Connecticut-based asset management firm Validea Capital has an active, highly informative website for public consumption. Jack Forehand, a portfolio manager at the company, recently published a ‘best-of’ online article featuring the five most important lessons he learned after a series of long interviews with prominent fund managers and finance industry gurus.
The five lessons were “Beware the risks you can’t see" (from a discussion with Corey Hoffstein from Newfound Research), “Learn to say ‘I don’t know’” (Jim O’Shaughnessy, O’Shaughnessy Asset Management), Active managers “get paid to endure pain” (Wes Gray, Alpha Architect), the importance of a repeatable thought process for investing (Michael Mauboussin, BlueMountain Capital Management) and “Sometimes, this time is different” (Ben Hunt, Epsilon Theory).
There are useful takeaways from every interview but I want to focus on Wes Gray’s observation that active fund managers get paid to endure pain. The discussion focused on whether the time-honoured value investing strategies that have underperformed over the past decade would ever return to favour.
The issue is important on two fronts. For one, most investors are taught that buying assets when they’re cheap, and selling them when expensive – value investing - is the basis of successful performance. But this hasn’t worked for years.
Second, the potential for value stocks to outperform the market in the near future has been a topic of interest for numerous prominent market strategists, particularly global equity strategist Chris Montagu at Citi.
Back to Mr. Gray, who believes value investing will stage a comeback. He noted that value strategies still provided lower risk returns, and that finding mispriced assets lead to competitive returns even in the current environment.
The manager then added “Our overarching framework for “active” strategies (which includes “value”), is what we call the sustainable active framework. The basic idea is simple: you get paid to do things that are painful.”
This is an interesting point (one that might also apply to factor investing ETFs but let’s not complicate things for now). The premise is that the fees paid to active managers are so that investors can buy the patience and discipline they might not be able to achieve themselves.
Applied to value investors, the fund manager endures the pain of underperformance so that value-based investing strategies are available if market conditions change, and value stocks begin to outperform the market.
-- Scott Barlow, Globe and Mail market strategist
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