Timing the market

MarkCarnage

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

BritishInvestor

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

"How do you know 'ex ante' what factors are going to perform well and when?"

You don't, and that's exactly my point. If fund manager "outperformance" is explained away by tilts to factors which cannot be timed, why would you pay for this?

"It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money"
Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

MK62

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

"How do you know 'ex ante' what factors are going to perform well and when?"

You don't, and that's exactly my point. If fund manager "outperformance" is explained away by tilts to factors which cannot be timed, why would you pay for this?

"It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money"
Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

It's not just the information itself (though personally I suspect fund managers probably get quite a bit a little before it hits Google), but how it's interpreted and acted upon.

Thrugelmir

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

Employing an analyst to cover Amazon full time ( there are 54 alone). Is probably cost effective for the large investment groups and investment banks. due to their clients exposure to the stock. As you come down the market cap scale. Increasingly it becomes less cost effective and analysts are assigned sectors rather than specific stocks. European small caps is an interesting area. There are 4.500 listed companies with a mkt cap of less than 1 billion on the European bourses. Hence why dedicated active investment teams are able to outperform their indices over longer periods of time. 

Diplodicus

Throw us a bone, Thrugelmir, give us one ..

Thrugelmir

Diplodicus said:

Throw us a bone, Thrugelmir, give us one ..

I can lend you a spade and a pan.............. very little in this world comes for free. 

Diplodicus

9yr old advice not to invest in Aapl must be high up, Thrugelmir.

MarkCarnage

 If fund manager "outperformance" is explained away by tilts to factors which cannot be timed, why would you pay for this?

I suggest that it's a bit more nuanced than explaining it away by tilts to factors. The active fund managers I have invested with both institutionally and personally didn't think about tilting to some factor or another which ex post might 'explain' their outperformance. Nor would they decide to sell a company where they were still comfortable with it's long term prospects and valuation just because it didn't fit into a particular factor category. If they underperformed a market index for a year or two as a result of several such decisions, it didn't particularly bother them or me. 

I spent a lot more time being comfortable with a manager's philosophy and process, and the robustness of that process than the previous 12 months performance or whether a factor tilt might explain it. I've terminated mandates/sold holdings for various reasons, but I struggle to recall short/medium term performance being one. 

BritishInvestor

MK62 said:

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

"How do you know 'ex ante' what factors are going to perform well and when?"

You don't, and that's exactly my point. If fund manager "outperformance" is explained away by tilts to factors which cannot be timed, why would you pay for this?

"It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money"
Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

It's not just the information itself (though personally I suspect fund managers probably get quite a bit a little before it hits Google), but how it's interpreted and acted upon.

That will be these people

https://en.wikipedia.org/wiki/Renaissance_Technologies

The fund managers will be way behind the curve

https://ofdollarsanddata.com/medallion-fund/

"Unbeknownst to Mercer, Chrysler had been acquired by Daimler AG in years prior and no longer existed as a stock! "

BritishInvestor

Thrugelmir said:

BritishInvestor said:

MarkCarnage said:

I have always been quite sceptical about the robustness of outcomes from factor, or so called 'smart beta' investing. The theory of it sounds fine up to a point. How do you know 'ex ante' what factors are going to perform well and when? It smacks of the market timing argument to me.
It's also true that where there were perhaps informational advantages to be exploited that they have been eroded by volume of money. Of course good fund managers will analyse their portfolios for factor tilts, but very often to check that there are no unanticipated ones there. However, it is not always easy to pin stocks down neatly into factors. They will and do change over time. 
I think that either passive or fundamental active are preferable. 

Yep, I'd be surprised if an active manager had any form of informational advantage in modern markets - far, far too competitive for that. 

Employing an analyst to cover Amazon full time ( there are 54 alone). Is probably cost effective for the large investment groups and investment banks. due to their clients exposure to the stock. As you come down the market cap scale. Increasingly it becomes less cost effective and analysts are assigned sectors rather than specific stocks. European small caps is an interesting area. There are 4.500 listed companies with a mkt cap of less than 1 billion on the European bourses. Hence why dedicated active investment teams are able to outperform their indices over longer periods of time. 

Why stay in asset management if they have a genuine edge? Far more money to be made in the hedge fund space, surely? Capacity constraints limiting leverage?