LSV Asset Management - LSVEX Fund

LSVEX vs. DFA

LSV Asset Management (LSVEX Fund) is a value equity management firm which was formed in 1994 by Lakonishok, Shleifer and Vishny – all of them are professor of Economics or Finance at distinguished universities in the U.S. Lakonishok is a well-known market behaviorist who believes that investors are irrational, being controlled by fear and greed: they usually hold onto losing stocks for too long, afraid to admit they have made bad decisions, but also quit too early on promising stocks, just to have their hands firmly grip onto their small rewards. By exploiting this, better-informed investors can make killings on consequent anomalies.

When deciding which stock to be put on LSVEX portfolio, Lakonishok also used common value indicators: cash flow to price, book to price, sales to price, dividend to price etc... However, he screens out cheap stocks of those near bankruptcy or takeover, plus the stocks that just went public, while his not-so-secret key factor in his model is diversification. Regarding small-cap stocks, no stock in LSVEX is too big to fall, and no single industry is too important as weighted in percentage. For large-cap stocks, Lakonishok fancies some undervalued companies that he thinks they “aren't as bad as the market thinks they are”. That makes up a portfolio that consistently beating the market, both in bulls and bears, in large-cap and small-cap.

When comparing to LSVEX, people often think of Dimensional Fund Advisors (DFA), one founded and directed by Fama – another famous professor of Finance in the same Illinois area as Lakonishok. Fama believes in efficient-market, that the stock price is correctly adjusted at anytime because they reflect information known to investors, so picking stock to “beat the market” is just some illusion. With that approach, Fama includes in DFA portfolio almost everything, except for those also near takeover. DFA is passively managed, thus its fees and cost are undoubtedly low when compare to other funds.

As a result, for different reasons, DFA’s and LSVEX’s portfolios both have the advantage of diversification while they also let out dying stocks. In the end, the two firms pick the same stocks or group of stocks even though their theories contradict one another.

LSVEX vs. SPY

For the analysis of LSVEX and SPY, monthly data from Yahoo! Finance was used for the period from 2009 to 2017.

LSVEX slightly outperforms SPY, so I recommend buying LSVEX.