Emerging Market Multifactor Fund For Canadians

Discussion of the Stock portion of the Permanent Portfolio

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Smith1776
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Emerging Market Multifactor Fund For Canadians

Post by Smith1776 » Tue Dec 01, 2020 1:26 pm

A niche investment product for a niche part of the investment community. I've had an incredibly difficult time finding an emerging markets multifactor fund in Canada that actually does what it says it will do and at a reasonable fee.

Ideally, you want emerging market companies that are below average in size, below average in valuation, but above average in quality. Is that so much to ask? In a little corner of the market from the relatively small fund provider Franklin Templeton, I found a great ticket in FLEM.

https://www.franklintempleton.ca/en-ca/ ... -index-etf

Exactly what you want in a multifactor fund: below average size and valuation, but above average quality.

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Smith1776
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Re: Emerging Market Multifactor Fund For Canadians

Post by Smith1776 » Thu Dec 03, 2020 6:45 pm

vincent_c wrote:
Thu Dec 03, 2020 3:01 pm
I've looked into the factors before in the context of the US markets but it seems that when you start combining factors the portfolio tends towards the market factor. Do you think it might be true for emerging markets as well?
Hmmmm. I agree with the spirit of what you're saying. Certainly, a poorly implemented factor portfolio could be self-neutralizing. And in the end a lot of the returns could simply be explained by beta. Additionally, loading on additional factors does tend to at least slightly attenuate loading on existing factors.

However, It seems to me that a well-designed multi-factor portfolio should still deviate significantly from the market. A pure value fund could have a fairly similar average market cap as the total market. However, once we add the size effect and tilt to small stocks the deviation from the market portfolio should only grow larger.

Be that as it may, take what I say with a grain of salt. I have long been the biggest factor advocate on this board. Certainly there are good reasons to not do any tilting at all -- tracking variance regret probably being the biggest one.

Full disclosure. My latest thinking on optimal equity allocation for Canadian investors would be something like:
  • 1/3 VEQT - Vanguard all-world market cap ETF. Fund has marginal home bias for tax and FX risk purposes.
  • 1/3 VVL - Vanguard value ETF that holds value stocks from developed global markets. Also has tangential size and profitability/quality exposures
  • 1/3 FLEM - Emerging markets multi-factor fund with emphasis on value and quality. Has tangential emphasis on size, momentum, low vol.
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