Factor Investing Can Keep Active Management Relevant

Despite its recent troubles, active management remains relevant, but its future “lies in low expenses that allow investors to enjoy a comfortable share of returns,” according to a recent article posted on ETF.com. The article cites comments by Tom Rampulla, managing director of Vanguard Financial Advisor Service, who argues that active managers have to employ factor and smart-beta investing, referred to as an “evolutionary stage of active” that can “benefit client portfolios.” According to Rampulla, active management “simply costs too much,” and he argues that the underperformance of such managers is worsening, exacerbated by the glut of investment professionals in […]

Ritholtz Says Stock-Picking is Still Alive if Not Kicking

Active fund management has been losing followers but isn’t going away entirely, writes Barry Ritholtz in a recent Bloomberg article. While stock-picking has seen a host of changes, he offers several insights as to “how we got here” including the following: Beating the market is tougher than most people thought, a notion that Ritholtz says has become “widely accepted among both professional investors and individuals.” We have a much greater understanding of investor psychology, and this “makes the case for low-cost index investing even more compelling.” Quantitative studies, writes Ritholtz, suggest that much of active investing performance is attributable to […]

James O’Shaughnessy: Knee-Jerk Investing Doesn’t Work

A quantitative investing guru who uses concrete metrics to analyze stocks, James O’Shaughnessy believes that investors get in the way of their own success by reacting emotionally, writes Validea CEO John Reese in this week’s Forbes. The article outlines O’Shaughnessy’s investment philosophy that, to outperform the market, an investor must choose a strategy and “stick to it, no matter what” as well as his belief that most investors lack the mindset that allows them to be successful. Reese explains O’Shaughnessy’s argument that when an investor chooses an active manager, it is essential to understand the underlying stock-picking process and avoid […]

Asness versus Arnott: The Factor Timing Debate Continues

AQR Management founder Cliff Asness continues to argue that factor timing is “deceptively difficult,” contrary to what Rob Arnott of Research Affiliates would have you believe, says a recent article in Institutional Investor. Asness’ issue, the article says, is with Arnott’s contention that risk premia factors such as value, momentum, growth and volatility have become “overvalued as a result of the rising popularity of smart beta and factor investing strategies” and that investors should “time their exposures to buy low and sell high.” Asness, on the other hand, argues that “diversification, not timing, is the best way to achieve returns […]

Simple is Smart in Smart-Beta Investing

Using a database of over 20 countries, a team of British academics tested the five most popular smart beta factors to see whether they would have proven successful over time. This according to a recent article in the Financial Times. The factors studied and respective finds are as follows: Low-risk: the highest returns “come from avoiding the riskiest stocks, rather than seeking out the least risky.” When divided into quintiles going back to 1963, the article explains, the highest-risk portion returned only 4.1 percent while the other four returned at least 10.9 percent. Momentum: Returns were volatile but, over time, […]

In Factor Investing, Integration is a Plus

Portfolio diversification is a known strategy for minimizing risk, but these efforts can be thwarted if the diversified securities react in a similar way to market conditions. Factor investing is designed to reduce this risk by adjusting holdings based on specific attributes, and returns have been shown to increase if several factors are combined. A recent article in Chief Investment Officer magazine asserts that how factors are combined also makes a difference in investment outcomes. Researchers at the global investment management firm AQR have found that rather than just “mixing” factors (eg. building one portfolio for value and a second […]

Factor Investing is Gaining Appeal

Many traditional investment portfolios are created by mixing asset classes to spread risk and optimize returns. However, the Financial Times recently reported on a growing shift by more sophisticated institutional investors toward a different approach referred to as “factor investing”. The idea behind factor investing is to break down securities into the fundamental issues that drive their returns, a methodology which requires investors to take a more granular approach than they would by selecting broader asset classes. Not unlike choosing the best foods to eat based on inherent nutrients rather than by food group, factor investing is intended to create a […]