1 00:00:10,800 --> 00:00:14,200 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,240 --> 00:00:18,560 Speaker 1: I'm Joe Wisenthal and I'm Tracy all the way, Tracy, 3 00:00:18,560 --> 00:00:22,680 Speaker 1: we're gonna have a debate today. I know. It's our 4 00:00:22,800 --> 00:00:27,560 Speaker 1: first ever Odd Thoughts debate. It's pretty exciting. I think 5 00:00:27,600 --> 00:00:29,520 Speaker 1: we had one like a few years ago about like 6 00:00:29,800 --> 00:00:33,080 Speaker 1: fiscal policy in India or something like that. I feel 7 00:00:33,080 --> 00:00:36,040 Speaker 1: like we've had at least one before, but maybe not. 8 00:00:36,240 --> 00:00:39,080 Speaker 1: Maybe I'm a hallucinating that. Yeah, I don't think so. 9 00:00:39,360 --> 00:00:42,040 Speaker 1: And this one is kind of on a topic that 10 00:00:42,080 --> 00:00:45,000 Speaker 1: we've we've touched on a few times this year. But 11 00:00:45,120 --> 00:00:52,120 Speaker 1: it's the terrible under performance of quant investing in recent times. Yeah, 12 00:00:52,200 --> 00:00:55,920 Speaker 1: exactly right. So for people who aren't its familiar. But 13 00:00:55,960 --> 00:00:58,320 Speaker 1: as we've been talking about a lot, like a lot 14 00:00:58,360 --> 00:01:05,080 Speaker 1: of traditional native strategies, quantitative signals have only done so so. 15 00:01:05,080 --> 00:01:08,680 Speaker 1: So the most sort of obvious example, it's quantitative strategies 16 00:01:08,959 --> 00:01:13,160 Speaker 1: that are built around value investing, identifying stocks that look cheap, 17 00:01:13,400 --> 00:01:16,720 Speaker 1: buying them, shorting the ones that look expensive. Things like that, 18 00:01:16,800 --> 00:01:19,440 Speaker 1: where you're sort of like take a screen or some 19 00:01:19,560 --> 00:01:22,560 Speaker 1: sort of method and sift out hundreds or thousands of 20 00:01:22,600 --> 00:01:26,759 Speaker 1: stocks that always turned them um a various sorts. They 21 00:01:26,840 --> 00:01:30,240 Speaker 1: really have not delivered the performance that they did in 22 00:01:30,280 --> 00:01:33,880 Speaker 1: the past, or that the performance that somely the academic 23 00:01:33,920 --> 00:01:38,080 Speaker 1: work underpinning them would suggest would happen. Yeah, And I 24 00:01:38,120 --> 00:01:42,080 Speaker 1: think a big part of this existential crisis for quant investing, 25 00:01:42,120 --> 00:01:45,120 Speaker 1: if you will, is that a lot of that underperformance 26 00:01:45,160 --> 00:01:49,080 Speaker 1: could be forgiven in you know, a lot of things 27 00:01:49,160 --> 00:01:53,440 Speaker 1: have changed. There's been a lot of unexpected developments this year, 28 00:01:53,480 --> 00:01:58,760 Speaker 1: to say the least, but even before quant investing or 29 00:01:58,760 --> 00:02:03,400 Speaker 1: systematic investing, or factors such as value however you want 30 00:02:03,400 --> 00:02:06,640 Speaker 1: to put it, they haven't been doing as well as 31 00:02:07,000 --> 00:02:09,160 Speaker 1: one might have expected. So this is sort of a 32 00:02:09,280 --> 00:02:13,280 Speaker 1: long term decline and has really just hammered at home. 33 00:02:15,000 --> 00:02:18,320 Speaker 1: And I guess the question is and we'll get to this, 34 00:02:18,639 --> 00:02:21,400 Speaker 1: but to me, the question is, is this like, are 35 00:02:21,440 --> 00:02:24,120 Speaker 1: we waiting for the mother of all mean reversions? So 36 00:02:24,200 --> 00:02:26,840 Speaker 1: you have years and years of underperformance for a strategy, 37 00:02:26,880 --> 00:02:29,359 Speaker 1: and if you just hold out a little longer, then 38 00:02:29,400 --> 00:02:33,880 Speaker 1: the big swing back towards historical norms happens. Or is 39 00:02:33,919 --> 00:02:38,000 Speaker 1: there something uh deeper in systemic systemic such that maybe 40 00:02:38,040 --> 00:02:41,160 Speaker 1: if everyone is engaging in the same strategies or the 41 00:02:41,200 --> 00:02:45,839 Speaker 1: strategies are well known beyond beyond the universe of academics. Uh, 42 00:02:45,880 --> 00:02:48,000 Speaker 1: they just don't work anymore because you know, we talked 43 00:02:48,000 --> 00:02:50,800 Speaker 1: about the concept of alpha decay all the time that 44 00:02:50,840 --> 00:02:53,919 Speaker 1: if everyone knows a winning strategy, then it doesn't work 45 00:02:53,919 --> 00:02:56,200 Speaker 1: as well. So there's sort of seems to be like 46 00:02:56,240 --> 00:02:59,080 Speaker 1: two big questions like which one is it? Or is 47 00:02:59,120 --> 00:03:02,160 Speaker 1: it just a matter of quantitative strategies could still work, 48 00:03:02,320 --> 00:03:04,720 Speaker 1: they just need to be sort of updated at their approach. 49 00:03:05,680 --> 00:03:08,079 Speaker 1: Is it different this time? I have a feeling our 50 00:03:08,160 --> 00:03:10,440 Speaker 1: two guests on this episode are going to have different 51 00:03:10,480 --> 00:03:13,280 Speaker 1: opinions on that topic. Well, let's bring in our two guests. 52 00:03:13,320 --> 00:03:16,680 Speaker 1: I'm super excited about having both of them on. We're 53 00:03:16,720 --> 00:03:20,000 Speaker 1: gonna be speaking with Inego Fraser Jenkins. He's a quantitative 54 00:03:20,080 --> 00:03:24,840 Speaker 1: strategist at Bernstein and UH. Last in October he actually 55 00:03:25,080 --> 00:03:28,080 Speaker 1: uh published a piece an essay, and in it he 56 00:03:28,120 --> 00:03:30,040 Speaker 1: said I'm no longer a quant and he kind of 57 00:03:30,080 --> 00:03:33,040 Speaker 1: had this big rebuke to the industry. So we'll get 58 00:03:33,080 --> 00:03:36,320 Speaker 1: to his arguments why and for a different perspective. Will 59 00:03:36,360 --> 00:03:39,160 Speaker 1: also be speaking with Aaron Brown. He's a professor at 60 00:03:39,160 --> 00:03:42,000 Speaker 1: the Math Institute at n y U. He's an author, 61 00:03:42,200 --> 00:03:45,520 Speaker 1: he's a Bloomberg opinion contributor, and for a long time 62 00:03:45,560 --> 00:03:48,080 Speaker 1: he was the head of financial markets research at a 63 00:03:48,200 --> 00:03:51,920 Speaker 1: qu R, which is a big quant shop. So really 64 00:03:51,960 --> 00:03:55,840 Speaker 1: delighted to have both of these guests on the show. 65 00:03:56,120 --> 00:03:59,000 Speaker 1: Uh Indego, thank you very much for joining us. Thank 66 00:03:59,040 --> 00:04:02,880 Speaker 1: you having me, and uh Aerin appreciate having it as well. 67 00:04:03,000 --> 00:04:06,960 Speaker 1: Thank you very much, Joe. So let's get started, uh 68 00:04:07,080 --> 00:04:08,800 Speaker 1: in Ago, why don't you just give us, you know, 69 00:04:08,960 --> 00:04:10,800 Speaker 1: sort of dramatic And I have to say, you're kind 70 00:04:10,800 --> 00:04:15,840 Speaker 1: of known for your dramatic statements because prior to prior 71 00:04:15,920 --> 00:04:20,440 Speaker 1: to blasting the entire quant world, you famously attacked passive 72 00:04:20,520 --> 00:04:23,200 Speaker 1: investing is worse than Marxism. I think you came on 73 00:04:23,240 --> 00:04:25,960 Speaker 1: the podcast and said maybe your statements were a little overblown, 74 00:04:26,200 --> 00:04:29,200 Speaker 1: but you certainly know how to uh say something provocative. 75 00:04:29,279 --> 00:04:32,840 Speaker 1: So tell us why the sort of very high level 76 00:04:32,920 --> 00:04:35,920 Speaker 1: view of why you think quant as we know it 77 00:04:36,000 --> 00:04:38,520 Speaker 1: is busted. So be happy to and I want to 78 00:04:38,600 --> 00:04:41,560 Speaker 1: be can start off by saying that the essay wasn't 79 00:04:41,560 --> 00:04:44,360 Speaker 1: really intend to be anti quant funds per se, because 80 00:04:44,640 --> 00:04:48,400 Speaker 1: the market is more systematically driven than it's ever been. 81 00:04:49,000 --> 00:04:51,600 Speaker 1: Ye before, But I do want to kind of reject 82 00:04:51,720 --> 00:04:53,840 Speaker 1: the canonical view of what kind of quantity is and 83 00:04:53,880 --> 00:04:55,760 Speaker 1: how it's used in the market. I think there are 84 00:04:55,680 --> 00:04:59,159 Speaker 1: a few different levels to this um you know. At 85 00:04:59,160 --> 00:05:02,080 Speaker 1: one point that's but Tracy mentioned just now, which is yes, 86 00:05:02,080 --> 00:05:05,160 Speaker 1: has been an under performance of quant funds this year. 87 00:05:05,640 --> 00:05:10,200 Speaker 1: I think that's actually excusable given the high correlation of 88 00:05:10,240 --> 00:05:13,480 Speaker 1: stocks in the market. That there's more tricky issue of 89 00:05:13,600 --> 00:05:17,719 Speaker 1: the under performance of many quant strategies over last three 90 00:05:17,800 --> 00:05:21,320 Speaker 1: years or more, and that's frankly harder to explain. And 91 00:05:21,360 --> 00:05:24,520 Speaker 1: that's even true for some of the more so new 92 00:05:24,560 --> 00:05:27,680 Speaker 1: approaches have been applied rather than just those exposed traditional 93 00:05:27,760 --> 00:05:31,320 Speaker 1: factors UM and linked to that, there's inevitably the question 94 00:05:31,320 --> 00:05:33,080 Speaker 1: of the value factor that maybe we can come back 95 00:05:33,120 --> 00:05:35,560 Speaker 1: to at some point, I mean, the discussion and van 96 00:05:35,680 --> 00:05:38,240 Speaker 1: the whites end value is dead or not dead. But 97 00:05:38,279 --> 00:05:41,360 Speaker 1: then are two deeper questions too. So one is around 98 00:05:41,360 --> 00:05:45,000 Speaker 1: the world of diversification, and the quant strategies tend to 99 00:05:45,000 --> 00:05:47,760 Speaker 1: be diversified in two different ways. One is at a 100 00:05:47,760 --> 00:05:50,360 Speaker 1: single security level and the others at the factor level. 101 00:05:50,520 --> 00:05:53,040 Speaker 1: And there's plenty of really good reasons for this, because 102 00:05:53,120 --> 00:05:56,880 Speaker 1: most quant models work on average rather than through high 103 00:05:56,920 --> 00:06:00,200 Speaker 1: conviction and through tight risk control, and so when wants 104 00:06:00,240 --> 00:06:04,440 Speaker 1: to be diversified. But the problem is that diversification generally 105 00:06:04,440 --> 00:06:08,280 Speaker 1: speaking has counted against fund performance in recent years. That's 106 00:06:08,320 --> 00:06:12,160 Speaker 1: true not just the quants actually, but for fundamental investors too. Now, 107 00:06:12,279 --> 00:06:15,320 Speaker 1: some parts of that might well be temporary, but I 108 00:06:15,320 --> 00:06:18,760 Speaker 1: would argue that that in the regime where real rates 109 00:06:18,760 --> 00:06:21,520 Speaker 1: are held are very low for a long time, that 110 00:06:21,720 --> 00:06:25,160 Speaker 1: might be more a long run concentration in the market. Um. 111 00:06:25,160 --> 00:06:27,880 Speaker 1: And the other big issue is this assumption that the 112 00:06:27,960 --> 00:06:31,240 Speaker 1: future is going to be like they passed and I 113 00:06:31,680 --> 00:06:35,320 Speaker 1: applying back tests to making future investment decisions. Now, of 114 00:06:35,320 --> 00:06:38,920 Speaker 1: course that's a really good way as a process for 115 00:06:38,960 --> 00:06:42,240 Speaker 1: avoiding simply forming investment views by shooting from the hip, 116 00:06:42,440 --> 00:06:45,159 Speaker 1: and I wouldn't want to advocate that. But equally, at 117 00:06:45,200 --> 00:06:47,559 Speaker 1: the same time, I think there's an argument who made 118 00:06:47,880 --> 00:06:49,960 Speaker 1: that the regime has changed. You know, if COVID doesn't 119 00:06:49,960 --> 00:06:52,920 Speaker 1: counts the regime change, I'd struggled to see what would 120 00:06:52,960 --> 00:06:56,000 Speaker 1: counts regime change. Now, we have be very careful in 121 00:06:56,640 --> 00:07:00,200 Speaker 1: you know, constantly overlaying discretion your views on models that 122 00:07:00,240 --> 00:07:04,719 Speaker 1: are meant to be systematic. That process has a troubled 123 00:07:04,760 --> 00:07:07,479 Speaker 1: past in many cases. But equally, you know, I think 124 00:07:07,720 --> 00:07:09,920 Speaker 1: that there is plenty of evidence that occasional regimes do 125 00:07:10,160 --> 00:07:13,480 Speaker 1: change have been a very big way UM. And one 126 00:07:13,560 --> 00:07:16,880 Speaker 1: particular aspect that now is a policy response to inflation 127 00:07:17,000 --> 00:07:19,960 Speaker 1: post COVID and have that effective the formance of things 128 00:07:20,000 --> 00:07:24,239 Speaker 1: like the value factor, but also just a mechanism of 129 00:07:24,320 --> 00:07:27,760 Speaker 1: the interaction and macro forces and policy. I mean, I 130 00:07:27,800 --> 00:07:31,080 Speaker 1: think we've been very used to a thirty year period 131 00:07:31,640 --> 00:07:36,760 Speaker 1: where the main job cushioning the the economy of the 132 00:07:36,760 --> 00:07:40,360 Speaker 1: business cycle and left to technocrats and central banks. That 133 00:07:40,440 --> 00:07:43,160 Speaker 1: approach has been running out of ammunition for some time. 134 00:07:43,480 --> 00:07:45,520 Speaker 1: I think the future is very different. It's a blend 135 00:07:45,560 --> 00:07:50,160 Speaker 1: of fiscal and monetary policy, a blend that inevitably has 136 00:07:50,240 --> 00:07:54,080 Speaker 1: more politics in it um and a long runway UM 137 00:07:54,120 --> 00:07:56,680 Speaker 1: and it's sort of messier and harder to forecast. And 138 00:07:56,720 --> 00:07:58,120 Speaker 1: so in that kind of environment, I think we need 139 00:07:58,160 --> 00:08:01,120 Speaker 1: to be very careful about applying back tests onto the future. 140 00:08:02,960 --> 00:08:06,920 Speaker 1: So there's clearly a ton to unpack there. I want 141 00:08:06,920 --> 00:08:11,240 Speaker 1: to focus for now on the the point about narrow 142 00:08:11,360 --> 00:08:15,320 Speaker 1: leadership by mega caps and that being a negative for 143 00:08:15,760 --> 00:08:20,840 Speaker 1: quant factors that basically focus on diversification, or quant portfolios 144 00:08:20,840 --> 00:08:24,640 Speaker 1: that focus on diversification. This is something that Aaron actually 145 00:08:24,680 --> 00:08:28,400 Speaker 1: picked up in his response to your note you go, 146 00:08:29,040 --> 00:08:32,560 Speaker 1: and he argued that, you know, people were saying similar 147 00:08:32,600 --> 00:08:36,160 Speaker 1: things back in the late nineties nineties during the tech bubble. 148 00:08:36,240 --> 00:08:38,600 Speaker 1: They were saying it was different this time, and maybe 149 00:08:38,640 --> 00:08:41,360 Speaker 1: investors should go out and just buy the really hot 150 00:08:41,400 --> 00:08:43,800 Speaker 1: tech stocks. And of course we all know how that 151 00:08:43,840 --> 00:08:47,240 Speaker 1: panned out. So, UM, Aaron, maybe just to begin with, 152 00:08:47,360 --> 00:08:51,120 Speaker 1: could you dig into that that mega cap leadership point 153 00:08:51,200 --> 00:08:55,960 Speaker 1: and how it relates to quants. Sure, thanks, Tracy. Um, 154 00:08:56,200 --> 00:08:59,280 Speaker 1: we may not get as a vibrant to debate as 155 00:08:59,320 --> 00:09:03,840 Speaker 1: you want. Most of the stuff I heard, uh going 156 00:09:03,920 --> 00:09:06,679 Speaker 1: to go so far? Um. I agree with um, not 157 00:09:06,720 --> 00:09:09,959 Speaker 1: all of it, and uh, you know it's uh a 158 00:09:10,000 --> 00:09:14,520 Speaker 1: little more nuanced than the headline of of his research piece. Yes, 159 00:09:14,960 --> 00:09:18,640 Speaker 1: we have a technical name in quant finance for extended 160 00:09:18,720 --> 00:09:23,120 Speaker 1: periods where the value factor underperforms, and we call them bubbles. Uh. 161 00:09:23,160 --> 00:09:26,880 Speaker 1: The overvalued stuff gets more overvalued, the undervalued stuff gets 162 00:09:26,880 --> 00:09:31,280 Speaker 1: even more ignored. Um. But but I do agree that 163 00:09:31,559 --> 00:09:34,800 Speaker 1: this particular value drawed in we're seeing really goes back 164 00:09:34,880 --> 00:09:37,640 Speaker 1: to the financial crisis. We have never in history and 165 00:09:37,760 --> 00:09:42,720 Speaker 1: hundreds of years seeing a value draw down to this extent. 166 00:09:43,559 --> 00:09:46,360 Speaker 1: And I and and one of the ways I agree 167 00:09:46,400 --> 00:09:51,640 Speaker 1: with UH and Ago is that I think the issue 168 00:09:51,679 --> 00:09:54,400 Speaker 1: here is not in the numerator, but in the denominator. 169 00:09:54,440 --> 00:09:57,160 Speaker 1: Whenever you look at a price, you're looking at a price, 170 00:09:57,240 --> 00:10:01,079 Speaker 1: you know in dollars per share st market hasn't changed 171 00:10:01,120 --> 00:10:06,800 Speaker 1: fundamentally in ten years. UM. The dollar has quantitative easing, 172 00:10:06,880 --> 00:10:12,680 Speaker 1: near zero interest rates, UH, massive FED purchases, massive fiscal imbalances. 173 00:10:13,240 --> 00:10:15,800 Speaker 1: I don't think those are I mean, those are some 174 00:10:15,880 --> 00:10:18,480 Speaker 1: of the reasons that we're seeing that the dollar has 175 00:10:18,559 --> 00:10:22,760 Speaker 1: become different. If you do value factors using everything in gold, 176 00:10:23,160 --> 00:10:26,240 Speaker 1: we find value is doing much better. I think that 177 00:10:26,320 --> 00:10:29,880 Speaker 1: there is a fundamental process going on, and it is 178 00:10:30,520 --> 00:10:35,080 Speaker 1: the market is awakening to the possibility of extended periods 179 00:10:35,080 --> 00:10:38,160 Speaker 1: of significant negative real rates, and that's causing a lot 180 00:10:38,160 --> 00:10:41,000 Speaker 1: of repricing in the market, and that makes the dollar 181 00:10:41,280 --> 00:10:44,520 Speaker 1: a bad thing to value, a bad thing to use 182 00:10:44,720 --> 00:10:48,200 Speaker 1: to measure value. So that's what I would say going 183 00:10:48,240 --> 00:10:49,760 Speaker 1: on there. I don't think we're in the mother of 184 00:10:49,800 --> 00:10:52,480 Speaker 1: all bubbles in the sense that you're going to make 185 00:10:52,520 --> 00:10:55,440 Speaker 1: a huge amount of money shorting the SMP five hundred 186 00:10:55,520 --> 00:10:58,520 Speaker 1: or buying puts. But I do think we could see 187 00:10:58,559 --> 00:11:03,559 Speaker 1: a extended period five years, ten years longer really mediocre 188 00:11:04,320 --> 00:11:07,280 Speaker 1: equity returns. I think that is the risk to investors 189 00:11:07,360 --> 00:11:12,760 Speaker 1: more than an immediate crash. So intego, I mean, how 190 00:11:12,880 --> 00:11:15,559 Speaker 1: much of this really is just a macro question in 191 00:11:15,600 --> 00:11:17,960 Speaker 1: your view? And you know, this is again another thing 192 00:11:17,960 --> 00:11:23,400 Speaker 1: that frequently comes up on our discussions, with lots of 193 00:11:23,440 --> 00:11:26,520 Speaker 1: different guests coming at the question from different sort of 194 00:11:26,520 --> 00:11:30,400 Speaker 1: intellectual frameworks, which is that, Uh, as long as we 195 00:11:30,640 --> 00:11:33,240 Speaker 1: are sort of in this mode where the only like 196 00:11:33,360 --> 00:11:36,840 Speaker 1: game in town, or the only sort of entity that 197 00:11:36,920 --> 00:11:39,719 Speaker 1: stabilizes the economy is the FED, and the FED is 198 00:11:39,800 --> 00:11:42,120 Speaker 1: sensitive to asset prices and doesn't want to see any 199 00:11:42,200 --> 00:11:46,120 Speaker 1: draw down, etcetera, how much of this is essentially nothing 200 00:11:46,200 --> 00:11:48,640 Speaker 1: is going to work until we get out of this regime, 201 00:11:49,200 --> 00:11:51,760 Speaker 1: this economics. Yes, so I think there are a blend 202 00:11:51,960 --> 00:11:55,160 Speaker 1: of macroshies and microshies here. I mean not that I 203 00:11:55,240 --> 00:11:59,120 Speaker 1: want to in any way claim that count investing is 204 00:11:59,200 --> 00:12:01,719 Speaker 1: just about the values, but value does tend to be 205 00:12:02,480 --> 00:12:06,679 Speaker 1: a large exposure in many quant approaches and certainly would 206 00:12:06,679 --> 00:12:10,200 Speaker 1: help if value had to turnaround. And I think there 207 00:12:10,200 --> 00:12:12,959 Speaker 1: are you know, in the debate that's gone on the 208 00:12:13,040 --> 00:12:16,080 Speaker 1: last ten years around is value dead or not dead? Um? 209 00:12:16,120 --> 00:12:18,479 Speaker 1: And I said a view that is not dead ultimately, 210 00:12:19,280 --> 00:12:23,240 Speaker 1: but equally I can see that there are headwinds for it, 211 00:12:23,679 --> 00:12:27,680 Speaker 1: some which macro and some which a micro. So you know, 212 00:12:27,720 --> 00:12:30,880 Speaker 1: I guess some of the more micro headwinds are around 213 00:12:31,160 --> 00:12:35,040 Speaker 1: the technology change, destroyed moats around certain industries, uh, and 214 00:12:35,240 --> 00:12:39,200 Speaker 1: the change in the basis by which corporate make investments 215 00:12:39,200 --> 00:12:42,200 Speaker 1: more than intangible assets rather than tangible assets, and so 216 00:12:42,320 --> 00:12:45,360 Speaker 1: something the measurement of value has been wrong. But one 217 00:12:45,400 --> 00:12:49,600 Speaker 1: thing has been clearly missing, I think, and that is inflation. 218 00:12:49,679 --> 00:12:51,839 Speaker 1: And you can show that of the last five years 219 00:12:51,840 --> 00:12:54,679 Speaker 1: on daily data, the last ninety years on quarterly data, 220 00:12:55,320 --> 00:12:57,560 Speaker 1: that period and inflation picks up tend to be generally 221 00:12:57,600 --> 00:13:00,559 Speaker 1: can the good ones for value. And so in a 222 00:13:00,640 --> 00:13:03,200 Speaker 1: sense you to say, well, we're waiting for a policy 223 00:13:03,240 --> 00:13:06,480 Speaker 1: shift here. And I happened to think that once the 224 00:13:06,480 --> 00:13:09,439 Speaker 1: immediate doest settled and we're out of our short term 225 00:13:09,480 --> 00:13:12,800 Speaker 1: deflationary shock, then actually the policy response to COVID is 226 00:13:12,840 --> 00:13:15,480 Speaker 1: going to be inflationary. In a sense that is part 227 00:13:15,559 --> 00:13:18,120 Speaker 1: of what value investor is waiting for a long time. 228 00:13:18,559 --> 00:13:21,400 Speaker 1: But with the enormous caveat. But I think there are 229 00:13:21,400 --> 00:13:23,600 Speaker 1: plenty of good reasons why the policy response to that 230 00:13:23,640 --> 00:13:26,480 Speaker 1: inflation when it comes will be different, and so there's 231 00:13:27,280 --> 00:13:30,120 Speaker 1: I think a likelihood as I mentioned that real rates 232 00:13:30,160 --> 00:13:32,679 Speaker 1: are held low for a long time, and what that 233 00:13:32,760 --> 00:13:35,200 Speaker 1: leads to I think is something of a bifurcation and 234 00:13:35,240 --> 00:13:39,320 Speaker 1: the value factor, where if value is an undervalued sickle company, 235 00:13:39,360 --> 00:13:41,840 Speaker 1: then find it can respond and do very well and 236 00:13:41,880 --> 00:13:44,439 Speaker 1: rebound a mean reverting that kind of environment. But the 237 00:13:44,559 --> 00:13:47,280 Speaker 1: value is a financial company, then it's much less likely too. 238 00:13:47,600 --> 00:13:50,000 Speaker 1: So if we're relying on simple baccess and what value 239 00:13:50,040 --> 00:13:53,240 Speaker 1: does inflation environments, then I think it might be be disappointed, 240 00:13:53,400 --> 00:13:57,960 Speaker 1: but more nuanced approach actually could potentially find some areas 241 00:13:57,960 --> 00:14:01,239 Speaker 1: of value that outperformed. The problem is that it requires 242 00:14:01,640 --> 00:14:06,079 Speaker 1: overlaying a regime policy view, which happens to be a 243 00:14:06,160 --> 00:14:09,360 Speaker 1: subjective discretion we kind of core um. And the other 244 00:14:09,400 --> 00:14:12,480 Speaker 1: thing I'd say linked to that is I really really 245 00:14:12,600 --> 00:14:14,439 Speaker 1: want to be able to believe in MIANA version. I 246 00:14:14,480 --> 00:14:18,360 Speaker 1: mean because without because with that MENA version, we're left 247 00:14:18,400 --> 00:14:21,440 Speaker 1: relying on forecasts and huing things are not tertally good 248 00:14:21,440 --> 00:14:24,800 Speaker 1: at making those um and in a world where I 249 00:14:24,800 --> 00:14:28,400 Speaker 1: would argue that actually all asset classes are pretty expensive, 250 00:14:28,400 --> 00:14:33,160 Speaker 1: you know, equities, credit, sovereign bonds, private equity, maybe the 251 00:14:33,280 --> 00:14:35,560 Speaker 1: value factor is the only cheap thing that we can 252 00:14:35,560 --> 00:14:39,120 Speaker 1: go and buy. The problem is that the way the 253 00:14:39,200 --> 00:14:41,880 Speaker 1: goals are phrased in the industry, and the way the 254 00:14:41,880 --> 00:14:44,800 Speaker 1: people think about their personal career risk, which can't be 255 00:14:44,840 --> 00:14:47,240 Speaker 1: hedged away. You could be wrong for a period of 256 00:14:47,240 --> 00:14:50,880 Speaker 1: time that makes almost impossible to hold it. And although 257 00:14:50,960 --> 00:14:54,160 Speaker 1: the engine of mean version might look like it's very strong, 258 00:14:54,600 --> 00:14:57,880 Speaker 1: we also do know that policy can simply override that 259 00:14:58,640 --> 00:15:02,520 Speaker 1: for every long period of time. So I have a 260 00:15:02,560 --> 00:15:05,800 Speaker 1: follow up question based on that, which is I mean 261 00:15:05,840 --> 00:15:08,080 Speaker 1: you ago you sort of touched on this in your 262 00:15:08,120 --> 00:15:11,120 Speaker 1: first answer, But one of the reasons people like quant 263 00:15:11,160 --> 00:15:15,480 Speaker 1: investing or systematic investing is that you sort of avoid 264 00:15:15,760 --> 00:15:19,320 Speaker 1: that shoot from the hip style of investing, where people 265 00:15:19,360 --> 00:15:22,400 Speaker 1: can sometimes I guess, become too reliant on their gut 266 00:15:22,480 --> 00:15:26,720 Speaker 1: feelings or irrational in one way or another. So should 267 00:15:26,840 --> 00:15:31,560 Speaker 1: quants be attempting to factor in these kind of big 268 00:15:31,640 --> 00:15:36,360 Speaker 1: macro calls into their portfolios. I think we need to 269 00:15:36,400 --> 00:15:40,680 Speaker 1: be very careful about adding a continuous series of discretionary 270 00:15:41,200 --> 00:15:44,840 Speaker 1: overlays onto what are meant to be systematic approaches to investing. 271 00:15:45,200 --> 00:15:47,840 Speaker 1: And the fact is generally the shoot from the hip 272 00:15:47,840 --> 00:15:51,360 Speaker 1: approach to investing, I think is going to struggle in 273 00:15:51,360 --> 00:15:53,920 Speaker 1: a structural way. Frankly, in a world where there's so 274 00:15:53,960 --> 00:15:56,720 Speaker 1: many cheap, semi passive ways to go and buy things 275 00:15:56,840 --> 00:15:58,600 Speaker 1: used to be thought of as active, and I'm thinking 276 00:15:58,600 --> 00:16:02,080 Speaker 1: you have sort of so called a beta strategies. Um, 277 00:16:02,160 --> 00:16:04,440 Speaker 1: that's very hard to have an approach that you know, 278 00:16:04,880 --> 00:16:08,520 Speaker 1: the only reminds on that. Having said that, occasionally, I 279 00:16:08,560 --> 00:16:12,040 Speaker 1: think there are huge regime shifts that do take place, 280 00:16:12,520 --> 00:16:14,320 Speaker 1: and I think this is one of them. I guess 281 00:16:14,320 --> 00:16:18,120 Speaker 1: most obviously UM in the policy environment and the way 282 00:16:18,120 --> 00:16:23,760 Speaker 1: the policy interacts with the market overall. En sure regime 283 00:16:23,840 --> 00:16:27,520 Speaker 1: shift is a nice sounding term for this time is different, 284 00:16:28,400 --> 00:16:31,640 Speaker 1: and quant is really based on the idea that sure 285 00:16:32,000 --> 00:16:35,800 Speaker 1: things do change, but people overestimate the change. People overreact 286 00:16:35,880 --> 00:16:38,280 Speaker 1: to the last six months, the last three years, the 287 00:16:38,360 --> 00:16:42,840 Speaker 1: last ten years, and if you look at things over centuries, 288 00:16:42,880 --> 00:16:46,280 Speaker 1: if you look at the same factor in many different markets, 289 00:16:46,280 --> 00:16:49,240 Speaker 1: and context, and you stick to that. You're not right 290 00:16:49,280 --> 00:16:53,240 Speaker 1: all the time, but you're right of the time. If 291 00:16:53,280 --> 00:16:58,240 Speaker 1: you go with whatever is popular, you're basically never right. UM. 292 00:16:58,320 --> 00:17:00,920 Speaker 1: And there are regime shifts in our day. It we 293 00:17:01,000 --> 00:17:05,240 Speaker 1: have the transition from gold standard defeat money in nineteen seventy, 294 00:17:05,359 --> 00:17:08,359 Speaker 1: we have the broken breaking of inflation in nineteen eighty two. 295 00:17:08,400 --> 00:17:11,200 Speaker 1: Going further back, we've got World War two, the Depression, 296 00:17:11,680 --> 00:17:15,440 Speaker 1: World War One. So we've seen regime changes before. They're 297 00:17:15,480 --> 00:17:18,480 Speaker 1: in the data, and there's no reason to have a 298 00:17:18,600 --> 00:17:22,000 Speaker 1: special way to deal with them now. Really, we've been 299 00:17:22,040 --> 00:17:26,800 Speaker 1: talking about quantitative factor investing in US large camp equities, 300 00:17:26,840 --> 00:17:28,960 Speaker 1: and that's that's one part of quant There is a 301 00:17:29,000 --> 00:17:33,840 Speaker 1: whole quant macro UH strategy UM that is trying to 302 00:17:33,840 --> 00:17:37,040 Speaker 1: take advantage of these macro things. You can be macro 303 00:17:37,200 --> 00:17:55,040 Speaker 1: and still be quant you know, speaking of regime shift, uh, 304 00:17:55,280 --> 00:17:57,600 Speaker 1: Aaron and Nego sort of hinted at it. I mean, 305 00:17:58,080 --> 00:18:00,320 Speaker 1: you know, one of the things that strive to me 306 00:18:01,119 --> 00:18:03,080 Speaker 1: I think about sometimes is you know, a lot of 307 00:18:03,119 --> 00:18:07,639 Speaker 1: what was once UH sophisticated strategy is now like I 308 00:18:07,720 --> 00:18:11,480 Speaker 1: can go into any online broker and quickly with a 309 00:18:11,480 --> 00:18:15,159 Speaker 1: few key strokes by some sort of so called value 310 00:18:15,200 --> 00:18:18,199 Speaker 1: e t F very cheaply. That used to be something 311 00:18:18,320 --> 00:18:21,240 Speaker 1: that you know, powerful people of powerful computers and hold 312 00:18:21,240 --> 00:18:25,119 Speaker 1: teams of traders had to do now super simple. Is 313 00:18:25,160 --> 00:18:28,280 Speaker 1: that a regime shift? And is that a contributor to 314 00:18:28,440 --> 00:18:31,359 Speaker 1: the alpha decay of some of these strategies? That the 315 00:18:31,440 --> 00:18:33,760 Speaker 1: ease with which sort of anyone can replicate them. We 316 00:18:33,800 --> 00:18:36,280 Speaker 1: don't need a whole team of geniuses. It's say an 317 00:18:36,280 --> 00:18:39,640 Speaker 1: a q R to do them per se. Yeah, well, um, 318 00:18:39,720 --> 00:18:41,800 Speaker 1: and about the geniuses, but we have a lot of 319 00:18:41,840 --> 00:18:44,600 Speaker 1: degrees at hqu are No, I don't think so. For 320 00:18:44,680 --> 00:18:47,040 Speaker 1: one thing, when more people pilo in, it tends to 321 00:18:47,040 --> 00:18:50,160 Speaker 1: strengthen the strategy. Right, if everybody is buying value stocks 322 00:18:50,160 --> 00:18:52,520 Speaker 1: and values going to value stocks will do well. If 323 00:18:52,520 --> 00:18:56,000 Speaker 1: everybody is doing momentum, and momentum will do well. The 324 00:18:56,080 --> 00:19:00,080 Speaker 1: problem comes when people change their minds. But also this 325 00:19:00,160 --> 00:19:02,679 Speaker 1: is just a natural way of financial markets. You know, 326 00:19:02,720 --> 00:19:05,320 Speaker 1: you start building a hedge fund strategy, you know, with 327 00:19:05,800 --> 00:19:08,520 Speaker 1: new assets, with new ways of doing things. But then 328 00:19:08,640 --> 00:19:10,840 Speaker 1: as you get better at it, as more people learn 329 00:19:10,880 --> 00:19:14,760 Speaker 1: about it, as liquidity improves, Uh, it becomes a beta 330 00:19:14,800 --> 00:19:17,800 Speaker 1: product that every retail investor can buy an et F forms. 331 00:19:17,800 --> 00:19:21,160 Speaker 1: We should all be very happy about this. It is true. 332 00:19:21,200 --> 00:19:25,080 Speaker 1: One of the downsides of doing cutting edge financial research is, 333 00:19:25,600 --> 00:19:27,520 Speaker 1: you know, you don't get rich forever. You have to 334 00:19:27,520 --> 00:19:30,480 Speaker 1: come up with a new idea every uh well frequently, 335 00:19:30,480 --> 00:19:33,200 Speaker 1: basically constantly. You have to keep them, you know, improving 336 00:19:33,240 --> 00:19:36,359 Speaker 1: your ideas and coming up with something new because the 337 00:19:36,400 --> 00:19:39,760 Speaker 1: basic product becomes generic very quickly. But I'm to agree 338 00:19:39,800 --> 00:19:42,800 Speaker 1: with Aaron. I don't think just because money has gone 339 00:19:42,800 --> 00:19:45,679 Speaker 1: into alex cool and smart be two factors that it 340 00:19:45,800 --> 00:19:48,520 Speaker 1: undermines the efficacy of the factors. Um, yes, okay, to 341 00:19:48,600 --> 00:19:52,879 Speaker 1: are examples perhaps of of apparent inefficiency in the market, 342 00:19:52,880 --> 00:19:54,679 Speaker 1: to have too much careful invested them and then they 343 00:19:54,680 --> 00:19:57,800 Speaker 1: stopped working. But I think there are plenty of the 344 00:19:57,880 --> 00:20:00,960 Speaker 1: reasons and why. But the slight value factors in the 345 00:20:01,000 --> 00:20:04,520 Speaker 1: markets do have some long one efficacy behind them. And 346 00:20:04,560 --> 00:20:07,120 Speaker 1: also it's a practical point if you look at where 347 00:20:07,240 --> 00:20:10,320 Speaker 1: money to be invested in smart beta e t S, 348 00:20:10,359 --> 00:20:13,760 Speaker 1: at least of that is indexed to the US market. 349 00:20:14,080 --> 00:20:18,439 Speaker 1: But the apparent lack of performance in value is something 350 00:20:18,480 --> 00:20:22,960 Speaker 1: that has been evident in European markets and to some 351 00:20:23,040 --> 00:20:26,680 Speaker 1: extend nation markets has done blessed well to in recent years. 352 00:20:26,880 --> 00:20:28,879 Speaker 1: I think that what's more interesting is this question of 353 00:20:29,400 --> 00:20:31,760 Speaker 1: what that does for the goal of investing. And it's 354 00:20:31,760 --> 00:20:35,720 Speaker 1: basically shifted the alpha beta boundaries somewhat. So on one 355 00:20:35,760 --> 00:20:38,280 Speaker 1: hand you can think about as being a pain for 356 00:20:38,359 --> 00:20:41,080 Speaker 1: an active manager to just raise the bar. What they 357 00:20:41,080 --> 00:20:43,359 Speaker 1: have to do is not just enough to beat the market, 358 00:20:43,359 --> 00:20:45,600 Speaker 1: but now they have to beat the market and value 359 00:20:45,640 --> 00:20:49,000 Speaker 1: and quality and low foal and momentum. But equally, I'll argue, actually, 360 00:20:49,080 --> 00:20:51,679 Speaker 1: ultimately good thing. So it makes it very clear what 361 00:20:51,880 --> 00:20:54,920 Speaker 1: the true goal of act investing is. It's a generation 362 00:20:54,960 --> 00:20:57,600 Speaker 1: of idistancretic alpha, and if you can do that, it 363 00:20:57,600 --> 00:21:00,880 Speaker 1: goes to the heart of why people should a premium 364 00:21:01,000 --> 00:21:04,080 Speaker 1: for an active fund. One of the topics that we've 365 00:21:04,080 --> 00:21:07,560 Speaker 1: been talking quite a lot about it is value investing, 366 00:21:07,600 --> 00:21:10,080 Speaker 1: of course, and whether or not if you did value 367 00:21:10,119 --> 00:21:14,320 Speaker 1: investing in some different way, for instance, by including intangibles 368 00:21:14,359 --> 00:21:17,680 Speaker 1: in book value, whether or not that particular factor would 369 00:21:17,680 --> 00:21:21,200 Speaker 1: look a lot different and maybe be even brought back 370 00:21:21,440 --> 00:21:24,000 Speaker 1: from the dead in one way or another. I'd be 371 00:21:24,040 --> 00:21:27,680 Speaker 1: curious to get your views on value investing specifically, is 372 00:21:27,720 --> 00:21:31,359 Speaker 1: there a way to resuscitate that strategy, and what does 373 00:21:31,640 --> 00:21:34,600 Speaker 1: um A new regime shift if there is one, actually 374 00:21:34,600 --> 00:21:39,679 Speaker 1: look like, well, thissten's aaron um. Adding intangible assets I 375 00:21:39,680 --> 00:21:41,680 Speaker 1: think would not be a good idea. That's that's kind 376 00:21:41,680 --> 00:21:46,280 Speaker 1: of sticking opinion into what should be a quantitative measure. 377 00:21:46,640 --> 00:21:50,199 Speaker 1: There is active research in the value factor, and we 378 00:21:50,200 --> 00:21:52,800 Speaker 1: shouldn't talk about it like it's dead everywhere. The large 379 00:21:52,840 --> 00:21:57,399 Speaker 1: cap US equities yes, European equities yes, other equities not 380 00:21:57,520 --> 00:22:02,600 Speaker 1: so much. Commodities no, in test rates no, real assets no. 381 00:22:02,920 --> 00:22:07,040 Speaker 1: So so value is still working many places, um, but 382 00:22:07,119 --> 00:22:10,359 Speaker 1: there is very active research. As I mentioned earlier, most 383 00:22:10,400 --> 00:22:12,920 Speaker 1: of the focus on the research is not on the assets, 384 00:22:13,640 --> 00:22:16,880 Speaker 1: but on the dollar. You know, it's the dollar still 385 00:22:17,080 --> 00:22:20,119 Speaker 1: a valid measure of value, of value of a valid thing, 386 00:22:20,200 --> 00:22:23,000 Speaker 1: and measure value in on my side, I you know, 387 00:22:23,040 --> 00:22:26,840 Speaker 1: I think that there are headmand as the value factor. 388 00:22:26,960 --> 00:22:30,199 Speaker 1: You know I mentioned sum early on. You know this 389 00:22:30,640 --> 00:22:34,400 Speaker 1: idea that some set there's a lots of offensive motor 390 00:22:34,400 --> 00:22:36,840 Speaker 1: around them, and so their value not just because of 391 00:22:36,880 --> 00:22:41,280 Speaker 1: a a passing higher risk premeum attached them at some 392 00:22:41,280 --> 00:22:44,480 Speaker 1: point a business cycle, because the structural problem is also 393 00:22:44,680 --> 00:22:48,399 Speaker 1: the apparently monotonic move down in rates has kind of 394 00:22:48,440 --> 00:22:51,680 Speaker 1: messed up the process of UNI version as well. But 395 00:22:51,720 --> 00:22:53,840 Speaker 1: as I said earlier, I think that one thing that's 396 00:22:53,880 --> 00:22:56,720 Speaker 1: clearly been missing is a macro force in the form 397 00:22:56,760 --> 00:22:59,879 Speaker 1: of inflation, and probably not plausibly the first time. Intend 398 00:23:00,280 --> 00:23:02,800 Speaker 1: I think that's a good reason to think why inflation 399 00:23:02,880 --> 00:23:06,600 Speaker 1: kind of could materialize, And so the idea of finding 400 00:23:06,880 --> 00:23:13,720 Speaker 1: you know, cyclical undervalued companies which fundamental or quant research implies, 401 00:23:13,760 --> 00:23:16,560 Speaker 1: and not going bankrupt through the kind of COVID kind 402 00:23:16,560 --> 00:23:20,840 Speaker 1: of period um, they should respond very well indeed to 403 00:23:21,040 --> 00:23:24,440 Speaker 1: an uptick inflation you know that occurs on us a 404 00:23:24,520 --> 00:23:26,400 Speaker 1: one year for the horizon, and the whole binds of 405 00:23:26,760 --> 00:23:30,720 Speaker 1: policy tools and goals of policy that have changed to 406 00:23:30,840 --> 00:23:33,520 Speaker 1: make that a relative possibility. I think in a way 407 00:23:33,560 --> 00:23:37,040 Speaker 1: that but that it wasn't before. So I think that 408 00:23:37,080 --> 00:23:42,800 Speaker 1: there could be a partial macro resuscitation of the value factor. 409 00:23:43,240 --> 00:23:46,159 Speaker 1: As I said, though that implies a split though of 410 00:23:46,640 --> 00:23:51,399 Speaker 1: value perhaps working in in course cyclicals in in in 411 00:23:51,840 --> 00:23:56,360 Speaker 1: commodity stocks were probably not in financials um and then 412 00:23:56,400 --> 00:23:58,920 Speaker 1: so so some structural headwinds are there in the background, 413 00:23:59,119 --> 00:24:00,760 Speaker 1: but I think such I'm some of them come be 414 00:24:00,800 --> 00:24:05,200 Speaker 1: resolved as well. So we start this conversation or debate 415 00:24:05,280 --> 00:24:09,480 Speaker 1: about quant investing and then, not surprisingly, it ends up 416 00:24:09,520 --> 00:24:12,520 Speaker 1: turning into a debate or question about value investing and 417 00:24:12,560 --> 00:24:15,600 Speaker 1: when it's if it's dead, Which oft of these discussions do? 418 00:24:16,400 --> 00:24:19,760 Speaker 1: Why not just look for other stuff? Why this sort 419 00:24:19,760 --> 00:24:22,199 Speaker 1: of like you all this research and to value investing, 420 00:24:22,240 --> 00:24:25,760 Speaker 1: it's value investing dead, etcetera. Why not just move on 421 00:24:25,840 --> 00:24:28,520 Speaker 1: and find some new factors, find some new find some 422 00:24:28,560 --> 00:24:32,040 Speaker 1: new dimensions of quant and UH sort of leave this 423 00:24:32,119 --> 00:24:35,879 Speaker 1: debate behind. Well, of course people are doing that and 424 00:24:36,119 --> 00:24:40,080 Speaker 1: there are you know, arbitrage is good, Momentum investing is 425 00:24:40,760 --> 00:24:45,520 Speaker 1: doing very well. But value is fundamental to quant. You know, 426 00:24:45,600 --> 00:24:49,560 Speaker 1: the day quant gives up looking for real economic value 427 00:24:49,560 --> 00:24:52,240 Speaker 1: in things, UH is the day that it just becomes 428 00:24:52,240 --> 00:24:56,119 Speaker 1: another form of technical analysis. It is very difficult for 429 00:24:56,200 --> 00:25:01,640 Speaker 1: me to imagine UH, you know, robust quant UH investment 430 00:25:01,720 --> 00:25:05,320 Speaker 1: management business that doesn't have at its core value. You know, 431 00:25:05,320 --> 00:25:07,280 Speaker 1: there's all this other stuff and it's great and it 432 00:25:07,320 --> 00:25:09,720 Speaker 1: has great returns. I mean, it has great properties, but 433 00:25:09,840 --> 00:25:13,200 Speaker 1: if you remove value from it, you have no anchor. 434 00:25:13,640 --> 00:25:15,480 Speaker 1: We agree with that, and that at least for the the 435 00:25:15,640 --> 00:25:20,159 Speaker 1: vast majority of quant approaches, we have investment horizons that 436 00:25:20,200 --> 00:25:24,320 Speaker 1: are we're measured in quarters or longer. It's hard to 437 00:25:24,359 --> 00:25:28,679 Speaker 1: imagine not havn'ting, but not having some kind of value 438 00:25:28,720 --> 00:25:31,920 Speaker 1: anchor in that. Of course, it's been a a huge 439 00:25:32,320 --> 00:25:36,760 Speaker 1: um an investment of time and dollars in trying to 440 00:25:36,800 --> 00:25:40,200 Speaker 1: discover new factors. I mean, I'm skeptical of extent that 441 00:25:40,200 --> 00:25:43,359 Speaker 1: that is a worthwhile activity, but I think that certainly 442 00:25:43,359 --> 00:25:48,240 Speaker 1: at least applying uh same machine learning techniques to extracting 443 00:25:48,359 --> 00:25:50,760 Speaker 1: data that we didn't have at our disposal ten years 444 00:25:50,800 --> 00:25:52,639 Speaker 1: ago at least seems like a worthwhile thing to go 445 00:25:52,680 --> 00:25:55,440 Speaker 1: and try. But equally, there's a danger there that one 446 00:25:55,920 --> 00:25:58,600 Speaker 1: ends in a sort of sort of I T arms race, 447 00:25:59,000 --> 00:26:02,400 Speaker 1: trying to discover new factors before they're are petraged out 448 00:26:02,480 --> 00:26:05,240 Speaker 1: in the market. So that can certainly work for certain 449 00:26:05,440 --> 00:26:10,679 Speaker 1: business models. I'm not so sure that um that as yet. 450 00:26:10,720 --> 00:26:13,800 Speaker 1: At least there's evidence that can work for long horizon 451 00:26:13,920 --> 00:26:18,280 Speaker 1: and for a mass market approach. But one thing I 452 00:26:18,280 --> 00:26:21,840 Speaker 1: would say is that if we, you know, think about 453 00:26:21,880 --> 00:26:24,760 Speaker 1: what else quant can do? You know, and yes you 454 00:26:24,760 --> 00:26:26,760 Speaker 1: can be more than the value factor, but it could 455 00:26:26,760 --> 00:26:28,680 Speaker 1: be more than just thinking about new factors as well. 456 00:26:28,720 --> 00:26:30,280 Speaker 1: You know, I think the one of the you know, 457 00:26:30,359 --> 00:26:34,280 Speaker 1: kind of key questions that interests me is where can 458 00:26:34,600 --> 00:26:37,760 Speaker 1: progress really be made in finance and investing. I mean, 459 00:26:37,760 --> 00:26:41,720 Speaker 1: I think it's hard to argue that progress is really 460 00:26:41,760 --> 00:26:44,520 Speaker 1: made in how you make directional investment decisions, in the 461 00:26:44,560 --> 00:26:47,440 Speaker 1: sense that given a view on the security now is 462 00:26:47,560 --> 00:26:50,880 Speaker 1: unlikely to be more valuable than similar view arrived at 463 00:26:51,480 --> 00:26:55,760 Speaker 1: several decades ago because markets more efficient. Likewise, it's hard 464 00:26:55,880 --> 00:26:59,840 Speaker 1: to innovate, I would argue in a more kind of 465 00:27:00,280 --> 00:27:03,840 Speaker 1: theoretical sense in finance. But where progress can be made 466 00:27:03,920 --> 00:27:07,320 Speaker 1: I think is on investment process, and there they can 467 00:27:07,359 --> 00:27:10,760 Speaker 1: actually be a series of incremental improvements over time that 468 00:27:10,840 --> 00:27:13,439 Speaker 1: are not things that simply arbitraged out by the market. 469 00:27:13,520 --> 00:27:16,439 Speaker 1: So things I had in mind might be the process 470 00:27:16,440 --> 00:27:20,560 Speaker 1: of portfolio construction, how that's applied to a different kinds 471 00:27:20,640 --> 00:27:24,080 Speaker 1: of ways that author's generated. Well, also the way the 472 00:27:24,200 --> 00:27:26,560 Speaker 1: goals are set. Frankly, I think it's a huge issue 473 00:27:26,640 --> 00:27:29,080 Speaker 1: for the pension front and a Dowmond industry at the 474 00:27:29,080 --> 00:27:31,240 Speaker 1: moment just to think about how they set long one 475 00:27:31,320 --> 00:27:35,080 Speaker 1: goals and how they then use those to issue mandates 476 00:27:35,080 --> 00:27:37,520 Speaker 1: to fund managers, and those are things that actually can 477 00:27:37,560 --> 00:27:40,760 Speaker 1: be improved on incrementally over time. And there's no reason 478 00:27:40,800 --> 00:27:43,720 Speaker 1: why quant can't be brought to bear to help with 479 00:27:44,080 --> 00:27:47,240 Speaker 1: to help with issues like that. So, Aaron, you mentioned 480 00:27:47,320 --> 00:27:51,639 Speaker 1: this idea that the dollar might not be as valid 481 00:27:51,680 --> 00:27:55,760 Speaker 1: as it once was as a way of actually measuring value, 482 00:27:55,760 --> 00:27:58,600 Speaker 1: and that that might be part of what's going on here. 483 00:27:59,200 --> 00:28:01,520 Speaker 1: I'd be curious on that last note that Intego made 484 00:28:01,560 --> 00:28:05,800 Speaker 1: about actually improving the investment process. Is there anything that 485 00:28:06,040 --> 00:28:09,919 Speaker 1: investors could do when it comes to the dollar or 486 00:28:09,960 --> 00:28:13,679 Speaker 1: how they're incorporating that into their portfolios. If you're a U. 487 00:28:13,800 --> 00:28:16,639 Speaker 1: S Dollar US citizen, you know, run your affairs in 488 00:28:17,080 --> 00:28:20,920 Speaker 1: US dollars, it's pretty hard to ignore that. But I 489 00:28:21,000 --> 00:28:23,719 Speaker 1: would argue the biggest investment risk if you're looking, you know, 490 00:28:24,280 --> 00:28:26,520 Speaker 1: will I have enough money to retire in ten years 491 00:28:26,640 --> 00:28:29,680 Speaker 1: or something like that, You really have to think about 492 00:28:29,760 --> 00:28:32,439 Speaker 1: what's the dollar going to be worth? Um? You know, 493 00:28:32,480 --> 00:28:34,760 Speaker 1: what's a tax regime going to be, what's the inflation 494 00:28:34,800 --> 00:28:38,800 Speaker 1: regime with purchasing power? Will you know, Libra or bitcoin 495 00:28:38,920 --> 00:28:43,160 Speaker 1: be the mode of transaction at that time? Um? Will 496 00:28:43,200 --> 00:28:45,960 Speaker 1: the law allow you to spend your money? The way 497 00:28:46,000 --> 00:28:49,320 Speaker 1: you want to spend it. Will the FED have bought 498 00:28:49,360 --> 00:28:51,600 Speaker 1: so many assets that everything you want to buy you 499 00:28:51,600 --> 00:28:52,840 Speaker 1: have to go to the FED to buy a loaf 500 00:28:52,880 --> 00:28:56,200 Speaker 1: of bread. You know, we just we have huge uncertainties 501 00:28:56,240 --> 00:28:59,560 Speaker 1: about that much more so I would argue that you know, 502 00:28:59,560 --> 00:29:02,400 Speaker 1: what's the some PEF hundred going to be in UH, 503 00:29:02,440 --> 00:29:05,680 Speaker 1: you know, real economic terms, which companies will be profitable 504 00:29:05,720 --> 00:29:09,160 Speaker 1: and so on. I don't think that's really been true 505 00:29:09,240 --> 00:29:12,840 Speaker 1: that level of uncertainty about the US dollar. You have 506 00:29:12,880 --> 00:29:15,240 Speaker 1: to really go back to maybe nineteen seventy, in the 507 00:29:15,320 --> 00:29:18,520 Speaker 1: nineteen seventies to think about when when you know the 508 00:29:18,640 --> 00:29:20,800 Speaker 1: risk of the currency was greater than the risk of 509 00:29:20,840 --> 00:29:25,320 Speaker 1: the equity market. I want to go back to UH. 510 00:29:25,400 --> 00:29:29,000 Speaker 1: And you know something you said both of you made 511 00:29:29,040 --> 00:29:34,360 Speaker 1: this point, but this idea that historically, speaking empirically, it 512 00:29:34,480 --> 00:29:38,000 Speaker 1: suggests that periods of a greater inflation, which is possible 513 00:29:38,040 --> 00:29:40,840 Speaker 1: that well you have in the post COVID UH period. 514 00:29:40,880 --> 00:29:45,800 Speaker 1: But I think that's highly TBD have historically been um 515 00:29:46,040 --> 00:29:50,040 Speaker 1: better for value investing or the value factor. Is there 516 00:29:50,040 --> 00:29:53,000 Speaker 1: an intuitive reason for that? Like what we can talk 517 00:29:53,080 --> 00:29:57,640 Speaker 1: about regime macro regime shift leading to quant regime shift 518 00:29:57,920 --> 00:30:00,760 Speaker 1: but what's the sort of logic behind or why should 519 00:30:00,760 --> 00:30:03,280 Speaker 1: we expect that to be the case? I mean, on 520 00:30:03,280 --> 00:30:05,840 Speaker 1: my side, um, I see these one part of that 521 00:30:05,920 --> 00:30:09,840 Speaker 1: reason as being you know, essentially a signal of of 522 00:30:10,200 --> 00:30:12,160 Speaker 1: of way on the business cycle and the ability of 523 00:30:12,200 --> 00:30:15,880 Speaker 1: certain kind of corporates to raise prices um and an 524 00:30:15,880 --> 00:30:21,480 Speaker 1: equities being in the main real assets, but the but 525 00:30:21,520 --> 00:30:23,920 Speaker 1: in the benefits, but that certain corporates can get on that. 526 00:30:24,040 --> 00:30:30,120 Speaker 1: So normally those are those upswings and inflations a signal 527 00:30:30,400 --> 00:30:33,320 Speaker 1: assigning of macro regime change or but the other way, 528 00:30:33,600 --> 00:30:36,280 Speaker 1: you know, if there's disinflation as we've seen you know, 529 00:30:36,480 --> 00:30:40,480 Speaker 1: the last ten years, and every episode of of higher 530 00:30:40,560 --> 00:30:46,040 Speaker 1: risk of this inflation tends to be signaling a cychnical 531 00:30:46,400 --> 00:30:51,480 Speaker 1: risk um and a increase in risk aversion which tends 532 00:30:51,520 --> 00:30:53,479 Speaker 1: not to be good for value companies. That's so much 533 00:30:53,560 --> 00:30:57,480 Speaker 1: high inflation as inflation uncertainty. If you hit a consistent 534 00:30:57,560 --> 00:31:00,640 Speaker 1: six percent inflation every year and everybody knew it, I 535 00:31:00,680 --> 00:31:03,959 Speaker 1: don't think it would be matter very much. But the 536 00:31:04,000 --> 00:31:05,720 Speaker 1: fact is, you know, if you just don't know what 537 00:31:05,840 --> 00:31:07,920 Speaker 1: inflation is going to be, if it could be zero percent, 538 00:31:08,000 --> 00:31:12,240 Speaker 1: it could be twelve percent um that makes value hard 539 00:31:12,320 --> 00:31:32,320 Speaker 1: to measure in dollars. Mm um Eron, you said, so 540 00:31:32,360 --> 00:31:36,560 Speaker 1: they want to go back talking about value x equities, 541 00:31:36,800 --> 00:31:39,800 Speaker 1: which is something that I haven't heard that much discussion 542 00:31:39,800 --> 00:31:41,440 Speaker 1: of because in my mind I have this sort of 543 00:31:41,440 --> 00:31:45,000 Speaker 1: like intuitive sense of what it means to find value 544 00:31:45,000 --> 00:31:47,640 Speaker 1: with inequities, whether it's some measure of assets or earning 545 00:31:47,680 --> 00:31:50,280 Speaker 1: his power. But talk to us a little bit more 546 00:31:50,400 --> 00:31:54,680 Speaker 1: about value approaches or quant approaches outside of the traditional 547 00:31:54,720 --> 00:31:58,840 Speaker 1: equities realm, and what really that means and what what 548 00:31:58,840 --> 00:32:06,120 Speaker 1: what's pursued there? Sure, Uh. Well, one one classic quant strategy, 549 00:32:06,160 --> 00:32:08,320 Speaker 1: of course is to borrow money and low interest rate 550 00:32:08,360 --> 00:32:12,160 Speaker 1: currencies and UH invested in high interest rate currencies to 551 00:32:12,200 --> 00:32:16,160 Speaker 1: earn the carey spread there. But you need a value 552 00:32:16,680 --> 00:32:22,040 Speaker 1: uh overlay in that to protect yourself against hyper inflating currencies, 553 00:32:22,160 --> 00:32:26,120 Speaker 1: currencies where the high interest rate is really illusory or 554 00:32:26,440 --> 00:32:30,000 Speaker 1: countries where the low interest rate is is an illusion 555 00:32:30,120 --> 00:32:35,360 Speaker 1: due to currency problems. UM. In commodities, people do uh, 556 00:32:35,480 --> 00:32:39,080 Speaker 1: you know, analysis of supply demand, actual use value of 557 00:32:39,120 --> 00:32:43,000 Speaker 1: commodities and use that as a quantitative way to decide 558 00:32:43,000 --> 00:32:47,360 Speaker 1: which which commodities are over and undervalued. Real assets, real 559 00:32:47,480 --> 00:32:51,600 Speaker 1: estate forestry minds. Things like that people do the same 560 00:32:51,640 --> 00:32:56,760 Speaker 1: strategy of buying cheap stuff and shorting very similar, highly 561 00:32:56,800 --> 00:33:00,640 Speaker 1: correlated expensive stuff. Doesn't work all the time. Time again, 562 00:33:00,680 --> 00:33:03,280 Speaker 1: you know, with all these quant strategies important to emphasize. 563 00:33:03,320 --> 00:33:05,000 Speaker 1: You know, they work fifty one percent of the time 564 00:33:05,040 --> 00:33:08,320 Speaker 1: if you're lucky, if you get it right, and you 565 00:33:08,400 --> 00:33:12,040 Speaker 1: have to be very uh. You have to be rigorous 566 00:33:12,080 --> 00:33:15,120 Speaker 1: about containing costs because you don't have a huge amount 567 00:33:15,160 --> 00:33:17,120 Speaker 1: of alpha. You don't have the kind of alpha where 568 00:33:17,120 --> 00:33:19,320 Speaker 1: you can just run out and buy the stuff you 569 00:33:19,360 --> 00:33:22,240 Speaker 1: like in short the stuff heedlessly. You have to watch 570 00:33:22,800 --> 00:33:25,560 Speaker 1: prices very carefully, keep your costs down, and you can 571 00:33:25,640 --> 00:33:29,160 Speaker 1: eke out um you know, a hundred basis points two 572 00:33:29,200 --> 00:33:32,640 Speaker 1: hundred basis points a year with very low volatility, and 573 00:33:32,680 --> 00:33:35,000 Speaker 1: therefore you can combine a bunch of these strategies and 574 00:33:35,160 --> 00:33:37,880 Speaker 1: leverage it up and make a nice safe return most 575 00:33:37,920 --> 00:33:41,360 Speaker 1: of the time. I think that cross asset angle is 576 00:33:41,360 --> 00:33:43,600 Speaker 1: actually super important. I mean, I end up, I say, 577 00:33:43,760 --> 00:33:46,440 Speaker 1: you really thinking about Okay, So there's been this recent 578 00:33:46,520 --> 00:33:51,520 Speaker 1: problem with traditional quant strategies. You know, everyone's running the 579 00:33:51,600 --> 00:33:56,960 Speaker 1: quant approach, the welcoone look to see as some competition 580 00:33:57,000 --> 00:34:00,000 Speaker 1: can growing market. And I think that probably the big 581 00:34:00,000 --> 00:34:02,800 Speaker 1: the problem in investment right now is the problem of 582 00:34:02,800 --> 00:34:05,480 Speaker 1: saving for retirement and the idea of how an earth 583 00:34:05,560 --> 00:34:08,840 Speaker 1: pension plans are going to be able to preserve purchasing 584 00:34:08,960 --> 00:34:11,279 Speaker 1: kind of the long run. If we end up in 585 00:34:11,280 --> 00:34:14,800 Speaker 1: a world where the cross asset return of traditional asset 586 00:34:14,840 --> 00:34:17,800 Speaker 1: classes is low and inflation goes up, it's a horrible 587 00:34:18,360 --> 00:34:22,239 Speaker 1: combination which really I think upset the horr a time 588 00:34:22,320 --> 00:34:24,759 Speaker 1: and model that's been in place for the last for 589 00:34:24,880 --> 00:34:28,279 Speaker 1: thirty years, and even potentially challenges with the idea that 590 00:34:28,320 --> 00:34:32,200 Speaker 1: you can hand on retirement risk to individuals. And so 591 00:34:32,520 --> 00:34:35,520 Speaker 1: I think factors have to play an enormous role in that. 592 00:34:35,600 --> 00:34:38,520 Speaker 1: And so I there's an interesting angle for a kind 593 00:34:38,520 --> 00:34:41,920 Speaker 1: of quant to you know, think about perhaps a slightly 594 00:34:42,200 --> 00:34:44,600 Speaker 1: a different kind of kind of client base. I I 595 00:34:44,680 --> 00:34:47,560 Speaker 1: see some quants already there, but in a world where 596 00:34:48,320 --> 00:34:51,280 Speaker 1: asset class beatas are going to be lower and also 597 00:34:51,400 --> 00:34:55,120 Speaker 1: frankly not off enough diversification amongst themselves, then I think 598 00:34:55,160 --> 00:34:58,320 Speaker 1: there is potentially quite a big bid for thinking about 599 00:34:59,040 --> 00:35:02,960 Speaker 1: the factor type strategies within strategic asset allocation in a 600 00:35:03,120 --> 00:35:08,000 Speaker 1: much bigger way has been attempted historically Austin that the 601 00:35:08,040 --> 00:35:11,520 Speaker 1: trouble with that is we don't see a huge correlation 602 00:35:11,680 --> 00:35:14,920 Speaker 1: among you know, if value is not working very well 603 00:35:14,960 --> 00:35:17,719 Speaker 1: in US stocks, that doesn't tell you very much about 604 00:35:17,719 --> 00:35:21,080 Speaker 1: whether value is going to be useful in commodities. We 605 00:35:21,200 --> 00:35:25,640 Speaker 1: played a lot with trying to do factor based asset allocation, 606 00:35:25,800 --> 00:35:27,879 Speaker 1: and really it's hard to come up with anything better 607 00:35:27,920 --> 00:35:31,520 Speaker 1: than risparity. Uh, you know, the correlations are too uncertain. 608 00:35:31,560 --> 00:35:35,400 Speaker 1: The factor correlations are no better than the gross uh 609 00:35:35,600 --> 00:35:39,040 Speaker 1: you know, rock correlations. Um. So I don't I don't 610 00:35:39,120 --> 00:35:41,640 Speaker 1: disagree that this would be very useful if somebody could 611 00:35:41,640 --> 00:35:45,160 Speaker 1: do it, But until somebody can beat risk parity consistently, 612 00:35:45,239 --> 00:35:49,560 Speaker 1: I don't see there's much value here. Yeah. Well, I mean, 613 00:35:49,800 --> 00:35:52,560 Speaker 1: so you mentioned risk parity, and it's not quite the 614 00:35:52,600 --> 00:35:55,000 Speaker 1: same thing, but it seems like in many cases it's 615 00:35:55,000 --> 00:35:58,399 Speaker 1: a more advanced version of you know, the sixty forty 616 00:35:58,480 --> 00:36:01,680 Speaker 1: portfolio in many cases is and there's so much talk 617 00:36:01,719 --> 00:36:04,640 Speaker 1: about that being dead because the bonds component of a 618 00:36:04,680 --> 00:36:09,000 Speaker 1: traditional diversified portfolio. In theory, treasuries don't have that much 619 00:36:09,000 --> 00:36:11,640 Speaker 1: more to rally of interest rates in the US don't 620 00:36:11,640 --> 00:36:16,520 Speaker 1: go below zero like is are these Are you worried 621 00:36:16,560 --> 00:36:19,520 Speaker 1: Aaron about like these sort of like basic bread and 622 00:36:19,560 --> 00:36:23,360 Speaker 1: butter portfolio allocation strategies because it seems like intego is 623 00:36:23,440 --> 00:36:25,960 Speaker 1: and I'm curing both of your takes. But um, are 624 00:36:26,000 --> 00:36:28,600 Speaker 1: you concerned that the sort of like what's sort of 625 00:36:28,719 --> 00:36:30,920 Speaker 1: simple and has worked for a long time could be 626 00:36:30,920 --> 00:36:33,520 Speaker 1: coming to its end just for sort of mathematical reasons 627 00:36:33,560 --> 00:36:38,560 Speaker 1: like that? Well, let mean, you know, never worked, never 628 00:36:38,560 --> 00:36:40,600 Speaker 1: had any theory behind it, was never a good idea. 629 00:36:40,960 --> 00:36:45,600 Speaker 1: Risk parity is is considerably more Okay, Yeah, people, people 630 00:36:45,640 --> 00:36:48,600 Speaker 1: have been saying bonds are dead for really as long 631 00:36:48,640 --> 00:36:51,719 Speaker 1: as I've been in finance, but so for you know, 632 00:36:51,840 --> 00:36:55,799 Speaker 1: they've they've outperformed other asset classes. I do believe there 633 00:36:55,880 --> 00:36:59,640 Speaker 1: is a significant possibility in the future of sustained periods 634 00:36:59,640 --> 00:37:04,360 Speaker 1: of imificant negative rates, meaning treasuries could do very well. 635 00:37:04,840 --> 00:37:07,200 Speaker 1: But I also agree that it's uh, you know, you 636 00:37:07,239 --> 00:37:10,360 Speaker 1: have to consider the fact, you know, is zero really important? 637 00:37:10,480 --> 00:37:13,360 Speaker 1: Is there are a reason? You know? And in the 638 00:37:13,520 --> 00:37:17,319 Speaker 1: basically most uh you know, most risk parity allocations would 639 00:37:17,320 --> 00:37:19,920 Speaker 1: have something like a quarter of the risk allocated to 640 00:37:20,520 --> 00:37:25,319 Speaker 1: major market major currency interest rates. Um, you know, is 641 00:37:25,360 --> 00:37:29,840 Speaker 1: there a reason to look for other investments within that 642 00:37:30,840 --> 00:37:34,440 Speaker 1: bucket that might give a better return. I'm certainly not 643 00:37:34,480 --> 00:37:36,640 Speaker 1: ready to say you should do that yet, but I 644 00:37:36,680 --> 00:37:38,440 Speaker 1: know a lot of people are looking into that, and 645 00:37:38,480 --> 00:37:41,080 Speaker 1: it is a little scary buying minds at zero percent. 646 00:37:42,480 --> 00:37:47,000 Speaker 1: So having had this conversation, I feel like there's actually 647 00:37:47,040 --> 00:37:49,640 Speaker 1: a bit of a consensus forming, which is that quant 648 00:37:50,239 --> 00:37:54,560 Speaker 1: investing might change in one way or another, but in 649 00:37:54,719 --> 00:37:59,879 Speaker 1: another way, the demand to systematically invest in assets, whether 650 00:37:59,880 --> 00:38:02,319 Speaker 1: it's a single type of asset or cross assets like 651 00:38:02,360 --> 00:38:05,919 Speaker 1: we were discussing earlier, is probably always going to be there, 652 00:38:05,960 --> 00:38:08,800 Speaker 1: and it's just going to change in shape and form. 653 00:38:08,920 --> 00:38:11,440 Speaker 1: And the thing that really reminds me of is, you know, 654 00:38:11,440 --> 00:38:14,319 Speaker 1: a few decades ago, no one would have thought that 655 00:38:14,719 --> 00:38:19,080 Speaker 1: low volatility would be a desirable thing, and yet nowadays 656 00:38:19,080 --> 00:38:21,520 Speaker 1: we have all these low volatility e t f s 657 00:38:21,560 --> 00:38:26,160 Speaker 1: and products and factors and things like that. Is that 658 00:38:26,280 --> 00:38:29,480 Speaker 1: where we're heading. Could you maybe give a summary of 659 00:38:29,520 --> 00:38:33,000 Speaker 1: what quant investing is going to look like in say, 660 00:38:33,040 --> 00:38:36,239 Speaker 1: five or ten years. Is it still here but it's 661 00:38:36,280 --> 00:38:40,759 Speaker 1: just changed in its nature? Why don't we start with indigo? Um? Okay, yeah, 662 00:38:40,760 --> 00:38:43,879 Speaker 1: I think the way heading towards a world where there's 663 00:38:44,120 --> 00:38:46,680 Speaker 1: no one kind of canonical view of what quant investing 664 00:38:46,719 --> 00:38:48,879 Speaker 1: actually is. Is the first thing I'd say, I can 665 00:38:48,920 --> 00:38:52,520 Speaker 1: imagine a number of routes to being explored. So one 666 00:38:53,440 --> 00:38:57,040 Speaker 1: would be an area where, in fact, but there ceases 667 00:38:57,120 --> 00:39:00,080 Speaker 1: to be a distinction between a quantum fundamental invest and 668 00:39:00,120 --> 00:39:02,880 Speaker 1: so for example, you know, if in the future an 669 00:39:02,880 --> 00:39:07,520 Speaker 1: analyst forming a view on a single stock happens to 670 00:39:08,120 --> 00:39:10,880 Speaker 1: form that view via a model that's written in Python 671 00:39:11,040 --> 00:39:13,000 Speaker 1: rather than an Excel, you know, is that a quant 672 00:39:13,000 --> 00:39:14,800 Speaker 1: model or fundamental model? Well, I don't really know. I 673 00:39:14,800 --> 00:39:17,440 Speaker 1: don't really care frankly, um, but you know, it ends 674 00:39:17,480 --> 00:39:20,040 Speaker 1: up with a kind of blending of quantum fundamental approaches. 675 00:39:20,080 --> 00:39:23,320 Speaker 1: So that's one possible route um, you know, I think there, 676 00:39:23,520 --> 00:39:27,440 Speaker 1: you know, will be a further attempt to make kind 677 00:39:27,480 --> 00:39:29,480 Speaker 1: of traditional quantum approach is going to work in a 678 00:39:29,960 --> 00:39:32,560 Speaker 1: turning value and it would help with that. I think 679 00:39:32,600 --> 00:39:36,920 Speaker 1: there's the possibility of exploring quant approaches which are less 680 00:39:36,960 --> 00:39:41,880 Speaker 1: diversified and have longer holding periods, which is an uncomfortable 681 00:39:41,920 --> 00:39:43,759 Speaker 1: area for quants to be in for all kinds of 682 00:39:43,800 --> 00:39:47,320 Speaker 1: good reasons. Be equally, you know, I think that's there's 683 00:39:47,360 --> 00:39:50,040 Speaker 1: something that kind of could be explored. UM, there's the 684 00:39:50,080 --> 00:39:54,600 Speaker 1: potential of applying a new techniques to new data sets. 685 00:39:54,600 --> 00:39:56,920 Speaker 1: I said, I think that is something that will continue 686 00:39:56,920 --> 00:39:59,839 Speaker 1: to be a huge interest, but I think probably as 687 00:39:59,840 --> 00:40:04,200 Speaker 1: a commercial proposition, something that's only relevant probably for a 688 00:40:04,239 --> 00:40:07,440 Speaker 1: small group of asset managers. And then also, as I mentioned, 689 00:40:07,480 --> 00:40:10,400 Speaker 1: you know, just using factors embedded as a way to 690 00:40:10,440 --> 00:40:13,200 Speaker 1: try and solve a long on pensions problem through strategic 691 00:40:13,239 --> 00:40:17,720 Speaker 1: decisions and allocations to them. UM. I would say that, 692 00:40:18,320 --> 00:40:21,000 Speaker 1: you know, if we define quant broadly as any kind 693 00:40:21,000 --> 00:40:25,359 Speaker 1: of systematic investing, and that's you know, that's clearly only 694 00:40:25,360 --> 00:40:28,560 Speaker 1: going to grow. It will become more machine learning and 695 00:40:28,760 --> 00:40:33,879 Speaker 1: artificial intelligence dominated. UM. But I use quant a little 696 00:40:33,880 --> 00:40:38,279 Speaker 1: more narrowly. I mean sort of the current academic and 697 00:40:38,320 --> 00:40:43,399 Speaker 1: professional consensus around kind of mainstream quant ideas. UM. If 698 00:40:43,440 --> 00:40:46,600 Speaker 1: these ideas were somehow overthrown, if they stopped working, people 699 00:40:46,640 --> 00:40:48,880 Speaker 1: would not go back to you know, looking for the 700 00:40:48,920 --> 00:40:51,600 Speaker 1: next war in Buffetter David Ironhorn for you know, looking 701 00:40:51,640 --> 00:40:56,120 Speaker 1: for individual loan geniuses that can't really be scaled. They 702 00:40:56,120 --> 00:41:00,120 Speaker 1: would look for new systematic want method I think that 703 00:41:00,200 --> 00:41:03,600 Speaker 1: the basic academic quant consensus is pretty safe for the 704 00:41:03,640 --> 00:41:06,960 Speaker 1: next ten or twenty years. There is always research. It's 705 00:41:07,000 --> 00:41:09,680 Speaker 1: always evolving. You know, it looks may look the same 706 00:41:09,760 --> 00:41:12,399 Speaker 1: if you're you know, from the outside, but having been 707 00:41:12,440 --> 00:41:15,759 Speaker 1: in this industry for decades, it uh, you know, it 708 00:41:15,880 --> 00:41:20,360 Speaker 1: changes enormously. The research is going on. But some fundamentals 709 00:41:20,440 --> 00:41:24,960 Speaker 1: like value, like momentum, like quality, like low volatility. I 710 00:41:25,000 --> 00:41:27,920 Speaker 1: think those are those are going to be there. They 711 00:41:27,920 --> 00:41:32,080 Speaker 1: may be interpreted by machine and and and no individual 712 00:41:32,160 --> 00:41:35,360 Speaker 1: human can understand them. Uh, they may be marketed and 713 00:41:35,640 --> 00:41:38,880 Speaker 1: pitched in different ways. There will certainly be improvements and 714 00:41:38,920 --> 00:41:41,720 Speaker 1: how they're measured and how they're exploited, and as Intego 715 00:41:41,840 --> 00:41:45,640 Speaker 1: is emphasized, how they're constructed into portfolios. One thing we 716 00:41:45,680 --> 00:41:49,480 Speaker 1: haven't really mentioned is even the most sophisticated quant shops 717 00:41:49,520 --> 00:41:53,120 Speaker 1: tend have very crude ways of forming portfolios. You know, 718 00:41:53,160 --> 00:41:57,320 Speaker 1: you do a value you go along thet of stocks 719 00:41:57,320 --> 00:42:00,360 Speaker 1: that are most undervalued and go short to their percent 720 00:42:00,400 --> 00:42:02,839 Speaker 1: that are most overvalued. Um. I mean it's a little 721 00:42:02,840 --> 00:42:06,319 Speaker 1: more sophisticated than that, but it's not. There's nowhere near 722 00:42:06,360 --> 00:42:10,080 Speaker 1: the amount of sophistication there is in measuring these factors. 723 00:42:10,120 --> 00:42:13,640 Speaker 1: You know, risk parity. You just wait, everything can inverse 724 00:42:13,680 --> 00:42:16,480 Speaker 1: proportion to its volatility. You know. That's those are pretty 725 00:42:16,480 --> 00:42:19,799 Speaker 1: crude uh techniques, So I suspect there will be a 726 00:42:19,800 --> 00:42:24,000 Speaker 1: lot of uh improvement in those, But I I have 727 00:42:24,080 --> 00:42:26,120 Speaker 1: faith in the basic quant out look. I think the 728 00:42:26,200 --> 00:42:29,239 Speaker 1: same people who are successful kuant investors today, if they 729 00:42:29,239 --> 00:42:32,239 Speaker 1: don't retire, will be successful kuant investors in ten or 730 00:42:32,239 --> 00:42:36,920 Speaker 1: twenty years. Well, uh, that was really awesome. I really 731 00:42:36,960 --> 00:42:41,640 Speaker 1: appreciated both of your perspectives. Intego Frasier Jenkins at Bernstein 732 00:42:42,360 --> 00:42:47,240 Speaker 1: and Aaron Brown, longtime veteran of the industry, author and professor. 733 00:42:47,360 --> 00:42:49,759 Speaker 1: Thank you very much, both of you for joining us. 734 00:42:49,800 --> 00:42:53,120 Speaker 1: Thank you. Thank you. Joe and Tracy and in Ago, 735 00:42:53,719 --> 00:43:18,680 Speaker 1: thank you. It's so funny, Tracy had, like so many 736 00:43:18,719 --> 00:43:21,080 Speaker 1: of our conversations all end up being about the same 737 00:43:21,080 --> 00:43:23,359 Speaker 1: thing these days, and even when we start with like, oh, 738 00:43:23,360 --> 00:43:25,880 Speaker 1: this is a different topic than this, it sort of 739 00:43:25,920 --> 00:43:29,439 Speaker 1: all comes back to the same thing. But actually, yeah, yeah, 740 00:43:29,680 --> 00:43:32,080 Speaker 1: I was also thinking that was such a polite debate, 741 00:43:32,400 --> 00:43:34,520 Speaker 1: you know, I was hoping it would sort of descend 742 00:43:34,560 --> 00:43:37,880 Speaker 1: into a drama and a shouting match, and at some point, 743 00:43:37,920 --> 00:43:40,400 Speaker 1: like Inigo would say something like you killed my factor 744 00:43:40,520 --> 00:43:43,759 Speaker 1: prepared to die or something like that. Um, but we 745 00:43:43,800 --> 00:43:46,480 Speaker 1: didn't really get that. It felt like there was a 746 00:43:46,560 --> 00:43:50,920 Speaker 1: sort of underlying consensus, which is that investing as we 747 00:43:51,040 --> 00:43:54,879 Speaker 1: know it might die in one sense or another, but 748 00:43:55,400 --> 00:43:58,680 Speaker 1: it's not really going to leave in the wider sense, 749 00:43:58,719 --> 00:44:01,720 Speaker 1: and that instead it's probably and the morphin evolve along 750 00:44:01,760 --> 00:44:05,719 Speaker 1: with the broader macro environment. Yeah. And I guess, you know, 751 00:44:05,800 --> 00:44:08,480 Speaker 1: like as I was saying, like so much ends up 752 00:44:08,520 --> 00:44:11,920 Speaker 1: coming down to this question. And I guess it's empirically 753 00:44:11,960 --> 00:44:13,759 Speaker 1: the case with the success of a lot of quant 754 00:44:13,840 --> 00:44:18,319 Speaker 1: factors of whether we get a change in the macro situation, 755 00:44:18,520 --> 00:44:20,839 Speaker 1: and the macro situation doesn't seem to be so much 756 00:44:20,880 --> 00:44:24,359 Speaker 1: about growth or recessions or whatever, but whether we get 757 00:44:24,400 --> 00:44:27,400 Speaker 1: a change of the macro regime, which is a central 758 00:44:27,400 --> 00:44:32,480 Speaker 1: banks being so um inclined to fight any any sort 759 00:44:32,520 --> 00:44:36,600 Speaker 1: of volatility, uh, you know, sort of limited fiscal response. 760 00:44:36,840 --> 00:44:38,920 Speaker 1: Like so many of our discussions come down to that, 761 00:44:39,560 --> 00:44:45,399 Speaker 1: including this question of whether the quant factors work. Yeah, 762 00:44:45,440 --> 00:44:49,960 Speaker 1: I do think anygoes point on that that want investors 763 00:44:50,040 --> 00:44:54,719 Speaker 1: rules based investing strategies might not be that good at 764 00:44:54,920 --> 00:45:00,400 Speaker 1: capturing UM. Sometimes erratic policy or you know, unexpec acted 765 00:45:00,880 --> 00:45:04,520 Speaker 1: policies by regulators, um central banks and the government. Like, 766 00:45:04,800 --> 00:45:07,680 Speaker 1: I think that is actually a fair point. And we 767 00:45:07,719 --> 00:45:10,319 Speaker 1: know that cell side analysts tend to be pretty bad 768 00:45:10,680 --> 00:45:14,279 Speaker 1: political analysts, So it's going to be really interesting to 769 00:45:14,280 --> 00:45:17,080 Speaker 1: see how the quant world rapples with that, because we 770 00:45:17,120 --> 00:45:21,160 Speaker 1: do see this consensus emerging about governments taking on a 771 00:45:21,200 --> 00:45:25,160 Speaker 1: broader role in the economy post COVID. I guess the 772 00:45:25,200 --> 00:45:27,600 Speaker 1: question is like how long can you wait? Like if 773 00:45:27,680 --> 00:45:29,399 Speaker 1: like you know, you could say, like, okay, a lot 774 00:45:29,400 --> 00:45:32,360 Speaker 1: of these strategies haven't done well since the Great Financial Crisis, 775 00:45:33,000 --> 00:45:35,640 Speaker 1: so we're talking like twelve or thirteen years or ten 776 00:45:35,719 --> 00:45:38,200 Speaker 1: or eleven years now. You know, it's like that's a 777 00:45:38,200 --> 00:45:41,239 Speaker 1: pretty big chunk of someone's career. Okay, maybe we're you're 778 00:45:41,280 --> 00:45:45,279 Speaker 1: like waiting for like yeah, when mean reversion. Yeah, when 779 00:45:45,360 --> 00:45:49,200 Speaker 1: I'm when I'm you know, finally the mean reversion is 780 00:45:49,200 --> 00:45:50,600 Speaker 1: going to happen, and then I'm gonna make up for 781 00:45:50,640 --> 00:45:55,040 Speaker 1: decades of underperformance. Like it's kind of a lot of faith. Yeah, 782 00:45:55,239 --> 00:45:57,080 Speaker 1: like I think that I think will one day be 783 00:45:57,120 --> 00:45:59,160 Speaker 1: in like a new system. But man, like you know 784 00:45:59,239 --> 00:46:01,279 Speaker 1: that's kind of like, yeah, I kind of want to 785 00:46:01,280 --> 00:46:04,960 Speaker 1: like find something that works in the meantime. Yeah. Actually, 786 00:46:05,280 --> 00:46:06,920 Speaker 1: I kind of feel bad. We should have asked about 787 00:46:06,920 --> 00:46:11,160 Speaker 1: momentum strategies um in that podcast, which we didn't. But um, 788 00:46:11,200 --> 00:46:14,080 Speaker 1: we'll have to come back to it. I guess plenty 789 00:46:14,120 --> 00:46:17,480 Speaker 1: more to talk about. Yeah. I have a feeling on 790 00:46:17,600 --> 00:46:19,759 Speaker 1: whatever our next episode is, it's going to come back 791 00:46:19,800 --> 00:46:23,560 Speaker 1: to the death of value investing or something similar. Um 792 00:46:23,560 --> 00:46:27,359 Speaker 1: for sure. All right, shall we leave it there? Let's 793 00:46:27,400 --> 00:46:31,040 Speaker 1: leave it there. Okay, this has been another episode of 794 00:46:31,080 --> 00:46:33,880 Speaker 1: the Ad Thoughts Podcast. I'm Tracy Alloway. You can follow 795 00:46:33,960 --> 00:46:37,200 Speaker 1: me on Twitter at Tracy Alloway and I'm Joe wi 796 00:46:37,239 --> 00:46:39,239 Speaker 1: isn't though you could have follow me on Twitter at 797 00:46:39,239 --> 00:46:44,320 Speaker 1: the Stalwart. Follow our producer Laura Carlston. She's at Laura M. Carlton. 798 00:46:44,640 --> 00:46:48,200 Speaker 1: Follow the Bloomberg head of podcast, Francesca Leavy She's at 799 00:46:48,200 --> 00:46:51,200 Speaker 1: Francesca Today, and check out all of our podcasts at 800 00:46:51,200 --> 00:46:59,840 Speaker 1: Bloomberg under the handle at podcast. Thanks for listening to