This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by John Davi, chief executive officer and chief investment officer of Astoria Portfolio Advisors in New York City.
I recently had the honor of speaking at the Inside Smart Beta conference in New York, and the question we sought to answer was, can you time factors?
There is no evidence to suggest that investors can time factors in a way that is systematic, repeatable and profitable across varying time periods. Do investors try to time factors anyway? Sure. Investors are human and will try anything, even if the odds are stacked against them.
Some investors have been able to profit from factor timing. Anything is possible in the short run. But the key is whether investors can successfully profit more than just once, and history suggests that’s very difficult—if not entirely improbably to do—by trying to time factors.
Unfortunately, the investment management industry has become enamored with short-duration capital. I don’t know too many strategies (if there are any at all) who have a high probability of making money in a systematic, repeatable and scalable format with short-duration capital.
Best Way To Access Factors
At Astoria, we believe it’s significantly more important to pick a set of factors that are robust, pervasive, intuitive and implementable, and to harvest them for the long run. Market timing is difficult; investors should select factors that have compelling evidence, harvest them in a cost-effective manner, and stick with them for the long run.
When compared with a single-factor strategy, the evidence suggests higher risk-adjusted returns are available if one were to invest in a diversified set of factors. The probability of forecasting when a factor will go in or out of style is low, and some factors can go out of favor for decades. Look at value, for instance—it has consistently underperformed growth in this current cycle. This isn’t uncommon if you look at the history of value versus growth performance.
That’s why we want to invest in a portfolio of various factors and harvest them for the long run. We believe this is a significantly better risk-adjusted strategy than factor timing.
Here is an example of how a multifactor ETF can help in a portfolio context: Last year, Astoria's Multi Asset Risk Strategy Fund owned the iShares Core MSCI Emerging Markets ETF (IEMG), but five stocks drove approximately 50% of the returns. We felt we needed to better manage our Emerging Market Equity risk budget in 2018. Emerging market stocks have enough inherent momentum characteristics and we weren’t comfortable with the concentration risk.
So, we swapped IEMG for the SPDR MSCI Emerging Markets StrategicFactors ETF (QEMM) in Q1 of 2018. During the volatility spike in January, QEMM outperformed IEMG by 200 basis points. This is exactly the type of diversification benefit that investing in multiple-factor ETFs can provide.
Charts courtesy of StockCharts.com
You can reach John Davi at [email protected] or @AstoriaAdvisors. Any ETF holdings shown are for illustrative purposes only and are subject to change at any time. For full disclosure, please refer to our website: www.astoriaadvisors.com/disclaimer.
