Mawer, The Value Premium, and Investing Costs plus ESG Follow-up with Tim Nash (EP.84)

Episode Summary

Executive Summary: In this episode of the Rational Reminder Podcast, hosts Benjamin Felix and Cameron Passmore discuss listener feedback on a previous crypto episode, analyze the performance of Canadian active manager Mawer using factor models, examine the value premium's persistence post-publication of Fama-French's 1992 paper, and break down total costs of ownership in investing. They also feature a follow-up with Tim Nash on ESG investing, debating whether integrating ESG factors can lead to outperformance or if it's an active bet against market efficiency.

Main Topics: Listener Feedback on Crypto Episode (Priority: 3/5): The hosts address the overwhelmingly critical feedback on their previous episode about cryptocurrencies, defending their balanced approach and explaining why the topic elicits strong reactions. Analysis of Mawer's Performance (Priority: 5/5): Benjamin Felix analyzes Mawer's international, US, and Canadian equity funds using factor regressions, finding that their outperformance is largely explained by value and profitability tilts, with no statistically significant alpha. Value Premium Post-Publication (Priority: 5/5): Discussion of Fama and French's new paper examining whether the value premium has declined since their 1992 publication, concluding that noise in the data prevents any definitive conclusion. Total Costs of Ownership (Priority: 4/5): Overview of explicit and implicit costs in investing, including MER, TER, trading spreads, cash drag, and tax implications, emphasizing the importance of understanding all costs. Bad Advice of the Week: Liquid Alts (Priority: 3/5): Critique of an article promoting liquid alternative funds as necessary for advisors, arguing that such products are expensive, lack theoretical backing, and prey on market timing fears. ESG Investing Debate with Tim Nash (Priority: 5/5): Tim Nash argues that integrating ESG factors can lead to outperformance by internalizing externalities, while the hosts counter that this is an active bet and that market efficiency suggests higher expected returns for shunned companies.

Key Arguments: Mawer's outperformance is explained by value and profitability factor tilts, not skill, as alpha is not statistically significant. The value premium has not definitively disappeared post-publication; volatility in premiums prevents reliable inferences. Total costs of ownership include hard costs (MER, TER) and soft costs (trading spreads, market impact, tax drag), which can significantly erode returns. Liquid alternative funds are expensive, lack empirical support, and are promoted by industry interests rather than investor needs. ESG investing may capture alpha if externalities are internalized, but it is an active bet against market efficiency; shunned companies may have higher expected returns if they survive.

Data Points: Mawer International Equity Fund return vs MSCI EAFE+EM: 7.97% vs 6.03% annualized (1988-2019) - Mawer outperformed the broad index by nearly 2% annually over 31 years. Mawer International Equity Fund alpha vs Dimensional value index: 38 basis points per year (not statistically significant) - After accounting for factor exposures, Mawer's excess return is indistinguishable from luck. US value premium 1963-1991 vs 1992-2019: 4.96% vs 1.05% annualized - The value premium declined post-publication but remains positive and not statistically different from zero. Japan value premium 1991-2019: 6.14% annualized - Value premium was large and positive in Japan over the same period where US premium was small. Cheapest vs most expensive US fund quartile fees: 0.83% vs 1.93% - Cheapest quartile had 25% of funds beating benchmark; most expensive had only 6%. Negative environmental externalities (UN report): $6.6 trillion - Mostly from CO2 emissions and water issues, cited by Tim Nash as evidence of market failure.

Pivotal Quotes: "Bitcoin makes people angrier than gold and dividend stocks combined." — Cameron Passmore: Reflecting on the intense negative feedback from listeners after the crypto episode. "We can't say with a high degree of confidence that the premium was caused by value; it was just random chance." — Benjamin Felix: Explaining that the post-publication value premium is not statistically significant. "I am placing a bet on capitalism figuring out these market failures. Because if they don't, my fear is that we are going to have some very serious systemic risks." — Tim Nash: Arguing that ESG integration is an active bet on internalizing externalities to avoid catastrophic outcomes.

Implications: Investors should be skeptical of active managers' past performance, as factor exposures often explain returns. The value premium remains plausible globally despite US noise. Understanding all costs (explicit and implicit) is crucial. ESG investing involves active bets; market efficiency suggests shunned companies may offer higher expected returns if they survive.