

Factor Investing with ETFs Whitepaper 

 

Download the transcript of this episode:  The Rational Reminder Podcast Ep.40 – Transcript