OSAM offers views on issues and events shaping the market, emphasizing the importance of investing with a cool head and disciplined, time-tested strategies.
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.
“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”—Peter Lynch
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.
“Financial markets lend themselves to initially self-reinforcing but eventually self-defeating processes.”—George Soros
Read how to build investment strategies for alpha, not scale—and why we believe the asset management industry has gone in the opposite direction. Though more and more investors are buying “factor”-based strategies, investing using measures like valuation and low volatility, the most popular strategies are applying factors the wrong way: hundreds of holdings and high overlap with their market benchmark (e.g., Smart Beta). Factor Alpha is by far a more powerful way to apply factors, using them first to avoid large chunks of the market and then to build more differentiated portfolios of stocks with only the most attractive overall factor profiles. While not as scaleable as Smart Beta, this alpha-oriented approach has led to much better results for investors.
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).
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.
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.
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.
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.
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.
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.
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.
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.
“Should five per cent appear too small / Be thankful I don’t take it all.”
—Taxman, The Beatles
Excessive taxes can erode alpha from investors’ portfolios. When managing active portfolios, managers must be mindful of the real world implications of their transactions in order to give their clients a strong after-tax return. This paper shows how emphasizing tax management throughout the year, and making trading decisions at the “lot” level, can deliver results using proven strategies.
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.
Perception of the U.S. large cap value market is that it’s very efficient, and therefore a hard category for managers to outperform the benchmark. As a result, index funds and ETFs have been gaining dramatic market share. Our latest whitepaper debunks conventional thinking with empirically-proven factors that have significantly outperformed in the U.S. large cap space in hypothetical backtests.
"Follow the course opposite to custom and you will almost always do well.”
—Jean Jacques Rousseau
Jim O’Shaughnessy contends that income seeking investors should prefer high yield equities over traditional fixed income investments. In a study covering 1970 to 2012, Jim discusses why an income investor would have received substantially more income while also protecting principal purchasing power by investing in a high dividend strategy instead of traditionally recommended fixed income.
As interest rates have risen over the previous 12 months, we often get asked about the impact on the performance of dividend-paying stocks. The paper reviews the historical performance of dividend yield in the U.S. back to 1926 and globally back to 1970. We conclude with suggestions on areas of the market we believe represent compelling opportunities.
“It ain’t so much what people know that hurts them as what they know that ain’t so.” —Artemus Ward
Because investors tend to extrapolate what their general experience in markets has been recently well into the future, it’s easy to see why investors are having a long-term love affair with bonds. Yet the data in this paper suggests that a crisis in long bonds is coming and, given this information, individual and institutional investors alike should reconsider the bond portion of their portfolios.
Emerging market equities present both unique opportunities and also unique risks. Unlike more mature economies, emerging markets’ economies have the potential for strong growth rates. But emerging markets also have the potential for damaging socio-economic and political instability. Equity returns in these countries are often strong, but to earn these returns investors must deal with considerably higher volatility than in the developed equity markets.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” —Mark Twain
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.
In the most difficult environment for generating income in 140 years, we survey the landscape of income-generating options, review lessons from the previous bond Bear Market, and demonstrate why we believe global, dividend-paying equities deserve a prominent role in investor portfolios.
As appearing on The Wall Street Journal's MarketWatch
Twenty-five years after the crash of 1987, in a MarketWatch guest commentary, Jim O’Shaughnessy shares his research of the market’s long-term behavior in order to determine equity performance following crashes of similar magnitudes.
Investors are understandably concerned with a "fiscal cliff" and what the resultant tax increases may mean for their portfolio values and dividend income. Our analysis suggests that, across history, tax rates and changes to those rates generally have not meaningfully impacted equity returns. Surprisingly, dividend-paying stocks performed well when taxes were highest.
This paper discusses how the O’Shaughnessy All Cap Core strategy combines the themes revealed in What Works on Wall Street, with eight decades of empirical evidence, to design a diversified core U.S. equity strategy that puts the historical odds in the investor’s favor. We conclude with a study of our strategy model from 1964-2011 to draw inference on how the strategy could perform in various scenarios including recessions and volatile market environments.
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.
Jim O'Shaughnessy offers his thoughts on our Enhanced Dividend strategy and the importance on focusing on the long-term when investing.
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).
In this paper, OSAM reviews the prospects for the major asset classes comprising investor portfolios: stocks and bonds. We then look at one of the most tried-and-true investment strategies of all time: dividends. But with a caveat — global dividends. We conclude with a study from 1977 to 2010 demonstrating why income investors should include equity dividends in their portfolio.
Jim and Patrick O'Shaughnessy describe the benefits of compositing value factors.
As appearing on TheStreet.com
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.
OSAM offers its thoughts on the current economic and market environment, and why the two don't necessarily correlate.
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
—John Maynard Keynes
Jim O’Shaughnessy looks at historical returns for stocks and bonds in various inflationary environments, and what investors might expect going forward.
“The most common cause of low prices is pessimism—sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
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.
“The rational man—like the Loch Ness monster—is sighted often, but photographed rarely.”
— David Dreman
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.
OSAM’s Research Team studies the performance of the market and our strategies during and after all bear markets since 1926.
Despite the recent trend of low-momentum stocks outperforming high-momentum stocks, buying recent winners has proven itself over more than 80 years to be an effective stock selection strategy. Momentum-based strategies currently offer an attractive "buy low" opportunity.
See why history tells us that investing in stocks with high dividend yields is a great way to beat the market following recessions.
Jim O’Shaughnessy shows how a move to overweight bonds versus stocks may prove to be disappointing over the next ten years.
Jim O’Shaughnessy reveals specific factors involved with the market upswing and shares the belief that, over the next three, five and ten years, investors might want to take the opportunity the market has given them in the equities asset class.
Jim O’Shaughnessy studies how rare the current market downturn has been—and why it may present a once in a lifetime buying opportunity.
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.
Jim O’Shaughnessy comments on how investors might miss a buying opportunity of historic magnitude by letting market fear obscure the importance of a long-term perspective.
Jim O’Shaughnessy comments on the emotion of the current markets and what could happen next.
“Be fearful when others are greedy and greedy when others are fearful.”
— Warren Buffett
A study of the American Association of Individual Investors' (AAII) "Investor Sentiment" poll from 1987-2008 (survey is available to AAII members at their website), provides solid evidence for Buffett's principle, especially as it pertains to growth investing. The average rolling one- and three- year returns to indices or strategies bought during times of prevalent bearish sentiment were all higher than their long term one- and three- year averages. The outperformance was most significant for growth strategies. For example, if you bought the Russell 2000 Growth during these periods of investor malaise, the average one year return would have been 7.36% higher than the overall average one-year return between 1987 and 2008. The opposite holds true during very optimistic times. All strategies (with the exception of Market Leaders Value) underperformed their long term average following periods when investors were the most hopeful. The data leads to a simple conclusion: when people are overly excited about the market, buy value. When they panic, buy growth. Market Leaders Value is a strong strategy regardless of investor sentiment—it is the one exception to the rule. Click here to download the rest of the study.
Jim O’Shaughnessy’s recent market research reveals that the current decade has been among the least attractive for investing in the past 110 years. See how investors in disciplined asset allocation strategies would have fared much better.
Jim O’Shaughnessy provides an update to his 2006 book Predicting the Markets of Tomorrow.
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.