Costs Javier Estrada The most underrated IESE of all financial - - PDF document

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Costs Javier Estrada The most underrated IESE of all financial - - PDF document

Dec 11, 2022 125 likes •302 views

Winning Investment Strategies Essential (but Underrated) Issues Javier Estrada Winter, 2014 1. Costs Types, magnitude, and impact 2. The Holding Period Relationship to risk Time diversification Costs Javier Estrada The most underrated

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  • 1. Costs
  • Types, magnitude, and impact
  • 2. The Holding Period
  • Relationship to risk
  • Time diversification

Winning Investment Strategies

Essential (but Underrated) Issues

Javier Estrada Winter, 2014

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

The most underrated

  • f all financial variables
  • Consider
  • An initial investment of $10,000
  • A 20‐year holding period
  • An annual return of 12%
  • Annual fees of 2% (Fund 1) and 0.5% (Fund 2)

F1: $67,275 F2: $88,206 Difference: Over twice the initial investment

Go

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

Visible

Loads (FE/BE) Management fee Incentive fee Other fees

⇒ TER

‘Hidden’

Trading costs Bid‐ask spreads Taxes

Costs are the big edge of passive management

Go1 Go2 Go3

Some relevant figures

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

And though it may be hard to believe …

Lower costs are associated to … higher returns lower volatility higher risk‐adjusted returns

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

The Holding Period

Investors usually consider …

Return Risk

And pay far less attention to …

Holding period

Big Mistake

It is a critical variable in investment decisions

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

The Holding Period

Why is it so important?

The absolute and relative risk of assets depends on the holding period Which asset is riskier, stocks or bonds?

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

The Holding Period

Time diversification

The longer the holding period, the more likely is a riskier (more volatile) asset to outperform a less risky (less volatile) asset The longer the holding period, the higher can (should) be the exposure to risk

Stocks/Bonds Value/Growth Small/Large EMs/DMs

Go Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

In Short

  • Costs
  • The most underrated financial variable
  • But critical in the long term
  • Determining obtained and expected returns
  • Lower costs deliver higher return and lower risk
  • The holding period
  • Critical variable in investment decisions
  • Determines the absolute and relative risk of assets
  • All else equal, the longer the holding period, the

higher should be the exposure to risk

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Appendix

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

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Costs

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs (Small‐Value)

Back

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

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Costs

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs – USA

Source: ETF Landscape, BlackRock, 2010.

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Costs – Europe

Source: ETF Landscape, BlackRock, 2010. Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs – John Bogle “The wonderful magic

  • f compounding returns

is overwhelmed by the powerful tyranny of compounding costs.”

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs – David Swensen “When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there’s almost no chance that you end up beating an index fund.”

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs – R. Kinnel (Morningstar)

“Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor

  • f performance. Start by

focusing on funds in the cheapest or two cheapest quintiles, and you'll be on the path to success.”

Back

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Costs, Risk, and Return

Back Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Risk and the Holding Period

RP<0 = 39/110 = 35%

(*) 1900‐2009, S&P and 10Y Treasuries

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Risk and the Holding Period

RP<0 = 15/101 = 15%

(*) 1900‐2009, S&P and 10Y Treasuries

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Risk and the Holding Period

RP<0 = 3/91 = 3%

(*) 1900‐2009, S&P and 10Y Treasuries

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Risk and the Holding Period

RP<0 = 0/81 = 0%

(*) 1900‐2009, S&P and 10Y Treasuries

Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Risk and the Holding Period

Back

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Javier Estrada IESE Business School Barcelona Spain WININV Winter, 2014

Risk and the Holding Period

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