Last week I posted an article about incorporating style premiums into a portfolio and how it will increase efficiency (higher return per unit of risk). Some readers had some questions that I will address today. The first question: when looking at a strategy that worked historically, (in our case going back to 1980) how relevant is that today? The second question: would the performance be the same if I used data tying to actual funds rather than market indexes? To address these concerns I will show some examples of portfolios using actual funds over a more recent time period. I will also show how these strategies can work in US, developed international and emerging markets.

US Equity Market

The portfolio at the end of the last article had a 50% allocation to a large cap momentum index and a 50% allocation to a small/value index. Below is a chart of that portfolio I call “US Equity,” which is built with actual funds. It consists of a 50% allocation to AMOMX, a large cap momentum fund, and a 50% allocation to DFFVX, a small cap value fund. The portfolio is rebalanced annually. These funds track the indexes from the last article. The chart below shows the “US Equity” portfolio and the Russell 3000 for the longest period AMOMX and DFFVX have been available, August 2009 through May 2013.

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The “US Equity” portfolio had a total return of 87.9% versus 81.5% for the Russell 3000. You can also see the “US Equity” portfolio performed better over most of that time period.

Developed International Equity Market

In similar fashion, for the “Developed International Equity” portfolio we will use a 50% allocation to AIMOX, an international large cap momentum fund, and a 50% allocation to DISVX, an international small cap value fund. The portfolio is rebalanced annually. Since we are dealing with developed international stocks an appropriate benchmark is the MSCI EAFE index including reinvesting dividends. The chart below shows the “Developed International Equity” portfolio and the MSCI EAFE index for the longest period AIMOX and DISVX have been available, August 2009 through May 2013.

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Here the total return of the “Developed International Equity portfolio” was 41.42% versus 36.5% for the MSCI EAFE index.

Emerging Equity Market

So far there have not been funds created to gain exposure to the momentum premium in emerging markets. (Though there is ample evidence to support one). There are some small cap value funds available, but they are inadequate in my opinion for a couple reasons. They do not follow a strict, rules-based investment philosophy, giving the fund’s portfolio managers too much discretion over the fund’s allocations. Or they are a passive instrument, but they define “value” in a suboptimal way. With emerging markets, I prefer to only tilt towards the value premium by utilizing the fund DFEVX. An appropriate benchmark is the MSCI Emerging Market Index including reinvesting dividends. Below is a chart since the inception of DFEVX from May 1998 through May 2013 and the MSCI Emerging Market Index.

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DFEVX had a total return of 538.43% versus 246.72% for the MSCI Emerging Markets Index.


There is a paradox when looking at historical investment performance. It takes a long time period to statistically prove a strategy is worth pursuing, but the reasons for an outperformance might not be relevant in today’s market. These strategies appear to still be relevant today using actual funds with real world costs.

Although there is no guarantee that historical outperformance will translate to future outperformance, two things lead me to believe that incorporating small, value and momentum premiums is a good strategy. First, these style premiums have stood the test of time through years of research in peer reviewed academic papers. They have persisted since their “discovery” as opposed to being arbitraged away like many other anomalies. Of course, there are some that disagree or are unaware of the research on certain style premiums, but this is what makes a market. For everyone in the market that tilts a portfolio towards value another must tilt towards growth.

Second, even if these premiums go away tomorrow, a portfolio built using these strategies is still robust enough to gain exposure to the growing pie of capitalism. At worst I would expect them to look similar to the market index, like the Russell 3000, over a long period of time. Contrast this to a portfolio using a manager’s skill to time the market, tactically rotate between sectors or asset classes, or pick individual stocks. If their skill (or most likely luck) runs out, there is no backup plan to ensure a positive investment experience.

It is worth noting that recently AQR and DFA have developed new “core” funds that are even more robust than the above strategies, while gaining exposure to multiple style premiums. These will most likely be my preferred strategies going forward, but they were only launched a few months ago.