More ways to estimate Fama-French HML in real-time

To implement the asset allocation described in my whitepaper, the Fama-French “value factor” HML sign must be estimated in real time.  One commenter helpfully proposed RALS:

The Index takes long positions in companies with large RAFI weights relative to weightings in capitalization-weighted indices and short positions in companies with small RAFI weights relative to their weightings in cap-weighted indices.

Each company receives a weight equal to the ratio of its sales (or cash flow, dividends, book value) to the aggregate sales (or cash flow, dividends, book value) across all companies in the universe.

This sounds similar to the construction of HML.

Monthly correlation with HML is 0.65, R2 = 0.42.

Most results fall into the lower left or upper right quadrants, indicating that the sign of HML may be reliably estimated.  Only the sign is required for asset allocation using the method described in the paper.



Another option is CHEP, based on the:

Dow Jones U.S. Thematic Market Neutral Value Index

Measures the performance of an investment strategy utilizing long positions on value companies and short positions on growth companies. Value is calculated using a multi-factor ranking process based on book value to price ratio, projected earnings per share to price ratio and trailing 12-month operating cash flow to price ratio.

This also sounds similar to the construction of HML.

Monthly correlation with HML is 0.39, R2 = 0.08.


Clearly RALS is the better fit.  Unfortunately there is only a 3 year history, not enough to replicate the 30 year tests in the whitepaper.


Whitepaper featured on Alpha Architect

My asset allocation whitepaper was recently featured in two posts on Alpha Architect.  The results were verified and then extended using more extreme component portfolios and ETFs.  Most readers here probably read AA but check the links if you missed them. Comments and questions are welcome.

Post 1

Post 2

Estimating Fama-French HML factor in real-time

A frequently asked question on my asset allocation whitepaper using the HML factor, is how to calculate HML in real time.  This can be accomplished by estimating with ETF returns (for example, Vanguard):

HML = 1/2 (Small Value + Big Value) – 1/2 (Small Growth + Big Growth).

= 1/2 (VBR + VTV – VBK – VUG)

Using Yahoo finance data gives the following results:


The trend line is at 45 degrees but scatter is significant.  I still need to recalculate the findings from the paper with estimated HML.  Of course, with a full database of stocks, actual HML could be calculated in real time but this is probably outside the resources of an individual investor.

The last 4 years looks like this:


Value outperformance over momentum is accelerating.