ESG and factor tilts - plus the best investing blogs and podcasts from the past week
Welcome to this week’s Fully Invested Newsletter. There’s limited input from me this week because I’m currently away in an old French house frustratingly resistant to reliable internet. But as normal, I’ve got the usual links to the best investing blogs and podcasts from the past week below.
Before that… a brief couple of things about ‘ESG’. Socially responsible investing has been a phenomenon for the investment industry over the past few years. But while the concept might be credible, the practical implementation sometimes seems far from it. The question of what counts as a genuine ESG investment - a well behaved firm with solid environmental, social and governance credentials - is vague. Try hard enough and more or less anything will fit.
I wrote an article for Investability on this subject recently (available to their subscribers here). But I also saw an interesting article from fund giant Vanguard about the implications of a connection between ESG fund performance and style factors like value, quality and size.
Now, Vanguard of course has its own ESG funds to flog, so it’s not surprising to see it stirring things up a bit (and attempting to make competitors uncomfortable). What its research suggests is that some ESG funds are actually plays on certain factors… which, of course, can experience periods of both outperformance and underperformance - so buyer beware!
Source: Vanguard calculations based on data from Morningstar, Inc. and Kenneth French’s website
What Vanguard says is that because ESG funds tend to overweight and underweight certain sectors, even index-driven funds have an element of ‘active risk’ in them. And that can ultimately translate into exposure to investing styles that the investor might otherwise have no idea about.
For those with an interest in factors, Vanguard’s research uses the Fama-French 5-factor model in its analysis of how ESG funds can be skewed. You can catch up with it here. In summary, it’s perhaps yet another reason for buyers of ESG investments to think carefully about how and where their funds are being deployed.
Top posts from the past week
A second consecutive week in the top posts list, but this article on the time it takes to recover from a bear market is super stuff from Monevator. Adjusted for inflation - which is essential when it comes to counting the cost on your real purchasing power - bear market recoveries take longer than you’d think: four years, four months on average. This blog deconstructs the realities and offers tips on thinking defensively to help you avoid the worst.
Last year, Michael Mauboussin, the closest thing you’ll get to a valuation guru, wrote a note he described as “a mantra for valuing cash-generating assets”. You can find that here. In this series from Meb Faber, Mauboussin actually reads that note, which adds a lot more meaning to it. For valuation novices and experts alike, it’s worth a listen.
AlphaMind Podcast - #95 Robert Carver: Trading, Trading Wisdom, and Trading Systems
Robert Carver is an ex-investment bank and hedge fund trader with a focus on using quant systems to manage his own money. He’s also the author of This Blog is Systematic. In this AlphaMind podcast he talks about different systematic trading techniques and what it takes to manage psychology and avoid mistakes in order to profit from the market. Whether you’re attracted to the idea of systematic investing or not, there’s a lot to take from this brilliant conversation.
Have a great weekend!
Ben
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The best and worst investment trusts of 2022 so far
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Money Makers
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Quality Small Caps