3. Supporting this main tenet are three beliefs: investor preferences are broader than risk and return; prices vary around fair value; and a lack of conviction prevents investors from exploiting long-term value. See “Our Investment Beliefs” Fundamentals (October 2014)
4. “Rebalancing: Boring and Dull? Not!” FQ Perspective (April 2001)
5. Over the course of our collective careers, the three of us have worked for two different consulting firms, two hedge funds of funds, and one $100 billion asset owner.
6. The average flow-weighted return is a simple weighted-average return with the weights being the net flows in 2014. The funds with higher (lower) net inflows receive a proportionally greater (smaller) weight in the average flow-weighted return of the popular group. The same is true for the unpopular group.
7. Of course, not all of these funds exhibit relatively static exposures; averages mask the truly tactical managers. Digging a little deeper reveals the managers who are willing to bear some maverick risk and allow their exposures to deviate from those of their peers. When ranking the funds by their volatility in beta terms, those in the top 20% (i.e., the most tactical managers) swung their equity exposure by a range more than double that of the typical fund. Over the seven-year horizon, this most dynamic group wasn’t shy about shifting their equity betas, with some reaching a low of 0.0 times and others approaching a high of 1.1 times.