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

Episode Summary

Executive Summary: This episode covered three major themes: a backlash to the prior crypto discussion, an evidence-based assessment of the Canadian manager Maurer/Mawer, and a deep dive into whether the value premium has weakened after publication. The hosts also reviewed investing costs and critiqued liquid alternatives marketing, then closed with a nuanced ESG debate featuring Tim Nash about externalities, climate risk, and whether sustainable investing is an alpha bet.

Main Topics: Crypto backlash and podcast listener reactions: The hosts reflect on unusually negative feedback to a prior crypto episode, arguing that while crypto is scam-heavy and they would not invest in it, discussing it openly was educational rather than endorsing it. Bob Iger / Disney leadership story: Benjamin Felix discusses Bob Iger’s book and leadership at Disney, emphasizing resilience, strategic acquisitions, and the brand-building behind Disney, Pixar, Marvel, Lucasfilm, and Fox. Mawer/Maurer fund performance and factor analysis: The hosts evaluate Mawer’s Canadian, U.S., and international equity funds against benchmarks and factor tilts. The analysis finds strong value/profitability exposure and some outperformance, but not enough evidence to conclude persistent alpha. Does factor investing converge to cap-weighted indexing?: They answer a listener question on whether widespread adoption of factor strategies would eliminate factor premia, concluding that convergence would only happen in a world where active price discovery disappeared entirely. Fama-French value premium after publication: The hosts summarize Fama and French’s latest paper showing that the U.S. value premium has declined post-1992, but the decline is not statistically significant and is consistent with high historical noise in returns. Total cost of ownership and hidden investing frictions: They review MER, TER, cash drag, turnover, market impact, taxes, withholding taxes, and trailer fees to show that explicit fees are only part of the total cost of investing. ESG and sustainable investing debate with Tim Nash: Tim Nash argues that ESG is early-stage, that externalities are being internalized, and that climate risk may reprice assets materially. The hosts push back that any expected-return advantage is an active bet, not a free lunch.

Key Arguments: The crypto episode was educational, not an endorsement; the hosts believe digital currencies remain rife with scams and would not recommend investing in them. Mawer/Maurer’s long track record is largely explainable by exposures to known factors, especially value and profitability, rather than clear statistically significant alpha. Factor premia would only truly converge to market returns in an unrealistic world where active trading and price discovery disappeared. Fama and French’s latest paper suggests the U.S. value premium has weakened after publication, but the decline is not statistically significant, so one cannot conclude value is dead. Value’s post-publication underperformance in the U.S. is not sufficient evidence against the factor because cross-country evidence still shows meaningful value premia in many markets. Investors should focus on total cost of ownership, not just MER; trading costs, taxes, foreign withholding tax, cash drag, and implicit market impact can materially reduce returns. Liquid alternatives are presented by industry as sophisticated tools, but the hosts view the marketing as one-sided and warn that these products are expensive and often sold with a “60/40 is dead” narrative. Tim Nash argues ESG is still in early innings, definitions are weak, and climate/other externalities may be repriced, creating an active opportunity in sustainable equities. The hosts counter that even if bad companies’ discount rates rise, diversified investors can rebalance and may still earn the higher expected return from those cheaper assets. There is agreement that sustainable investing can affect capital costs and prices, but disagreement on whether it creates predictable alpha for investors.

Data Points: Listener feedback on crypto episode: 100% of comments were critical - Hosts said prior episode on crypto generated unusually negative feedback compared with the usual 15–20 comments, most of which are normally positive. Typical comment sentiment: 90%+ positive - Benjamin Felix noted that most episodes usually receive mostly positive listener comments. Disney acquisitions under Bob Iger: 4 major takeovers - Iger’s tenure included Pixar, Marvel, Lucasfilm, and 21st Century Fox. Mawer International Equity Fund annualized return: 7.97% vs 6.03% - January 1988 to December 2019, comparing Mawer’s international fund to MSCI EAFE+EM. Mawer U.S. Equity Fund annualized return: Underperformed by about 1.4% annualized - 1993 onward, relative to the S&P 500. Mawer Canadian Equity Fund annualized return: 9.31% vs 8.38% - July 1991 onward, compared with the S&P/TSX. International fund return (factor regression period): 8.67% vs 5.57% - 1990–2019, Mawer international equity versus MSCI developed+EM benchmark used in the discussion. Dimensional market-wide value benchmark (international): 8.42% annualized - Used as a more risk-appropriate comparison for Mawer’s international fund, before fees and withholding tax. Mawer international alpha: 38 bps/year - Estimated after fees, but not statistically significant at the 95% level. Regression explanatory power: 90% of monthly return variation - Five-factor model explained most of Mawer international fund returns. Big value share of market cap: 11.6% - Fama-French discussion of U.S. big value’s average market-cap weight. Correlation of market and big value: 0.84 - Used to argue big value still has enough independent variation versus the market. U.S. value premium, full sample: 2.77% annualized - 1926–2019, Fama-French value research index versus CRSP market. U.S. value premium, original paper sample: 4.96% annualized - 1963–1991, the sample used in the 1992 Fama-French paper. U.S. value premium, prior out-of-sample: 2.4% annualized - 1926–1963, examined in Fama and French’s earlier out-of-sample work. U.S. value premium post-1992: 1.05% annualized - July 1992–June 2019, positive but not statistically different from zero. US fund expense ratio, cheapest quartile: 0.83% - Morningstar database, 15 years ending Dec. 2017. US fund expense ratio, most expensive quartile: 1.93% - Morningstar database, 15 years ending Dec. 2017. Benchmark-beating rate, cheapest quartile: 25% - Share of funds beating their benchmark in the cheapest fee quartile. Benchmark-beating rate, most expensive quartile: 6% - Share of funds beating their benchmark in the most expensive fee quartile. Value premium around the world: Japan 6.14%, UK 0.29%, EM 3.02%, Asia Pacific 5.4%, Australia 2.95%, Canada -0.53% - July 1991–June 2019, compared with the market. Mawer Canadian value benchmark: 10.77% annualized - Dimensional market-wide Canadian value index over Mawer’s Canadian fund period. Tobacco-related externalities: $6.6 trillion - UN estimate cited by Tim Nash for negative environmental externalities. Current liquid alternatives AUM: Just over $8 billion - IFIC data referenced in the “bad advice of the week” segment. Forecast liquid alternatives market size: Up to $100 billion AUM in five years - Industry quote cited in the Globe and Mail article.

Pivotal Quotes: "Bitcoin makes people angrier than gold and dividend stocks combined." — Benjamin Felix: Quote of the week while discussing backlash to the prior crypto episode. "The biggest factor when it comes to your long-term expected returns is going to be the growth in the overall economy." — Tim Nash: Explaining why ESG may not necessarily reduce long-run equity returns if markets reprice externalities. "We can't say statistically the value premium is dead." — Cameron Passmore: Summarizing the Fama-French findings and resisting claims that value has disappeared.

Implications: Listeners should treat crypto, ESG, factor investing, and liquid alts with skepticism and nuance: understand what is evidence-based, what is an active bet, and what costs are hidden. For firms, the episode reinforces disciplined factor analysis, low-cost implementation, and careful messaging around products.