In January of this year the author published in Lipper Insight the article, “Do U.S. Equity Mutual Fund Investors Really Chase Returns?” In this article the author explained why retail mutual fund investors prefer equity funds over bond funds or vice versa. Since questions are arising again about why retail investors seem to be preferring equity funds over bond funds, we are reprinting some excerpts from that article. Before the excerpts, however, we want to quote the Lipper weekly flows report of August 16, “Mutual fund (ex-ETF) investors’ interest in equity mutual funds remained intact; they injected a net $2.6

We wrote last week that stock selection by construction, e.g., using factors such as stock fundamentals, does not trade off risk and return but does explicitly and transparently tilt a portfolio toward the desired stock characteristics or risk factor(s). When we just trade off risk and return, such as is the case when volatility minimization is used to build a low-volatility portfolio, the methodology does not take into account the individual stocks’ characteristics. As a consequence, the methodology could be adding unwanted risk(s) that come from the stock characteristics “preferred” by the risk-return methodology. The risk-return methodology of portfolio construction,

  Hedge funds on average gained a little more than 1% in July.  These gains do not match those of the S&P 500 in July which rose more than 5%.  Year-to-date, hedge funds are up 4.5% versus the S&P 500’s 19.6%.  Stock-focused hedge funds did the best in July (up 2.4%), followed by credit, macro and managed futures (0.2%, -0.8% and -0.9% respectively).  

In the first two articles in this series on smart-beta funds we have given a definition of them and started our discussion of characteristics-based and diversification-based smart-beta indices. In this article we look at stock selection and weighting schemes in more detail. Amenc et al..[1] write, “Stock selection by construction, e.g. stock fundamentals, takes into account only the stand alone properties of stocks and it therefore does not account for the interaction effects between stocks.”  Stock selection on its own does not trade off risk and return but does explicitly and transparently tilt a portfolio toward the desired stock characteristics