Mark Yusko is CEO and CIO of Morgan Creek Capital Management. He has a background in the endowment space and is considered an expert in alternative investments. Yusko will be part of a two-sided debate at the Inside Smart Beta conference taking place in New York City, June 6-7. He recently gave ETF.com a preview of his side of the timing-factors discussion and shared his expectations for hedge funds.
ETF.com: Your panel with John Davi of Astoria Portfolio Advisors at Inside Smart Beta poses the question of whether you can time factors. Which side of that argument are you taking, and why?
Yusko: I'm definitely on the that-you-can-time side. Really, it has to do with time horizons. I think both of us would agree that, over longer periods of time, there's a cyclicality to factors, and that you should think about timing. There's probably a little bit of difference of opinion on the short-term opportunities.
My view is that the momentum factor is really just human reaction to securities' prices, and that therefore humans tend to react with certain patterns, and you can time those things.
That said, I believe that if you think about the old strategic investment policy and having targets and ranges, rebalancing toward a target is just that—rebalancing. Moving away from a target is market timing. And everyone has this negative connotation about market timing; I actually don't.
There's nothing wrong with saying, “We think the value factor is undervalued; or, we think the momentum factor is overextended. Therefore, if our long-term target for a factor or a segment or an asset class or a region or a geography is X, we can temporarily take a view that we're going to be overweight or underweight that, and have that be accretive to the portfolio, as opposed to market timing always being a negative.”
ETF.com: How do you approach investing?
Yusko: We start from a fundamental approach. We look at the world and say, fundamentally, where are we? Where are we in the economic cycle? Where are we in the profit cycle? Where are we in the leverage cycle? Based on those fundamentals, we have a perspective on what factors should be in favor.
If the economy is rapidly expanding and profits are good, then certainly growth and momentum should outperform. If we're getting to late stages of the cycle and profit is starting to roll over, you should probably start migrating towards things that are cheaper, and value factors.
We also look at the technical factors. Soros said people think contrarian investing means you're always going against the trend. That's not true; he said the trend is your friend until it changes. And that's the only time being a contrarian makes sense. You have to be able to identify these trend changes.
One of the nice things about, really anything—whether it be a factor or geography, a sector, an asset class—is, during the primary trend, the volatility tends to be very low; the directionality seems to be very stable. And then suddenly you get a heightening of volatility. And that heightening of volatility gives you a signal that the trend is about to change.
It's that increased vibration in variability that gives you a sense that you're about to have a phase shift. It’s similar to when you go from water to ice, or water to steam, just like you go from value to growth, or growth to value, or U.S. to emerging markets, or emerging markets to U.S., etc.
ETF.com: What factors are you looking at now?
Yusko: We’re clearly in the camp that we are late cycle, economically, and therefore it's time to be shifting from the momentum factors to more value-oriented factors. Our first angle of attack is to start making that shift.
Rather than rebalancing back to target, we think it's probably a time that you want to blow through the targets and go to an overweight position in the value-oriented factors or the defensive factors because they're so far out of favor. Nobody wants to own things that are defensive. Nobody wants to own things that are lower volatility or low beta. Everybody's looking at high beta, high volatility, growth and momentum. And we think that game is in its final innings.