Implementing A Popular Approach

March 11, 2015

WHERE DO YOU LOOK TO RESEARCH THE STRATEGIES, AND HOW DO YOU BEST IMPLEMENT THEM? IS IT ALWAYS THROUGH ETFS?

Edward Allen: Academic theory is the place to start, and focusing on the evidence for the long term outperformance of any factor. ETFs and actively managed funds appear at the moment to be the best way of capturing this outperformance, although this market is rapidly developing, so it may change.

Alan Miller: Yes, always through ETFs. We research the strategies based on the manufacturer information together with third party analysis from Morningstar, Bloomberg and other tools.

Peter Sleep: We use smart beta futures, funds and certificates, and we put together our own value portfolios, as well as ETFs.

 

ARE THERE ANY STRATEGIES YOU THINK WORK BETTER THAN OTHERS, OR IT IS ENTIRELY MACRO CLIMATE DEPENDENT?
Edward Allen: The environment is an important driver for returns; for example, falling yields tend to positively affect higher-yielding factors such as “value.” However, there is evidence that this same factor has worked over some very long time periods, so the environment is not the “be all end all.”

Allan Miller: There are no hard and fast rules, and this is not macro climate dependent.

Edward Allen: The environment is an important driver for returns; for example, falling yields tend to positively affect higher-yielding factors such as “value.” However, there is evidence that this same factor has worked over some very long time periods, so the environment is not the “be all end all.”

Peter Sleep: There are no hard and fast rules, and this is not macro climate dependent.

All the long-only strategies are dependent on the market direction. You will not go up if the market is going down. You might outperform in a downmarket in a low beta strategy for instance, but you will still be dependent on the market direction. There are some long/short strategies that try to be market neutral—long/short value for instance—but even the results of these strategies are variable.

 

HOW DO YOU KNOW WHICH STRATEGIES WORK IN WHICH MARKET ENVIRONMENT?
Allan Miller: You can look at history, but this of course is a danger. Many smart beta strategies that may work well in certain conditions, normally the recent past, may not continue to do well in all market conditions, normally the next few years. It may just be that smart beta can capture more growth and lower valuation anomalies, which a simple market cap weighted index cannot.

Peter Sleep: With the benefit of hindsight, minimum variance strategies do well in a falling market environment; momentum does well in an upmarket environment, but gets killed at market turns; and value tends to do well across cycles. Value did not do well in strong upward momentum markets like 1997 to 2000, when the big stocks just got bigger.

 

WHICH STRATEGIES HAVE YOU FOUND MOST USEFUL IN THE LAST TWO YEARS, AND WHY?
Edward Allen: We have used a version of the “Aristocrats” strategy, specifically allocating to companies which have consistently raised their dividends over long periods of time. This strategy has the advantage of having relatively low turnover, and hence relatively low trading/implementation costs and a consistent exposure to companies that possess this important discipline.

 

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