Sustainable Investing

Comments on “Identifying and Screening for Vice and Virtue Stocks,” by Charles Rotblut, CFA, in the September 2018 AAII Journal:

As an AAII member and a financial adviser with a specialization in environmental, social and governance (ESG) strategies, I take issue with two points in the recent story on “vice and virtue” investing. First, the statement regarding the “consensus sin industries” fails to even mention the fast-growing concern regarding fossil fuel companies, which are at the center of the scientific consensus that greenhouse gas emissions are the main cause of climate change.

Secondly, the article indicates a bias that “virtue” investing may cause underperformance, which has been shown to be a canard.

Over the past 25 years, numerous academic studies have demonstrated that ESG does not have a negative impact on performance. Perhaps it was best summarized by Morningstar in a recent review of the field, stating, “based on the research we’ve studied, we can’t find any reason to suggest that sustainability means diminished performance.”
—Ron Freund, CFS, from California

Beat the Market Without Timing

Comments on “Learning From the Mistakes Made by Legendary Investors,” by Michael Batnick, in the October 2018 AAII Journal:

“If you’re like most people, you’ve tried to beat the stock market.” I’m glad I’m not like most people. I (and most of my clients) couldn’t care less what “the market” does. The goal of “beating the market” is completely irrelevant and wrong-headed.

Here’s a novel approach: Establish an investment discipline (value investing), stick with it no matter what with a goal of earning satisfactory (absolute) returns. Chances are, you’ll beat the market anyway, by default. It’s worked quite well for Benjamin Graham and his disciples for the last 100 years.
—Steve Nichols, CFA, from Wisconsin

Shadow Stock Transactions

Comments on “Model Shadow Stock Portfolio: Why Quarterly Reviews Still Make Sense,” by John Bajkowski, in the October 2018 AAII Journal:

I am new, and this table consists of neither the entry date nor price. This portfolio is why I joined, and it seems incomplete in this form. May I find that somewhere?
—Walter Boyer from Florida

Charles Rotblut responds:
A listing of portfolio transactions is available on our website at www.aaii.com/model-portfolios/portfolio-transaction-history. There is also a link near the top of this page showing you the details for the various transactions, including purchases, sells and dividends. Please read through the Shadow Stock Selection Rules and the Model Portfolios User’s Guide for more on how to follow the Model Shadow Stock Portfolio.

Measuring the Quality Factor

Comments on “Getting the Same Return With Less Risk: The Power of Factors” an interview with Larry Swedroe, in the October 2018 AAII Journal:

When I first read of these factors just over a year ago, I was excited at the prospects of creating a portfolio accordingly. Then I wondered if I could only do that by piecing together a collection of exchange-traded funds (ETFs) according to which factor the ETF claimed to represent. That did not seem right. Use of Stock Investor Pro did not seem helpful.

I don’t know how to measure how much quality is in a stock or an ETF that claims to accentuate quality.
—Charles H. from Washington

Charles Rotblut responds:
Unlike factors such as value, momentum or size, there is no specific definition for quality. Depending on the index an ETF is based on, the definition of quality will differ.

For the VMQ Stocks approach (vmq.aaii.com), I settled on five characteristics to identify underlying quality: a lack of reliance on accruals, an improving asset turnover ratio, a positive buyback yield (net decrease in shares outstanding), a growing dividend and positive revisions to a company’s earnings estimates. Because quality is used as an overlay, it’s not required that a company have all five traits, but rather at least two, preferably three, of the five.