Comments on: Fair Value Weighting Part II http://www.wheredoesallmymoneygo.com/fair-value-weighting-part-ii/ A Canadian Personal Finance Blog Wed, 17 Mar 2010 14:36:54 -0700 http://wordpress.org/?v=2.8.4 hourly 1 By: Severing The Link Between Price and Weight Part II : WhereDoesAllMyMoneyGo.com http://www.wheredoesallmymoneygo.com/fair-value-weighting-part-ii/comment-page-1/#comment-24629 Severing The Link Between Price and Weight Part II : WhereDoesAllMyMoneyGo.com Thu, 28 Jan 2010 01:58:39 +0000 http://www.wheredoesallmymoneygo.com/?p=958#comment-24629 [...] Whether one uses these metrics (they don’t in practice) or metrics found in the audited financial statements (like gross sales), they all accomplish the goal of randomizing pricing errors instead of magnifying the overpriced weightings and decreasing the weights to underpriced companies. This is the important concept in all of this and it is spelled out in detail in this post. [...] [...] Whether one uses these metrics (they don’t in practice) or metrics found in the audited financial statements (like gross sales), they all accomplish the goal of randomizing pricing errors instead of magnifying the overpriced weightings and decreasing the weights to underpriced companies. This is the important concept in all of this and it is spelled out in detail in this post. [...]

]]> By: Returns Reaper http://www.wheredoesallmymoneygo.com/fair-value-weighting-part-ii/comment-page-1/#comment-6840 Returns Reaper Fri, 28 Nov 2008 20:18:59 +0000 http://www.wheredoesallmymoneygo.com/?p=958#comment-6840 This is a very interesting concept. However I feel that although it has a few good things going for it, I feel it shouldn't overlook a few of the good things in a cap-weighted index: 1. In a perfect total market cap weighting index, there should be zero turnover. You buy a fixed percentage of every company on the market and hold them all as long as you stay invested in the index. I'm light on the understanding of how these funds operate internally, but I would assume there is still some turnover due to churn as a result of new purchases and redemptions. 2. Due to the low turnover, it is hard for arbitrageurs to drive up hidden costs of the funds. 3. Also due to low turnover, these funds often have better tax characteristics if they're held outside of a tax-sheltered account like an RRSP or TFSA. Having said all of that, from an academic standpoint, I would agree that fair-value weighting sounds like a smarter way to invest. It sounds to me like a form of investing that would come with higher fees, and I wonder if it can outperform simpler cap-weighted funds to the extent that it can overcome the higher costs (explicit and hidden). However, innovation and uncertainty go hand in hand, so I'd like to see some investing products utilize this concept and see how they do. Preet, are you aware of any products that do this or can you say whether your company is working on introducing products that use this strategy? This is a very interesting concept. However I feel that although it has a few good things going for it, I feel it shouldn’t overlook a few of the good things in a cap-weighted index:
1. In a perfect total market cap weighting index, there should be zero turnover. You buy a fixed percentage of every company on the market and hold them all as long as you stay invested in the index. I’m light on the understanding of how these funds operate internally, but I would assume there is still some turnover due to churn as a result of new purchases and redemptions.
2. Due to the low turnover, it is hard for arbitrageurs to drive up hidden costs of the funds.
3. Also due to low turnover, these funds often have better tax characteristics if they’re held outside of a tax-sheltered account like an RRSP or TFSA.

Having said all of that, from an academic standpoint, I would agree that fair-value weighting sounds like a smarter way to invest. It sounds to me like a form of investing that would come with higher fees, and I wonder if it can outperform simpler cap-weighted funds to the extent that it can overcome the higher costs (explicit and hidden).

However, innovation and uncertainty go hand in hand, so I’d like to see some investing products utilize this concept and see how they do.

Preet, are you aware of any products that do this or can you say whether your company is working on introducing products that use this strategy?

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