WEBVTT - Andrew Ang Discusses Asset Management (Podcast) 0:00:02.240 --> 0:00:06.800 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.360 --> 0:00:10.080 This weekend. On the podcast, I have an extra special 0:00:10.119 --> 0:00:14.960 guest and it is filled. Our conversation is filled with 0:00:15.160 --> 0:00:19.640 geeky goodness. Uh Andrew Ang, head of Factor Investing at 0:00:19.680 --> 0:00:22.600 black Rock name run I don't know six points something 0:00:22.680 --> 0:00:27.480 trillion dollars um. Ang is really a born and bread 0:00:28.080 --> 0:00:31.000 uh factor investor. Not only does he have a background 0:00:31.400 --> 0:00:35.640 in stats and finance from from UM Stanford, but he 0:00:35.720 --> 0:00:41.280 taught finance at Columbia and the opportunity to put his 0:00:41.440 --> 0:00:46.600 theories into actual practice at black Rock just proved to 0:00:46.640 --> 0:00:51.840 be too tempting. He had to leave UM the theoretical 0:00:51.880 --> 0:00:55.280 practice of teaching and working at Columbia that he really 0:00:55.360 --> 0:00:57.680 enjoyed to give it a shot at black Rock, and 0:00:57.720 --> 0:01:01.280 it's worked out extremely well. If you are at all 0:01:01.360 --> 0:01:09.000 interested in quantitative investing, modeling, factor investing, anything remotely involved 0:01:09.080 --> 0:01:14.600 in the wonky goodness of mathematical theory and investing, you're 0:01:14.600 --> 0:01:18.920 gonna love this conversation. So, with no further ado, my 0:01:19.080 --> 0:01:24.039 conversation with Black Rocks Andrew Ang. My extra special guest 0:01:24.120 --> 0:01:28.000 this week is Andrew Ang. He is the head of 0:01:28.120 --> 0:01:32.360 Factor investing at black Rock, the firm manages over six 0:01:32.400 --> 0:01:35.440 trillion dollars. He comes to us with a PhD in 0:01:35.520 --> 0:01:39.520 finance and a master's degree in statistics from Stanford and 0:01:39.600 --> 0:01:43.640 he is the author of a book called Asset Management, 0:01:44.080 --> 0:01:49.840 A Systemic Approach to Factor Investing. Andrew Ang, Welcome to Bloomberg. 0:01:49.880 --> 0:01:52.120 Thank you. Barrett's a real pleasure to be here. Thanks 0:01:52.160 --> 0:01:55.320 for coming in. You have You have a really fascinating background. 0:01:55.360 --> 0:01:59.200 You spend the first half of your career in academia, 0:02:00.160 --> 0:02:04.160 made you decide to transition from theory to practice. Indeed, 0:02:04.200 --> 0:02:08.600 I was a professor for fifteen years at Columbia University 0:02:08.720 --> 0:02:12.320 and ended as chair of the Finance and Economics Division 0:02:12.639 --> 0:02:16.720 and was the Anne F. Kaplan Professor of Business. What's 0:02:16.760 --> 0:02:20.520 interesting is that my wife, she was born in China. 0:02:21.120 --> 0:02:25.680 Her parents have this long, very scholarly Confucian style tradition 0:02:25.800 --> 0:02:29.320 and the highest life form for them is a tenured 0:02:29.360 --> 0:02:32.240 professor at an Ivy League institution. And I thought I 0:02:32.320 --> 0:02:36.720 was absolutely crazy and leaving that and coming to industry. 0:02:36.960 --> 0:02:39.440 My parents, on the other hand, they didn't go to university. 0:02:39.520 --> 0:02:43.880 They actually I really don't know still today what a 0:02:43.919 --> 0:02:46.600 professor does well what do you mean you're not teaching. 0:02:46.760 --> 0:02:50.120 You mean you're on vacation. And they were really proud 0:02:50.120 --> 0:02:53.239 of me for getting a real job. So the disparity 0:02:53.280 --> 0:02:56.720 in the attitudes, well, one thing that was very interesting 0:02:56.800 --> 0:03:00.160 is my wife said to me, Andrew, you're a hypocrite, 0:03:00.720 --> 0:03:03.000 because I used to feel that a lot of academics, 0:03:03.000 --> 0:03:06.160 and I was myself one. They're very theoretical, but they 0:03:06.240 --> 0:03:09.440 believe that the world should operate in a particular way, 0:03:09.800 --> 0:03:12.840 of course, the way that they study the world, but 0:03:13.480 --> 0:03:17.080 they he she called me a hypocrite because actually I 0:03:17.120 --> 0:03:21.679 believed so much that I accepted a job offer to 0:03:21.720 --> 0:03:25.040 come to Black Crop because I wanted to change the 0:03:25.080 --> 0:03:29.639 way that finance was practiced in accordance to the research 0:03:29.720 --> 0:03:32.160 and factors that I was doing. So let's talk about 0:03:32.160 --> 0:03:35.360 that research a little bit. You have a background and statistics, 0:03:35.440 --> 0:03:39.080 You get a PhD in finance that really lends itself 0:03:39.160 --> 0:03:43.280 to factor investing. That sort of quantitative approach is practically 0:03:43.880 --> 0:03:47.600 made for this. But I have to ask from your research, 0:03:47.680 --> 0:03:50.080 how did you find your way to a factor investing. 0:03:50.840 --> 0:03:52.600 I was a professor, and I did a lot of 0:03:52.640 --> 0:03:55.280 consulting while I was a professor, and I had the 0:03:55.280 --> 0:04:00.200 privilege of working for some very large institutions, including the 0:04:00.280 --> 0:04:03.120 Norwegian Sovereign Wealth Fund, and this is a very special fund. 0:04:03.160 --> 0:04:07.440 It's a trillion dollars today, it's multiple multiples times the 0:04:07.440 --> 0:04:11.160 country's GDP, and they went through some tough times in 0:04:11.400 --> 0:04:15.680 two thousand and eight, like many institutions, and I was 0:04:15.760 --> 0:04:19.279 tasked by the Ministry of Finance representing Parliament, together with 0:04:19.360 --> 0:04:23.839 two other academics to take a deep look at the fund, 0:04:24.360 --> 0:04:27.560 to analyze it, to see where the losses were coming from, 0:04:27.600 --> 0:04:30.599 and to make recommendations. And what we found was that 0:04:30.760 --> 0:04:36.040 despite this fund owning tens of thousands of securities dozens 0:04:36.080 --> 0:04:38.839 of active managers, what mattered at the end of the 0:04:38.920 --> 0:04:43.440 day were these factors broad and persistent sources of returns. 0:04:43.480 --> 0:04:47.760 Macro factors like economic growth, real rates and inflation which 0:04:47.800 --> 0:04:52.080 comes through market cap indices, and then relative to those 0:04:52.120 --> 0:04:56.440 market cap benchmarks, style factors like value and momentum quality, 0:04:56.480 --> 0:05:00.880 minimum volatility explain two thirds of the variation of these 0:05:00.920 --> 0:05:04.719 active returns, and so factors really mattered, and it was 0:05:04.880 --> 0:05:08.400 entirely appropriate for Norway to have these exposures to these 0:05:08.440 --> 0:05:13.280 factors that resulted in long term superior returns. So, so 0:05:13.360 --> 0:05:15.280 let me jump in right here and ask this. You're 0:05:15.360 --> 0:05:19.400 you're viewing a trillion dollar portfolio. You're really separating the 0:05:19.400 --> 0:05:22.880 wheat from the chaff. You're identifying what the source of 0:05:23.000 --> 0:05:28.400 returns within that trillion dollar portfolio is. Do do the 0:05:28.440 --> 0:05:31.320 managers of the Norwegian Sovereign Wealth Fund then turn around 0:05:31.320 --> 0:05:35.559 and say, we're going to move away from the parts 0:05:35.560 --> 0:05:39.480 of our portfolio that aren't performing and towards where our 0:05:39.720 --> 0:05:44.760 out performances coming from. Or did they consider that diversification 0:05:44.839 --> 0:05:49.279 and they leave it as it was. Norway has always 0:05:49.360 --> 0:05:54.160 used different sources of return, including fundamental analysis, and they 0:05:54.200 --> 0:05:58.320 continue to do that. But what we recommended and they 0:05:58.320 --> 0:06:02.120 did adopt, was to make a very top down, deliberate 0:06:02.120 --> 0:06:06.479 decision on these factors. And as a result, Norway started 0:06:06.520 --> 0:06:11.039 directly allocating to these factors to manage, better understand their risks, 0:06:11.080 --> 0:06:14.200 to enhance their returns, and as you say, Barry too, 0:06:14.880 --> 0:06:18.520 improve the diversification. So so they seem to be pretty 0:06:18.560 --> 0:06:22.600 well versed in understanding the academic literature. But out in 0:06:22.640 --> 0:06:25.680 the real world, which is a fair statement to say, 0:06:25.680 --> 0:06:28.320 out in the rest of the real world, how does 0:06:29.160 --> 0:06:33.680 the way most people invest differ from from what's in 0:06:33.839 --> 0:06:38.880 the textbook. What what are the big disparities between people 0:06:38.920 --> 0:06:41.800 who aren't the Norway sovereign wealth funds and and the 0:06:41.839 --> 0:06:45.320 average investor? What what's the difference in their process and 0:06:45.360 --> 0:06:48.360 in their results? Great question bear because I really think 0:06:48.360 --> 0:06:50.839 they are more similarities than differences. But if you have 0:06:50.920 --> 0:06:53.080 to think about you know, I used to be a 0:06:53.120 --> 0:06:56.360 professor and now you're a practitioner. What what are these differences? 0:06:56.800 --> 0:06:59.400 A lot of people talk about implementation short for and 0:06:59.400 --> 0:07:02.200 a lot of a jargon, the difference with transaction costs 0:07:02.240 --> 0:07:05.720 and stale prices or stale data. But actually the real 0:07:05.839 --> 0:07:09.880 difference between academic and practice is you've got to work 0:07:09.880 --> 0:07:12.920 with a lot of people to get these things to fruition. 0:07:12.960 --> 0:07:14.679 And as a professor, you're sitting there in your office, 0:07:14.760 --> 0:07:17.800 you're sitting there by yourself often and you just do 0:07:17.840 --> 0:07:21.040 your own thing. But to make a difference, you have 0:07:21.560 --> 0:07:24.880 dozens of people and teams that you've got to partner 0:07:24.960 --> 0:07:28.400 with in order to make a product come until an 0:07:28.400 --> 0:07:32.400 advisor shelf. Let's talk a little bit about the best 0:07:32.440 --> 0:07:36.320 way to use factors. Are they designed to manage risk 0:07:36.760 --> 0:07:43.200 or are they designed to deliver market out performance. Well, yes, actually, 0:07:44.160 --> 0:07:48.120 I think factors should be used in all facets of 0:07:48.160 --> 0:07:52.360 the investment process. We definitely need factors to look at 0:07:52.560 --> 0:07:54.880 really what drives our returned So there is an angle 0:07:54.920 --> 0:07:58.240 for risk management, and I think your firm has exemplified 0:07:58.280 --> 0:08:00.800 that very But we also would like to use factors 0:08:00.840 --> 0:08:03.520 to enhance our returns as well, and we can do 0:08:03.600 --> 0:08:08.240 that with value, quality, momentum size, and combinations of these 0:08:08.240 --> 0:08:11.560 return enhancing factors. We can also use factors to target 0:08:11.640 --> 0:08:17.120 specific outcomes like minimizing our downside risk exposure through minimum 0:08:17.160 --> 0:08:20.480 volatility strategies. Factors can be used for all of these, 0:08:20.560 --> 0:08:23.800 And what's really exciting is that we can ask, what's 0:08:23.880 --> 0:08:26.040 the outcome you want to achieve. Perhaps it has created 0:08:26.040 --> 0:08:29.600 a versification or put full of resilience, and we will 0:08:29.680 --> 0:08:33.679 have some combination of factors that's right for you. So 0:08:34.360 --> 0:08:37.600 here's the question that always comes up when I discuss 0:08:37.640 --> 0:08:41.560 factors with other people. It seems once everybody discovers a 0:08:41.559 --> 0:08:45.680 new idea, it's power has a tendency to sort of 0:08:45.720 --> 0:08:49.400 fade away. Now that we know so much about factors, 0:08:49.400 --> 0:08:51.480 we know about value, we know about small cap, we 0:08:51.520 --> 0:08:54.920 know about quality, why hasn't that been arbitraged away. How 0:08:55.040 --> 0:08:59.600 is it that long term factors still deliver some degree 0:08:59.640 --> 0:09:04.280 about formants. Ultimately, that's a question of who's on the 0:09:04.320 --> 0:09:07.560 other side, because not everyone can buy cheap. For every 0:09:07.760 --> 0:09:10.240 value stock that's cheap, there's got to be a stock 0:09:10.320 --> 0:09:15.600 that's relatively expensive. The economic rationales behind all these factors 0:09:16.320 --> 0:09:19.959 are the same reasons why we think that these sources 0:09:20.000 --> 0:09:22.160 of returns are going to persevere for a long time. 0:09:22.320 --> 0:09:25.320 And there are three. There's a reward for bearing risk, 0:09:25.720 --> 0:09:30.040 a structural impediment, and investors behavioral biases. So wait before 0:09:30.040 --> 0:09:32.160 we get to the first and the third one, which 0:09:32.200 --> 0:09:34.160 I have a feeling, I know what you're gonna say, 0:09:34.320 --> 0:09:36.800 tell me about the second one. What is the structural 0:09:36.840 --> 0:09:42.120 impediment to buying cheap or buying quality? Well, for value, 0:09:42.240 --> 0:09:45.079 there is no structural impediment because you can buy cheap. 0:09:45.480 --> 0:09:49.640 But for minimum volatility though, this is where structural impediments 0:09:49.679 --> 0:09:51.760 come in. And if we look at the United States, 0:09:51.840 --> 0:09:54.439 there are a large number of very large funds, a 0:09:54.480 --> 0:09:58.760 lot of public pension plans, but also other large institutions 0:09:58.800 --> 0:10:01.320 that have high to to return targets but a lot 0:10:01.400 --> 0:10:04.880 of restrictions on what they can do with their investment policies. 0:10:05.360 --> 0:10:10.160 Some of those institutions will gravitate to higher risk stocks 0:10:10.240 --> 0:10:13.280 in an attempt to meet those high told to return targets, 0:10:13.600 --> 0:10:18.360 and then underweight the low volatility or low risk stocks, 0:10:18.440 --> 0:10:21.920 and that gives rise to minimum volatility strategies. Now, if 0:10:22.000 --> 0:10:26.320 that structural impediment disappeared and suddenly all of those institutions 0:10:26.360 --> 0:10:29.640 had much more flexible investment policies than perhaps we might 0:10:29.640 --> 0:10:33.120 see minimum volatility go away. But let's go to the 0:10:33.160 --> 0:10:36.840 first and third of those right, Well, well, what about 0:10:36.880 --> 0:10:39.080 the reward for bearing risk? And here I'll give value 0:10:39.120 --> 0:10:42.920 as an example, since you raised this before, or small cap, 0:10:42.960 --> 0:10:47.040 because I keep having discussions with people who insist that 0:10:47.200 --> 0:10:50.080 the small cap premium is all risk, and I'm not 0:10:50.120 --> 0:10:53.400 sure how true that is. And if it is largely 0:10:53.520 --> 0:10:56.559 risk that we're shown, but that's a risk that you 0:10:56.600 --> 0:10:59.920 should be comfortable bearing and will result in the long 0:11:00.120 --> 0:11:04.440 term with compensated higher returns. Now, Value a lot of 0:11:04.559 --> 0:11:08.319 value companies a little bit old fashioned. They often manufacture 0:11:08.360 --> 0:11:11.079 things or produce services. They're very good at that, often 0:11:11.120 --> 0:11:14.360 with a lot of fixed or physical capital. And when 0:11:14.440 --> 0:11:17.960 you get into a lite economic cycle or an economic recession. 0:11:18.080 --> 0:11:22.480 It's very hard to change what your factory is currently manufactured, 0:11:23.080 --> 0:11:27.280 and so not surprisingly, those value firms tend to underperform 0:11:27.400 --> 0:11:31.760 those fixed costs. All of that physical capital give those 0:11:32.000 --> 0:11:34.920 value companies economies of scale, so they tend to perform 0:11:34.960 --> 0:11:38.200 the best coming out from the recessions in the recovery. Now, 0:11:38.360 --> 0:11:42.880 you can't stomach these cyclical losses, and value absolutely no doubt, 0:11:42.920 --> 0:11:45.480 has had a pretty rough ride of it over the 0:11:45.520 --> 0:11:48.680 past couple of quarters, consistent where where we are in 0:11:48.679 --> 0:11:52.320 the late economic cycle. If you can't stomach that under performance, 0:11:52.720 --> 0:11:56.080 then well values not for you, but for those who 0:11:56.280 --> 0:12:00.960 can bear those risks of short term to performance, you 0:12:01.000 --> 0:12:04.240 will be compensated with a long term value premium. That's 0:12:04.240 --> 0:12:07.040 the reward for barons. So how long is long term? 0:12:07.120 --> 0:12:10.280 Because since the OH nine crisis ended, value is under 0:12:10.520 --> 0:12:14.000 underperformed growth. That's a solid decade. We've been having an 0:12:14.080 --> 0:12:17.559 argument in my office. Is it one decade, two decades? 0:12:17.600 --> 0:12:22.720 It goes quite a while. Since value has consistently outperformed growth, 0:12:23.200 --> 0:12:27.560 What is the long term for for a factor manifesting 0:12:27.559 --> 0:12:30.120 itself as alpha. Yeah, these cycles can be three to 0:12:30.200 --> 0:12:33.800 five years, but over the last ten years value has outperformed. 0:12:33.840 --> 0:12:36.160 But we give a little bit of a story coming 0:12:36.360 --> 0:12:39.640 into twenty six and that was a really great year 0:12:39.760 --> 0:12:43.160 for value. In fact, particularly in the last part of 0:12:43.160 --> 0:12:48.960 the year. Started before Trump's election in November, value was 0:12:49.040 --> 0:12:53.520 pretty much flat, and then there was tremendous under performance. 0:12:53.960 --> 0:12:56.080 It was until the fourth quarter of the fourth quarter 0:12:58.240 --> 0:13:01.520 Uarter four, and then through twenty eighteen we saw those losses. 0:13:01.559 --> 0:13:06.920 Ex sorry, we find that twenty eighteen to now where 0:13:07.040 --> 0:13:12.720 in May is the fourth worst value draw down, fourth 0:13:12.720 --> 0:13:14.920 worst value draw down in almost a hundred years of 0:13:15.000 --> 0:13:19.079 data using the data set that starts in five constructed 0:13:19.080 --> 0:13:21.839 by Nobel Prize winning Gene Farmer and his longtime co 0:13:21.960 --> 0:13:26.240 author Kenneth French. Isn't that amazing fourth worth through century? 0:13:26.520 --> 0:13:30.120 That that's quite fascinating. Well again, fourth quarter of eighteen, 0:13:30.240 --> 0:13:35.439 when the market SMP fell about we saw value indexes 0:13:35.520 --> 0:13:38.080 do much better. They fell a little bit, but not 0:13:38.280 --> 0:13:40.480 nearly as much as the growth in this disease. The 0:13:40.520 --> 0:13:43.160 fang stocks got she lacked in the fourth quarter, But 0:13:43.240 --> 0:13:46.600 here we are pretty close to near all time highs 0:13:46.640 --> 0:13:49.079 and it looks like growth has kind of caught up again. 0:13:49.520 --> 0:13:53.640 So is the expectation we're going to see some serious 0:13:53.679 --> 0:13:55.800 mean reversion and at some point in the not to 0:13:55.960 --> 0:13:59.880 distant future. Well, I believe in value, I'm a value investor. 0:14:00.080 --> 0:14:03.760 M H. We do need to stay the course. Let's 0:14:03.760 --> 0:14:07.000 put that fourth worst draw down in context, so it's 0:14:07.840 --> 0:14:10.960 not unprecedented. There are some worst times, and if we 0:14:11.000 --> 0:14:13.840 look at the top six to eight episodes of really 0:14:13.920 --> 0:14:17.520 bad value performance, they're characterized by an environment like what 0:14:17.559 --> 0:14:21.600 we've had late economic cycle, except our cycle today has 0:14:21.960 --> 0:14:25.280 perhaps been very prolonged to be in this late stage, 0:14:25.280 --> 0:14:27.480 and I mean I think that's a separate macro post 0:14:27.520 --> 0:14:33.920 financial credit crisis, FED intervention, etcetera, monetary policy and all 0:14:34.000 --> 0:14:37.280 the rest of that. We also see some very severe 0:14:37.320 --> 0:14:39.840 accessions that There are two episodes in the nineteen thirties 0:14:39.880 --> 0:14:42.960 as well that are but the worst one is the 0:14:43.040 --> 0:14:47.360 late nineteen nineties in fact, and we're about half as 0:14:47.400 --> 0:14:52.120 bad as So let's talk a little bit about fixed 0:14:52.120 --> 0:14:56.080 income investors. Are they actually beginning to use factors now? 0:14:56.680 --> 0:15:00.360 They are, and we've just introduced a few fixed income 0:15:01.000 --> 0:15:03.280 factor e t f s. That's part of the next 0:15:03.320 --> 0:15:07.440 evolutionists pushing these time tested concepts of like buying cheap 0:15:07.560 --> 0:15:11.360 and finding higher quality names, finding trends, but pushing that 0:15:11.480 --> 0:15:15.280 from where it's being mostly equities to fixed income and 0:15:15.320 --> 0:15:21.200 then to other multi assets applications like currencies and commodities, 0:15:21.720 --> 0:15:24.680 and then also to go invest in a long short 0:15:24.680 --> 0:15:27.280 manner as well, and fixed income. It's right there at 0:15:27.280 --> 0:15:30.080 the frontier. So when I think of factor investing, I 0:15:30.120 --> 0:15:32.960 think of capsize, and I think of quality, and I 0:15:33.000 --> 0:15:38.600 think of price, namely value. Are you creating parallel versions 0:15:38.680 --> 0:15:44.400 of this for UM bonds? I mean our bonds cheaper 0:15:44.440 --> 0:15:49.320 expensive as a function relative to UM the combination of 0:15:49.320 --> 0:15:53.560 their credit quality and their forward expected cash flow based 0:15:53.600 --> 0:15:56.080 on will this default or not? How do you determine 0:15:56.520 --> 0:15:59.880 value or is it yield relative to to what the 0:16:00.040 --> 0:16:02.880 ten your treasury is doing. All of these factors are 0:16:03.000 --> 0:16:06.560 broad and persistent, so they are seen in many different areas, 0:16:06.600 --> 0:16:09.800 but you do need some research to apply it in 0:16:09.840 --> 0:16:13.400 these different asset classes. So value it's all about buying 0:16:13.480 --> 0:16:17.960 cheap relative to intrinsic right, what's intrinsic or fundamental value 0:16:17.960 --> 0:16:20.800 for a bond? And so we can measure or apply 0:16:20.960 --> 0:16:23.160 value by looking at the yield of a bond. Well, 0:16:23.160 --> 0:16:26.360 that's equivalent to price. But we might now have intrinsic 0:16:26.680 --> 0:16:30.600 value versus a forward rate curve or versus an option 0:16:30.640 --> 0:16:34.440 adjusted spread, for example. But we can apply the same 0:16:34.480 --> 0:16:39.000 concepts price or yield relative to a measure of intrinsic value. 0:16:39.040 --> 0:16:42.520 How does how does the risk free um treasury fit 0:16:42.600 --> 0:16:46.600 into figuring out what value is for a bond? The 0:16:46.720 --> 0:16:51.080 risk free rate operates across these different asset classes, and 0:16:51.120 --> 0:16:54.280 it's a base rate. It's sort of like the opportunity cost. 0:16:54.480 --> 0:16:57.520 Instead of parking your money in the bank, well, we're 0:16:57.520 --> 0:16:59.440 now going to take risk and were going to be 0:16:59.480 --> 0:17:03.080 rewarded for it. So it's coming across asset classes now. 0:17:03.520 --> 0:17:07.080 The risk free rate, though in fixed income, gives you 0:17:07.160 --> 0:17:11.640 a term structure, and that term structure will translate into 0:17:11.800 --> 0:17:15.439 different factor strategies. So some people will talk about curve 0:17:15.720 --> 0:17:20.600 or row down. That's certainly a part of income investing 0:17:20.680 --> 0:17:24.000 or carry. We can also talk about risk free rates 0:17:24.040 --> 0:17:26.639 affecting different countries, and so now we think of an 0:17:26.920 --> 0:17:31.119 uh an international version of fixed income factor investing as well. 0:17:31.400 --> 0:17:35.120 Since we're talking about fixed income investing, there's now about 0:17:35.280 --> 0:17:40.119 twelve trillion dollars of bonds that carry in negative yield. Here, 0:17:40.480 --> 0:17:42.679 I'm gonna lend you money, and I'm gonna pay you 0:17:42.760 --> 0:17:46.160 to hold my cash for me. How does that figure 0:17:46.480 --> 0:17:50.480 into factor investing for for bonds? And what does this 0:17:50.560 --> 0:17:56.040 say about the world of the cost of capital? I 0:17:56.040 --> 0:18:00.920 and almost guilty, really, because a lot of academics spent 0:18:01.200 --> 0:18:04.920 an enormous amount of time writing down very complicated models 0:18:04.960 --> 0:18:08.119 to ensure that interest rates remain positive. And what are 0:18:08.119 --> 0:18:11.200 they now? They're they're not positive. It's almost like all 0:18:11.320 --> 0:18:15.639 that literature could have been thrown out more seriously, More seriously, 0:18:16.240 --> 0:18:20.200 what's really relevant here is the real rate rather than 0:18:20.280 --> 0:18:24.120 the nominal relative to inflation, relative to inflation, and there 0:18:24.200 --> 0:18:27.520 we've seen many episodes of negative real rates, and some 0:18:27.600 --> 0:18:30.439 of them I've I've worked with some co authors in 0:18:30.520 --> 0:18:33.320 papers about. The second is that if we think about 0:18:33.720 --> 0:18:36.280 the negative yielders, that you invest in bonds and you're 0:18:36.280 --> 0:18:41.280 going to lose money. But we've had debt consolidations, we've 0:18:41.320 --> 0:18:46.000 had demonetizations, confiscations in the past. In the United States, 0:18:46.000 --> 0:18:49.680 we've actually seen some wealth destruction. In the nine thirties, 0:18:50.080 --> 0:18:53.520 we had a ban on individuals holding gold right, and 0:18:53.560 --> 0:18:55.560 that's a near money substitute, or at least it was 0:18:55.600 --> 0:18:57.560 at the time, because we were on the gold standard, 0:18:57.880 --> 0:19:01.320 So these negative yielding in a much order context. It's 0:19:01.960 --> 0:19:06.879 actually we've had these episodes before. Factors will continue to 0:19:06.920 --> 0:19:09.440 have a place in this period. I think you still 0:19:09.480 --> 0:19:12.080 want to buy cheap, you still want to find these trends, 0:19:12.400 --> 0:19:15.960 you want higher quality names probably that's more important than ever. 0:19:16.160 --> 0:19:18.439 And you want to have portfolio resilience. And we can 0:19:18.480 --> 0:19:21.639 hold a combination of factors to help these investors. So 0:19:22.320 --> 0:19:25.480 you mentioned the evolution of factors and the evolution of 0:19:25.560 --> 0:19:29.000 new products. What what do you see coming down the pike? 0:19:29.080 --> 0:19:31.520 What sort of stuff we've been hearing for a long 0:19:31.560 --> 0:19:35.520 time about these one thirty thirty portfolios, these long short 0:19:35.600 --> 0:19:38.720 et f s. What are the next things that factor 0:19:38.800 --> 0:19:42.320 investing is going to drive From the product side, we 0:19:42.400 --> 0:19:45.280 talked about some of these already pushing out these concepts 0:19:45.280 --> 0:19:48.440 from equities to fix income and other multi asset classes. 0:19:48.800 --> 0:19:51.760 But I think the real gains will come from applying 0:19:51.840 --> 0:19:55.919 data and technology. Two. The mom and dad sitting across 0:19:55.960 --> 0:20:01.080 the table from a financial advisor. And my vision is 0:20:01.080 --> 0:20:04.800 that if you're having that conversation with an individual and 0:20:04.800 --> 0:20:07.600 that individual says I'm really worried about losing my job, 0:20:08.280 --> 0:20:11.640 they're making a statement about economic growth, and we can 0:20:11.760 --> 0:20:14.960 have some factors to help hedge that bad outcome. What's 0:20:14.960 --> 0:20:18.480 a day in the life of Andrew Ang, Like, yeah, 0:20:18.520 --> 0:20:21.000 what does that mean? Leading factor investing at black Rock 0:20:21.160 --> 0:20:23.440 means like talk with a lot of people. I have 0:20:23.520 --> 0:20:26.359 the privilege of working with some really talented people, and 0:20:26.400 --> 0:20:28.680 I feel like a little kid in a candy store 0:20:28.880 --> 0:20:31.840 because there's all this great data and technology at Black 0:20:31.840 --> 0:20:34.600 Crock and we can put things to work and introduce 0:20:34.640 --> 0:20:38.200 new products and make it happen and have some factor analytics, 0:20:38.280 --> 0:20:40.879 data and technology all based on factors as well. So 0:20:40.960 --> 0:20:42.960 let's talk a little bit about your book. This is 0:20:43.000 --> 0:20:48.080 a serious um quantitative work. Tell us how the book 0:20:48.119 --> 0:20:52.760 came about, and uh, who's it for. I wrote the 0:20:52.800 --> 0:20:59.800 book after working for several large sovereign institutions, sovereign wealth fronts, 0:21:00.160 --> 0:21:03.480 sovereign pension plans, and I talked all about factors, and 0:21:03.520 --> 0:21:08.800 I wanted to bring all of that knowledge that just 0:21:08.920 --> 0:21:11.840 even a decade two decades ago, were only available to 0:21:12.680 --> 0:21:18.040 really large sophisticated institutions, and I wanted to democratize access. 0:21:18.040 --> 0:21:21.159 In fact, that's our mission statement. It's to democratize the 0:21:21.200 --> 0:21:25.119 broad and persistent democratize access to factors. And this book 0:21:26.000 --> 0:21:29.960 really put into context with case studies based on some 0:21:30.119 --> 0:21:33.480 of those, Uh, some of those institutions how to use 0:21:33.520 --> 0:21:39.439 factors in portfolios. So you said factors plural um and 0:21:39.480 --> 0:21:42.760 you mentioned Gene Farmer before, So the original Farmer French 0:21:42.840 --> 0:21:47.520 model was right. Then we got the five factor model, 0:21:47.560 --> 0:21:50.840 then the seven factor model. And some people have made 0:21:50.840 --> 0:21:55.359 the claim that and I'm a little skeptical that most 0:21:55.400 --> 0:21:59.359 of these are of of really significant value, that there 0:21:59.359 --> 0:22:01.760 are four hun drew to a five factors. Some people 0:22:01.800 --> 0:22:04.920 have said a thousand factors. How many factors are there 0:22:04.960 --> 0:22:12.359 and how many really can be implemented? There are half 0:22:12.359 --> 0:22:16.360 a dozen macro factors and half a dozen style factors. 0:22:16.960 --> 0:22:20.400 Macro factors drive returns across asset classes. The big three 0:22:20.400 --> 0:22:24.480 are economic growth, real rates, and inflation, and they explain 0:22:24.960 --> 0:22:29.159 about eight of the variation of returns across these different 0:22:29.160 --> 0:22:32.159 asset classes. Give us private markets. Give us those three again, 0:22:32.480 --> 0:22:38.240 economic growth, real rates, and inflation. Those are the big three, 0:22:39.280 --> 0:22:44.000 and within each different asset class, within equities, we can 0:22:44.080 --> 0:22:47.960 find pockets of securities that over the long run have 0:22:48.080 --> 0:22:51.280 resulted in higher risk adjusted returns. Those securities that are 0:22:51.400 --> 0:22:54.000 cheap or high quality that we talked about earlier, and 0:22:54.040 --> 0:22:58.919 we can find those same patents in bonds and the commodities. 0:22:58.920 --> 0:23:02.119 We can even find them in private markets like private 0:23:02.160 --> 0:23:05.679 equity and real estate. Those are style factors and they 0:23:05.720 --> 0:23:09.520 operate within an asset class, and in equities we think 0:23:09.560 --> 0:23:15.320 of value, quality, momentum, size, a minimum volatility. Now the 0:23:15.440 --> 0:23:19.639 criteria for these and why there's only like half a 0:23:19.680 --> 0:23:23.040 dozen macro half a dozen style, there's four criteria that 0:23:23.080 --> 0:23:28.040 whittles down the potential hundreds or thousands to just these narrows, 0:23:28.040 --> 0:23:31.280 just this narrow set. The first is that economic rationale 0:23:31.280 --> 0:23:34.240 that we talked about earlier, reward for bearing risks, structural 0:23:34.240 --> 0:23:39.520 and pediment or behavioral bias. We want very long histories 0:23:39.600 --> 0:23:43.080 and that removes basically most of that. A lot of these, 0:23:43.119 --> 0:23:46.280 a lot of these don't don't have decades worth of history, 0:23:46.720 --> 0:23:49.760 and we would like that so that it informs how 0:23:49.800 --> 0:23:52.480 we can build those strategies and offer them. We want 0:23:52.600 --> 0:23:57.800 differentiated returns, particularly with respect to market cap benchmarks, right, 0:23:57.880 --> 0:23:59.920 what is it giving us that that that is different 0:24:00.000 --> 0:24:03.000 And then finally we want and this is a choice 0:24:03.040 --> 0:24:05.320 for black Rock, we want to be able to offer 0:24:05.359 --> 0:24:08.359 these in scale, so that means we can pass on 0:24:08.440 --> 0:24:12.720 low costs to our clients. After him imposing all those 0:24:12.760 --> 0:24:16.160 full criteria, we're only left with that half a dozen 0:24:16.200 --> 0:24:19.520 macro half a dozen stuff quite interesting. So so what 0:24:19.720 --> 0:24:24.280 is next in factor land? Are there any yet undiscovered 0:24:24.320 --> 0:24:28.359 factors out there that might fall into either of these 0:24:28.960 --> 0:24:32.480 um two half dozen groups or have we pretty much 0:24:32.520 --> 0:24:34.919 squeezed all the juice out of the orange at this point. 0:24:35.640 --> 0:24:39.240 There's always continued development, but I think it's a little 0:24:39.280 --> 0:24:42.920 bit like Shakespeare. You know, he wrote some great plays 0:24:42.920 --> 0:24:46.160 and sonnets back in Elizabeth E. Times, did that with 0:24:46.400 --> 0:24:49.160 quill and inc. Right, we still have well, he will 0:24:49.200 --> 0:24:52.160 be writing screenplays today. Right, Perhaps we have some streaming 0:24:52.160 --> 0:24:54.359 TV and other things like that, but there's still character 0:24:54.480 --> 0:24:56.919 and plot. But it's done in different forms. And we 0:24:56.960 --> 0:25:01.560 want to evolve buying cheap finding train, so the implementations 0:25:01.560 --> 0:25:03.640 of cost will change. We can do this better with 0:25:03.880 --> 0:25:08.560 more efficient data and technology to lower transaction costs. We 0:25:08.600 --> 0:25:12.320 would also like to see how we can use them 0:25:12.320 --> 0:25:17.040