WEBVTT - Morgan Stanley’s Slimmon on Factor Exposures 0:00:13.720 --> 0:00:16.919 Welcome to Inside Active, a podcast about active managers that 0:00:16.960 --> 0:00:19.959 goes beyond sound bites and headlines and looks deeper into 0:00:20.000 --> 0:00:25.480 the processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:25.480 --> 0:00:28.360 i lead mutual fund and active research at Bloomger Intelligence. 0:00:28.640 --> 0:00:32.560 Today my co host is Christopher kine Us, quantitative strategist 0:00:32.560 --> 0:00:36.160 at Bloomberg Intelligence. Chris, thank you for joining me today. 0:00:36.560 --> 0:00:38.240 Thank you for having me, David. 0:00:38.680 --> 0:00:42.480 So, you did a recent note about the traditional equity factors. 0:00:42.920 --> 0:00:44.760 How have they performed so far this year? You know 0:00:44.800 --> 0:00:46.160 which ones are performing the best? 0:00:46.960 --> 0:00:49.680 Sure, it's been certainly a strong gear for equity factors 0:00:50.040 --> 0:00:53.559 so far. You know, we have our four main equity 0:00:53.600 --> 0:00:57.560 factor families I would call them, which is low volatility, value, momentum, 0:00:57.640 --> 0:01:01.600 and quality. Three of the four are this year. They're 0:01:01.600 --> 0:01:04.560 all up double digits actually on a long short basis. 0:01:04.600 --> 0:01:08.039 The only laggard is value, which is only down moderately. 0:01:08.600 --> 0:01:11.880 We have our low volatility factor long short as actually 0:01:11.920 --> 0:01:14.560 the best on the year. Now, one little wrinkle with 0:01:14.600 --> 0:01:17.200 that is that you know we have a beta neutralized 0:01:17.520 --> 0:01:20.160 long between the long and short legs. So what that 0:01:20.240 --> 0:01:23.040 really means is a little bit more, you know, a 0:01:23.040 --> 0:01:24.560 little bit more money in the low ball and a 0:01:24.560 --> 0:01:26.320 little bit less money in the high ball. When you 0:01:26.400 --> 0:01:28.800 do the long short factor that's the best performing on 0:01:28.840 --> 0:01:31.720 the year momentum and quality. I've also performed very well. 0:01:32.000 --> 0:01:33.880 Like I said, value is down. But the one thing 0:01:33.920 --> 0:01:36.280 I'll say about value is when you do long short 0:01:36.319 --> 0:01:39.520 on equal weight basis, it's just down moderately. It's just 0:01:39.520 --> 0:01:42.959 that market cap weighted long short value is really getting harmed. 0:01:42.959 --> 0:01:46.040 And that's because of the FASTAUP performance of the largest 0:01:46.040 --> 0:01:48.880 most expensive stocks on the year. Interesting. 0:01:49.480 --> 0:01:51.160 So I think it'd be a great time to introduce 0:01:51.200 --> 0:01:56.560 our guest, Andrew Slimon, managing director at Morgan Stanley Investment Manager, 0:01:56.840 --> 0:01:59.880 where he's the lead senior portfolio manager on all long 0:02:00.000 --> 0:02:04.440 equity strategies for applied equity Advisors. So, Andrew, welcome to 0:02:04.480 --> 0:02:05.080 the podcast. 0:02:05.640 --> 0:02:07.480 Hey, thanks for having me on. Very exciting. 0:02:08.280 --> 0:02:10.760 So, you know, before we dig in, you know you're 0:02:10.760 --> 0:02:13.040 no stranger to factor models. You know, I'd like to 0:02:13.120 --> 0:02:15.320 kind of get your thoughts on what Chris just said. 0:02:15.360 --> 0:02:17.640 And you know, are you seeing you know, higher returns 0:02:17.639 --> 0:02:20.160 for momentum and quality? Is that kind of helping you 0:02:20.280 --> 0:02:22.640 identify market drivers. 0:02:23.240 --> 0:02:26.280 Well, I think, you know, I would begin by saying 0:02:26.400 --> 0:02:28.760 this year hasn't really been that different, to the extent 0:02:28.800 --> 0:02:33.120 that if you look very very long term, what factors 0:02:33.160 --> 0:02:39.000 work over time? The best performing factors are momentum and profitability, 0:02:39.080 --> 0:02:43.080 which are is a form of quality. So you know, 0:02:43.160 --> 0:02:46.840 I don't think this is very different. I do think, 0:02:47.080 --> 0:02:50.200 you know a lot of people predicted that Value would 0:02:50.240 --> 0:02:52.600 have a better year. It's done, as Chris said, it's 0:02:52.600 --> 0:02:57.680 done okay, but it hasn't been spectacular. But overall, I 0:02:57.760 --> 0:02:59.799 look at you know, what works long term, quality and 0:03:00.240 --> 0:03:04.760 sticking with winners. Usually there's some fundamental backdrop behind it, 0:03:04.800 --> 0:03:06.840 and this year hasn't been really different. 0:03:07.440 --> 0:03:10.239 No, it's great, So I'd like to stick I guess 0:03:10.280 --> 0:03:13.520 step take the step back. You know, I think we'd 0:03:13.520 --> 0:03:15.360 really love to hear how you got your start in 0:03:15.400 --> 0:03:16.320 the investment business. 0:03:17.560 --> 0:03:20.400 Sure, I mean it's a great question because in many 0:03:20.400 --> 0:03:26.080 ways it's a great way to frame the global concentrated 0:03:26.080 --> 0:03:29.800 product that we run. And my experience in the business 0:03:30.080 --> 0:03:34.079 really led up to really starting this strategy. So if 0:03:34.080 --> 0:03:36.320 I could just wind the clock back for you a 0:03:36.360 --> 0:03:39.320 little bit, I started my caravan in a very long time. 0:03:39.680 --> 0:03:41.600 I think One of the things I love about this 0:03:41.720 --> 0:03:45.480 business is, you know, I played college sports and competed 0:03:45.560 --> 0:03:48.680 as a junior, and I love the investment business because 0:03:48.720 --> 0:03:50.720 there's you know, there's a you know, there's score at 0:03:50.720 --> 0:03:53.200 the end of the day, and you can't make up 0:03:53.320 --> 0:03:55.720 you know, there's no room for commentary on the scoreboard. 0:03:56.320 --> 0:03:59.320 And I think that's true of sports also. But I started, 0:03:59.560 --> 0:04:02.480 you know, my career at a at a private bank 0:04:02.640 --> 0:04:04.880 in New York out of college that had a you know, 0:04:05.080 --> 0:04:09.920 an investment management arm and I never you know, they 0:04:09.960 --> 0:04:14.080 had about thirty research analysts that cover all these different industries, 0:04:14.160 --> 0:04:15.960 and you know, I was right out of college and 0:04:16.000 --> 0:04:18.400 I was in the research department, and they all seemed 0:04:18.480 --> 0:04:21.200 very very bright. And they had an investment committee that 0:04:21.320 --> 0:04:26.120 met once a week and they would debate the investments 0:04:26.160 --> 0:04:30.800 and then they put the investments into the fund based 0:04:30.839 --> 0:04:34.640 on you know, what the research analysts would recommend. And 0:04:35.200 --> 0:04:38.239 they all seem very very bright. Except I noticed after 0:04:38.279 --> 0:04:41.000 being there a couple of years that the performance was, yeah, 0:04:41.200 --> 0:04:43.800 it wasn't it wasn't terrible, but it was never really 0:04:44.080 --> 0:04:49.440 really that good. And our outperformance and I think, now, 0:04:49.560 --> 0:04:53.160 you know, what we've learned since the eighties. Is well, 0:04:53.800 --> 0:04:58.520 when you have an investment committee that meets once a week. Uh, 0:04:58.560 --> 0:05:00.440 you know, the market is more you know, kind of 0:05:00.920 --> 0:05:06.320 reflexive than that. Uh, management by committee hasn't done as 0:05:06.360 --> 0:05:10.400 well as managed by kind of uh lead or or 0:05:10.440 --> 0:05:13.280 closely Philip Kim and I run the strategies. I think 0:05:13.320 --> 0:05:16.279 that's That's another thing. And then most importantly, we've learned 0:05:16.320 --> 0:05:20.000 that when you own you know, one hundred plus securities 0:05:20.040 --> 0:05:22.039 in your benchmarks to the S and P, it's really 0:05:22.120 --> 0:05:24.880 hard to perform over time. So that was the first 0:05:24.920 --> 0:05:28.960 experiences that led me to believe huh, okay, uh, when 0:05:28.960 --> 0:05:31.240 I start this, you know, I started the group. Those 0:05:31.320 --> 0:05:34.440 experiences didn't work, you know very well. Maybe I won't, 0:05:34.560 --> 0:05:36.919 I won't mimic that. Then I went to the Universe 0:05:37.000 --> 0:05:39.560 Chicago Business School because I wanted to you know, kind 0:05:39.560 --> 0:05:44.080 of hardcore finance experience, and I took Gene Foma's course 0:05:44.120 --> 0:05:46.719 and Ken French's course, and I learned that, you know, 0:05:46.800 --> 0:05:49.680 kind of there's a quantitative side to investing, and that 0:05:50.200 --> 0:05:56.440 buying cheap stocks outformed buy expensive stocks. Uh. And uh, 0:05:56.880 --> 0:06:00.440 you know, things like momentum actually work. And that had 0:06:00.480 --> 0:06:03.640 nothing to do with fundamental research it had to do 0:06:03.800 --> 0:06:07.320 for the quantitative side. And I think since that time 0:06:07.400 --> 0:06:10.520 in business school and even morning Star has come out 0:06:10.560 --> 0:06:13.760 and proven studies that you know, kind of two thirds 0:06:13.800 --> 0:06:18.599 of it in manager's return comes from its factor exposure. 0:06:18.960 --> 0:06:20.840 You know, Chris is loving what I'm saying now, But 0:06:22.000 --> 0:06:25.080 the reality is is that think about the year twenty 0:06:25.240 --> 0:06:30.200 twenty one. Growth in twenty twenty twenty one got so 0:06:30.400 --> 0:06:34.359 expensive that going into twenty twenty two, it didn't really 0:06:34.400 --> 0:06:37.720 matter what growth manager you chose. It really didn't matter 0:06:37.800 --> 0:06:40.479 what growth stocked your own. You went down a lot. 0:06:41.080 --> 0:06:45.279 So it really the decision was not which growth stock owner, 0:06:45.320 --> 0:06:48.520 which growth manager invested in, is should I own growth stocks? 0:06:48.560 --> 0:06:53.240 And so that led me to HM, before we get 0:06:53.279 --> 0:06:59.240 to the fundamental research of analyzing a stock, maybe we 0:06:59.279 --> 0:07:05.920 should understand what factor exposure we're getting when we buy 0:07:05.920 --> 0:07:09.040 a sock. And look at the last month and a half, 0:07:09.080 --> 0:07:12.040 did it really matter what financials you own? They've all 0:07:12.080 --> 0:07:15.200 done great now, maybe some have done better than the other, 0:07:15.240 --> 0:07:17.000 but they've done a hacker a lot better than they've 0:07:17.040 --> 0:07:20.240 done recently. So it was a factor shift. And so 0:07:20.840 --> 0:07:24.520 I think that's the second experience, and then third coming 0:07:24.520 --> 0:07:27.480 out of business school, I wanted to stay in Chicago. 0:07:27.680 --> 0:07:32.600 My wife got a very good job in Chicago, and 0:07:32.760 --> 0:07:35.680 I wanted to really be start my career on as 0:07:35.680 --> 0:07:37.960 a research you know, going back to the buyside. But 0:07:38.040 --> 0:07:41.280 I couldn't really get a job. That was in nineteen 0:07:41.480 --> 0:07:43.920 ninety one. We're in the depths of a bear market, 0:07:44.440 --> 0:07:47.640 and I started my career at Morgan Stanley in their 0:07:47.680 --> 0:07:52.320 prior wealth management office area. At the time, we didn't 0:07:52.400 --> 0:07:56.360 have a you know, a broad distribution of wealth management 0:07:56.400 --> 0:07:59.360 financial advisors, so we had this small group that kind 0:07:59.400 --> 0:08:04.880 of cover family offices, smaller institutions and show them, you know, 0:08:05.040 --> 0:08:09.280 investment ideas. And what I observed was a couple things 0:08:09.320 --> 0:08:15.240 from that experience. Number one is clients generally don't care 0:08:16.240 --> 0:08:20.280 whether they own growth, their value or large cap mid cap. 0:08:20.920 --> 0:08:24.119 They want to make money and it doesn't really matter 0:08:24.160 --> 0:08:28.680 where it comes. And the problem with that is that 0:08:28.960 --> 0:08:36.280 their patients duration of investing in a style of investing 0:08:37.200 --> 0:08:41.719 is not consistent with the duration which a style can 0:08:41.760 --> 0:08:45.680 go out of favor. So inevitably, you know, after about 0:08:45.720 --> 0:08:49.920 two years of your value manager underperforming the S and P, 0:08:51.520 --> 0:08:53.880 the client starts to go with me. You know, maybe 0:08:53.880 --> 0:08:56.600 we should get rid of them, and so eventually say 0:08:56.600 --> 0:08:58.360 oh yeah, yeah, wah, we should definitely get rid of 0:08:58.400 --> 0:09:00.880 that manager. And it always has happens right before that 0:09:00.960 --> 0:09:04.840 style comes back into favor. So the point of this 0:09:05.120 --> 0:09:10.240 was is that Okay, the style box driven managers, they 0:09:10.320 --> 0:09:13.920 get all their money after they've done well because the 0:09:14.120 --> 0:09:19.640 tear sheet, your tear sheet only tells you what they've 0:09:19.640 --> 0:09:23.600 done in the past. It doesn't tell you what will 0:09:23.640 --> 0:09:29.040 happen in the future. So the combination of the tear 0:09:29.160 --> 0:09:35.080 sheet plus the emotional biases to buy things that are 0:09:35.240 --> 0:09:39.360 working that are priced up in the equity market, which 0:09:39.360 --> 0:09:41.840 is crazy. I don't know of any other market in 0:09:41.880 --> 0:09:47.000 the world where when things go down prices are marked down, 0:09:47.040 --> 0:09:50.040 people more willing to sell, and when we're marked up, 0:09:50.120 --> 0:09:54.120 they're more willing to buy, except for this market. But 0:09:54.240 --> 0:09:59.360 that's the reality. So when things have done poorly, clients 0:09:59.400 --> 0:10:02.400 didn't want to buy, they wanted to sell it, and 0:10:02.520 --> 0:10:05.880 so it led me to believe let's see, let's put 0:10:05.960 --> 0:10:10.839 all those experiences together. We know we need a small team. 0:10:11.200 --> 0:10:14.319 We know we need a portfolio that has a limited 0:10:14.360 --> 0:10:18.319 number of socks. We know we need to focus on 0:10:18.440 --> 0:10:24.000 a quantitative approach first, but quant doesn't explain everything, just 0:10:24.120 --> 0:10:28.920 a portion. And thirdly, we can't be stylebox driven because 0:10:28.920 --> 0:10:30.880 at the end of the day, clients really they're not 0:10:31.040 --> 0:10:34.720 clientbox driven. Hey I did great, I lost you less 0:10:34.760 --> 0:10:37.760 money than the growth index. Yeah, but you want to 0:10:37.800 --> 0:10:40.440 perform the SMP, so let's move to something that's performed 0:10:40.480 --> 0:10:43.560 the S and P. So by the very nature of 0:10:43.640 --> 0:10:47.120 all these style boxing we're kind of setting people up 0:10:47.160 --> 0:10:50.520 to fail. And so that was really, you know, kind 0:10:50.559 --> 0:10:53.960 of the experiences led me to believe. In two thousand 0:10:53.960 --> 0:10:55.600 and three, I raised my hands said I don't want 0:10:55.600 --> 0:10:57.520 to cover these clients anymore. I want to start this 0:10:58.480 --> 0:11:01.400 group that will be at the at the you know, 0:11:01.400 --> 0:11:03.800 at the at the base of what we do is 0:11:03.840 --> 0:11:07.760 factor analysis, quantitative analysis. But it won't be just that. 0:11:08.120 --> 0:11:11.920 We're going to have a fundamental group that focuses on 0:11:12.400 --> 0:11:15.840 fundamental research so that we once we get the factors right, 0:11:16.320 --> 0:11:18.640 we can overlay it with what's the best you know, 0:11:18.880 --> 0:11:22.360 value socks oone, what's the best financialist to own? And that, 0:11:22.679 --> 0:11:25.360 you know, that's what we started. Uh and I started 0:11:25.440 --> 0:11:29.000 oh four Philip Kim, who had a much deeper quantitative 0:11:29.040 --> 0:11:32.439 background than I did join me late oh four, and 0:11:32.480 --> 0:11:35.000 you know we've been off to the running ever since. 0:11:35.920 --> 0:11:38.720 So I think that's a great segue into you know, 0:11:38.760 --> 0:11:41.800 the strategy we're going to talk about today, the Global 0:11:41.880 --> 0:11:46.640 Concentrated portfolio fund ticker mL and i X. Can you 0:11:46.679 --> 0:11:50.120 go into just with the processes of how this all 0:11:50.200 --> 0:11:52.960 works when you're making selections for the fund. 0:11:53.480 --> 0:11:58.079 Sarah, So, first and foremost, we try to limit the 0:11:58.160 --> 0:12:02.400 number of sacks of twenty sacks. Occasionally it goes a 0:12:02.400 --> 0:12:05.559 little over if we're kind of transitioning into out of 0:12:05.600 --> 0:12:11.040 one sock into But the purpose of twenty stocks is 0:12:11.200 --> 0:12:14.160 it is it's a global strategy. It's benchmark to the 0:12:14.280 --> 0:12:17.520 MSCI world, which I don't know has fifteen hundred stocks 0:12:17.520 --> 0:12:21.000 in it. So if we own twenty stocks and there 0:12:21.000 --> 0:12:25.240 are fifteen hundred in the index, well that means our 0:12:25.280 --> 0:12:28.400 active share is really high. And remember what I said before, 0:12:28.600 --> 0:12:32.800 What studies have shown is that managers that have higher 0:12:32.840 --> 0:12:38.079 active share ten not all. It was ten to outperform 0:12:38.120 --> 0:12:41.719 managers that are benchmark huggers. Because at the end of 0:12:41.720 --> 0:12:44.040 the day, if you have high active share, you differ 0:12:44.120 --> 0:12:48.240 from the index, and therefore your people are going to 0:12:48.240 --> 0:12:50.520 find out pretty quickly. You're either doing a good job 0:12:50.640 --> 0:12:55.160 or you're not. You're not going to gradually underperform. So 0:12:55.240 --> 0:13:00.840 we by having twenty stocks, it keeps our active very high. Now, 0:13:00.880 --> 0:13:03.840 to be clear, you could have high active share because 0:13:03.880 --> 0:13:05.960 you own lots and lots of socks, none of which 0:13:06.000 --> 0:13:10.600 are in the index. But there's another measure that's very 0:13:10.679 --> 0:13:13.240 very important to us, and it's called your tracking air, 0:13:13.480 --> 0:13:17.079 and your tracking air measures how volatile your fund is 0:13:17.880 --> 0:13:22.040 relative to the benchmark. Now it's not your beta because 0:13:22.080 --> 0:13:24.680 that just measure is relative to the index. But so 0:13:24.720 --> 0:13:27.960 in other words, if I had lots and lots of 0:13:27.960 --> 0:13:31.360 stocks that weren't in the index, so I owned a 0:13:31.480 --> 0:13:34.160 hundred socks none of which were in the index, well 0:13:34.280 --> 0:13:38.600 then I wouldn't move with the index much, and so 0:13:38.720 --> 0:13:42.439 my tracking air would be very very high. But if 0:13:42.480 --> 0:13:46.440 I could own twenty stocks, all of which are in 0:13:46.480 --> 0:13:50.360 the index, but they're not all you know, kind of 0:13:50.400 --> 0:13:53.880 focused on one theme or one bet, then I could 0:13:53.960 --> 0:13:57.600 keep my tracking air down and all Again, the academic 0:13:57.679 --> 0:14:02.280 studies show high active share and only moderate tracking air, 0:14:03.120 --> 0:14:05.840 you know, leads to success. So that's where we start. 0:14:05.920 --> 0:14:08.920 We start with. Every time we look at a stock. 0:14:09.040 --> 0:14:12.240 We say, well, if we add a stock, you know, 0:14:12.640 --> 0:14:14.520 we got to take one away because we want to 0:14:14.559 --> 0:14:18.520 keep it at twenty. But if we add that stock, 0:14:19.560 --> 0:14:23.360 will that increase our tracking air which we don't want 0:14:23.360 --> 0:14:28.200 to do, or lowers our tracking. So broadly speaking, if 0:14:28.240 --> 0:14:32.760 we liked, say value, and we own only financials, well, 0:14:32.800 --> 0:14:37.680 adding another financial would increase our value exposure, but it 0:14:37.720 --> 0:14:41.400 would also increase our tracking. So we think in large 0:14:42.360 --> 0:14:46.760 a lot about how to add or change stocks that 0:14:47.240 --> 0:14:51.680 give us the factor exposures that we want but don't 0:14:51.720 --> 0:14:56.880 necessarily they're not correlated to other stocks in the portfolio. 0:14:56.920 --> 0:15:00.160 And that's how we you know, we start the the 0:15:00.280 --> 0:15:05.400 process and then we begin with okay, well, what factors 0:15:05.560 --> 0:15:08.760 are working? We want to stay in the game. We 0:15:08.920 --> 0:15:12.720 don't want to be you know, all in value where 0:15:12.760 --> 0:15:16.320 I'm sitting there and saying value work long term, and 0:15:16.360 --> 0:15:19.360 you're you know, you're mister, mister or missus client, you're saying, yeah, 0:15:19.360 --> 0:15:22.760 but value hasn't worked for three years. Right. We're looking 0:15:22.880 --> 0:15:28.440 at what factors are working from a price performance basis 0:15:29.400 --> 0:15:33.640 and then making an assessment and it continue to work 0:15:33.720 --> 0:15:37.480 in the future. And that assessments based on is the 0:15:37.520 --> 0:15:42.600 factor expensive or cheap. So we're looking at valuation and 0:15:42.760 --> 0:15:47.280 momentum of the factor and assessing can it work in 0:15:47.280 --> 0:15:50.520 the future. And if you look around the world, I've 0:15:50.560 --> 0:15:52.680 heard a lot of people tell say, you got to 0:15:52.680 --> 0:15:55.360 buy you know, especially in Europe, value is really cheap. Well, 0:15:55.440 --> 0:15:57.840 it's really cheap, but it had to work for a 0:15:57.960 --> 0:16:01.960 very very long time, so it hasn't pay just because 0:16:02.080 --> 0:16:05.680 value is very very cheap, it hasn't worked. And so 0:16:05.920 --> 0:16:11.160 again we're thinking about how to bias the portfolio from 0:16:11.320 --> 0:16:17.800 a quantitative standpoint first in each part of the world US, Europe, Japan, Asia, 0:16:17.800 --> 0:16:21.960 extrapan from a factor standpoint, and then and only then 0:16:23.040 --> 0:16:28.400 picking stocks that give us that appropriate factor exposure that 0:16:28.440 --> 0:16:33.160 we like for a fundamental, pure fundamental reasoning. So they 0:16:33.200 --> 0:16:39.240 call us a quantinmental team quantinental philosophy. I just know 0:16:39.320 --> 0:16:43.600 that pure quants try to diversify away the fundamental side, 0:16:43.640 --> 0:16:47.600 and my roots started with a fundament. I know there's 0:16:48.200 --> 0:16:52.000 value added good stock picking, but I'm also well aware 0:16:52.520 --> 0:16:55.000 that at the end of the day, you got to 0:16:55.040 --> 0:16:58.160 get your factors right first, and that's the most important. 0:16:58.200 --> 0:16:59.440 That's the core of what we do. 0:17:01.160 --> 0:17:03.280 Man Andrew, I love so many things you said, I 0:17:03.280 --> 0:17:07.199 don't know where to start, just two quick comments. You know, 0:17:07.320 --> 0:17:11.320 I joked that the momentum windows one year, but investors 0:17:11.320 --> 0:17:14.600 windows like three to five for hiring and firing managers, 0:17:14.640 --> 0:17:16.480 which is more of a mean reversion window. So it 0:17:16.600 --> 0:17:19.040 kind of goes to what you're saying. When they fire you, 0:17:19.040 --> 0:17:21.960 you start out performing, and then you know, I think 0:17:22.000 --> 0:17:25.000 a concentrated factor portfolio makes so much sense because you know, 0:17:25.000 --> 0:17:28.560 what people don't really understand is, after so many assets, 0:17:28.560 --> 0:17:30.520 so many alphas, however you want to say it, you 0:17:30.560 --> 0:17:32.719 don't get very much diversification benefit. 0:17:32.760 --> 0:17:33.240 I mean, it's. 0:17:33.119 --> 0:17:37.359 Extremely marginal after let's say twenty stocks, extremely marginal. So 0:17:37.400 --> 0:17:40.359 the difference in diversification between twenty and one hundred is 0:17:40.400 --> 0:17:43.919 not nearly as dramatic as it kind of seems. So 0:17:43.960 --> 0:17:46.560 I just love all of that. So my question is 0:17:47.320 --> 0:17:50.639 maybe with value, you know, the much maligned value factor. 0:17:50.760 --> 0:17:53.439 You know, without giving away your secret sauce, you mentioned 0:17:53.440 --> 0:17:57.320 that you studied under the legend Professor Farma at Chicago. 0:17:57.760 --> 0:18:00.440 When I think of Professor Fama, I think book to 0:18:00.480 --> 0:18:04.760 market factor, you know, as a value factor. You know, 0:18:05.400 --> 0:18:07.560 what do you how do you think about constructing value? 0:18:07.640 --> 0:18:10.320 Is it a composite of a lot of different metrics. 0:18:10.359 --> 0:18:12.720 You don't have to like get into them. But or 0:18:12.720 --> 0:18:15.800 how do you broadly think about a constructing a value factor? 0:18:16.480 --> 0:18:18.840 Yeah, so so Chris, this is this is a very 0:18:18.840 --> 0:18:21.399 interesting question because you know, don't forget I had worked 0:18:21.400 --> 0:18:25.239 on Wall Street before gone to univer Chicago, and then 0:18:25.280 --> 0:18:28.520 I had studied under Fama, and he's, you know, in 0:18:28.600 --> 0:18:32.720 the classroom saying, look, price to book works great long term, 0:18:33.240 --> 0:18:36.959 and then you start to really decompose deep what I 0:18:37.000 --> 0:18:40.159 call price to book is a deep value metric, and 0:18:40.200 --> 0:18:45.480 you realize it rarely works, but when it works, it 0:18:45.640 --> 0:18:50.480 works huge. Right, So twenty twenty, in the midst of COVID, 0:18:50.680 --> 0:18:53.600 if you had just bought stocks, had just gotten cream 0:18:54.000 --> 0:18:57.920 because you know they were casinos or airlines or cruise ship. 0:18:58.840 --> 0:19:02.040 If you just bought those, you did great. But you 0:19:02.080 --> 0:19:04.800 know that's true of nine also two thousand and nine. 0:19:04.840 --> 0:19:07.879 But most of the time price book doesn't work. So 0:19:08.920 --> 0:19:15.000 on a calendar your basis. So it's great in academia 0:19:15.400 --> 0:19:21.000 to talk about deep value as a factor, but in 0:19:21.280 --> 0:19:24.439 the reality of what we're trying to apply, Oh, we 0:19:24.480 --> 0:19:26.359 can't just look at deep value because most of the time, 0:19:26.359 --> 0:19:30.280 it doesn't work, and I can't keep saying, hey, don't worry, well, 0:19:30.320 --> 0:19:32.560 there will be a time when it'll work again. Clients 0:19:32.600 --> 0:19:37.119 don't They're gone, They are gone. How many clients we're 0:19:37.160 --> 0:19:40.639 buying into deep value strategies in you know, you know, 0:19:40.800 --> 0:19:45.399 in twenty twenty into covid u, They how about it? 0:19:45.440 --> 0:19:48.840 In eight? No way, but that's when they work. So 0:19:49.000 --> 0:19:54.000 it's it doesn't it does, It's not practical to the 0:19:54.040 --> 0:19:58.960 emotional biases of this business. So you move to earnings yield, 0:19:59.400 --> 0:20:03.640 which doesn't do long term as well, but it has 0:20:03.760 --> 0:20:07.320 a more consistent time frame. So we look at price 0:20:07.440 --> 0:20:10.600 to book, but I think over time, we you know, 0:20:10.680 --> 0:20:14.080 we look at things like earnings yel more closely. But 0:20:14.119 --> 0:20:16.679 we so we have a deep value factor, we have 0:20:16.720 --> 0:20:19.600 a stable value. We've looked at a gazillion different kind 0:20:19.640 --> 0:20:24.560 of metrics quality, growth, value, but we've learned to try 0:20:24.600 --> 0:20:28.600 to keep it simple and don't make it too complicated 0:20:28.960 --> 0:20:32.639 because you're never going to kind of find only stocks 0:20:32.680 --> 0:20:35.359 that fall into into one bucket. But I would say, 0:20:36.040 --> 0:20:40.000 you know, practicality, it's it's very, very hard to run 0:20:40.040 --> 0:20:43.720 a deep value book when clients can movement any in 0:20:43.800 --> 0:20:46.679 and out of your fund or strategy on a you know, 0:20:46.960 --> 0:20:50.080 on a daily basis. If I if I ran a 0:20:50.119 --> 0:20:52.199 fund that was locked up for ten years, I just 0:20:52.240 --> 0:20:54.359 go buy a lot of really really cheap stocks. 0:20:54.400 --> 0:21:00.000 But that's that's not realistic. Sure sure, so interesting. Yeah, 0:21:00.000 --> 0:21:03.120 I have to ask you about combining multiple factors. I mean, 0:21:03.160 --> 0:21:05.200 this is something that I get to question a lot. 0:21:06.240 --> 0:21:08.480 So I guess kind of a two part question. Number one, 0:21:08.640 --> 0:21:11.560 Like you know, you said your your global fund, your 0:21:11.600 --> 0:21:15.119 your benchmark to the MSCI. So when you look at 0:21:15.119 --> 0:21:17.919 these factors, I mean, do you normalize them for like 0:21:18.000 --> 0:21:21.280 the country they're in or the geographic region they're in, 0:21:22.640 --> 0:21:25.200 like like similar to like what we call sector neutralization 0:21:25.359 --> 0:21:29.320 in the United States. And then the bigger question is 0:21:29.320 --> 0:21:32.399 is around the kind of much maligned topic of factor timing. 0:21:33.240 --> 0:21:37.479 You know, you mentioned factor timing. I think you did, 0:21:37.520 --> 0:21:39.600 you know, I think you were hinting at that and 0:21:39.720 --> 0:21:42.480 using momentum to time factors. You know, I'm informed by 0:21:43.440 --> 0:21:46.439 the paper from aq R factor Momentum Everywhere, which basically 0:21:46.520 --> 0:21:49.399 shows that factors themselves have momentum. So you know, I 0:21:49.400 --> 0:21:51.280 would love to know is you know, is that your 0:21:51.320 --> 0:21:55.040 main input in how much tactically, are we switching between 0:21:55.080 --> 0:21:58.000 these factors or are you uh, you know, as Cliff says, 0:21:58.000 --> 0:21:58.720 sitting a little. 0:22:00.400 --> 0:22:03.880 So first of all, in terms of geographic we have 0:22:04.119 --> 0:22:11.920 a factor timing model for factor models for US Europe, 0:22:12.800 --> 0:22:16.720 so we look at that one group at Japan and 0:22:16.880 --> 0:22:22.080 Asia ex Japan, which captures most of MSCI world, and 0:22:22.400 --> 0:22:28.160 different factor models send different clues about how much we 0:22:28.200 --> 0:22:34.560 want to allocate to a country. For instance, when a 0:22:35.080 --> 0:22:38.639 factor model is saying, hey, you should buy high dividend 0:22:38.720 --> 0:22:44.320 yielding quality stocks, that's usually a sign of a risk 0:22:44.359 --> 0:22:50.160 off market versus a mark versus word that says hey 0:22:50.200 --> 0:22:54.040 buy growth or buy value, that's usually a risk on market. 0:22:54.119 --> 0:23:00.640 So we will allocate and buyas the portfolio from a 0:23:00.800 --> 0:23:05.159 regional standpoint where we see the factor models are setting 0:23:05.160 --> 0:23:11.320 the strongest, strongest system signal. Now stay within the the 0:23:11.480 --> 0:23:17.200 guidelines of you know, kind of requirements. We never can 0:23:17.240 --> 0:23:20.479 go more than seventy percent in the US or seventy 0:23:20.520 --> 0:23:23.520 percent outside of the US, so we will all there 0:23:23.560 --> 0:23:27.960 are certain guidelines, but broadly speaking, it has paid to 0:23:28.280 --> 0:23:32.200 have a higher allocation to the US within a global strategy, 0:23:32.200 --> 0:23:34.480 and that's one of the reason why we started global 0:23:34.480 --> 0:23:39.600 strategies was simply kind of my kind of picture advertisement, 0:23:40.080 --> 0:23:44.800 which is, hey, international manager can only buy non US 0:23:45.160 --> 0:23:47.520 A global manager can buy if it happens to be 0:23:47.600 --> 0:23:51.159 the best the best era. But look, I'm you know, 0:23:51.440 --> 0:23:54.200 like I like to say, I'm agnostic towards regional allocation. 0:23:54.280 --> 0:23:57.439 I'm agnostic towards styles. I'm not here to convince you 0:23:57.480 --> 0:23:59.320 to buy any sales. I just want to stay in 0:23:59.359 --> 0:24:03.480 the game in terms of factor timing. Very interesting, Chris. 0:24:03.520 --> 0:24:09.240 So when I started these strategies, especially on the institution side, 0:24:09.280 --> 0:24:11.840 So I started going on and I you know, I'd 0:24:11.840 --> 0:24:15.080 be taking around the world these very large institutions and 0:24:15.119 --> 0:24:17.840 I'd say, well, you know, we're starting these you know 0:24:17.960 --> 0:24:23.880 these we run these factor models and there's a factor 0:24:23.960 --> 0:24:27.560 component to them. And I would get a lot of 0:24:27.600 --> 0:24:30.920 pushback because at the time, it was kind of ten 0:24:31.040 --> 0:24:34.880 years ago, people just started about factor modeling, and they 0:24:35.160 --> 0:24:37.000 a lot of times I say, oh, well, we just 0:24:37.119 --> 0:24:40.439 hired you know, ten PhDs that are going to build 0:24:40.440 --> 0:24:44.240 these factor models, and you know, I thought, well, I've 0:24:44.280 --> 0:24:47.000