Chili P is My Signature: Things that Don't Matter #5
June 9, 2017·0 comments·narrative
Investors say they believe in value investing. The research supports it. Yet when you examine how they actually build portfolios, something strange emerges. Their conviction shrinks to a half-hearted tilt that changes almost nothing about expected returns or risk. What drives the gap between what people claim to believe and what their portfolios actually express?
- The standard portfolio split between core and value holdings is not the result of mathematical optimization. It's a rule of thumb dressed up as sophisticated allocation strategy.
- A shift from zero to 32 percent value exposure in large cap allocations delivers only about 26 basis points in additional expected return. That's the entire payoff of moving dramatically in one direction on a conviction-driven strategy.
- The actual value premium delivered by real-world indices and funds is roughly 80 basis points annually. This is far smaller than what investors imagine when they talk about value as a source of return.
- The same pattern repeats across hedge fund allocations. Low-volatility hedge funds get added to aggressive portfolios not because of portfolio math but because the strategy feels sophisticated and provides a way to signal expertise.
- If portfolios are filled with tilts and allocations that don't meaningfully impact outcomes, what are they actually doing? The answer may reveal something uncomfortable about how decisions really get made.
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