latames
Spring has to come simply because economic fundamentals require it

Spring has to come simply because economic fundamentals require it

26-02-2021 | Entrevista
How do you perceive the quant equity winter? Will factors be arbitraged away? Here are some of the topics we discussed with our guest Sunil Wahal, Professor of Finance and Director of the Center for Investment Engineering at the W.P. Carey School of Business, Arizona State University.
  • Lusanele Magwa
    Lusanele
    Magwa
    Investment Writer

Speed read

  • Investors can benefit from targeting value and profitability jointly
  • Strategies with valid economic underpinnings should recover from quant equity crisis
  • Genuine factors reflecting economic fundamentals are not prone to arbitrage
Sunil Wahal
Sunil Wahal
Professor of Finance and Director of the Center for Investment Engineering at the W.P. Carey School of Business, Arizona State University.

In one of your research papers(1) you examine the profitability and investment premiums pre 1963. While the former is evident when controlling for value, does the failed out-of-sample test for the investment factor mean that it should be rejected?

“There are three reasons that suggest caution when evaluating the evidence on the investment or asset growth factor.”

“First, in the post-1963 period, the relationship between value or profitability and returns is monotonic. For example, if one constructs five portfolios with increasing profitability, their returns increase uniformly from one portfolio to the next. That is not true for investment. In fact, most of the return differences come from the extreme underperformance of high-investment firms.”

“Second, the results seem to be sensitive to how one measures investment (e.g. Cooper et al., 2020). This suggests that the effects of investment are not clear cut as suggested by earlier studies. For a phenomenon to be robust, it should not be overly sensitive to measurement choices.”

“Finally, the fact that investment generates no variation in returns prior to 1963 suggests that it is not nearly as stable as value and profitability. To be clear, the economic mechanism for investment/asset growth to matter is sound – it is the evidence that appears to be shaky.”

Manténgase al día de las últimas perspectivas sobre inversión cuantitativa
Manténgase al día de las últimas perspectivas sobre inversión cuantitativa
Suscríbase

What is your perspective on the assertion that the investment factor subsumes the classic value factor post 1963?

“The data are what they are: the research says that the investment factor subsumes the ‘standard’ value factor after 1963 in the US. The more important question is what this means both for the underlying economics, as well as for investors. My view is that this is a very sample-specific result and one should not make too much of it. As I mentioned earlier, investment does not subsume value prior to 1963, or outside the US.”

‘Pure value and pure profitability strategies commit the sin of ignoring information relevant for each other’

In another one of your papers,(2) you conclude that value and profitability are related and long-only investors can benefit from targeting both factors jointly. To this end, how do you view smart beta index/ETF providers that either offer pure value and/or pure profitability strategies?

“Economic primitives link value and profitability. The evidence linking the two is pervasive in three different data sources: pre-1963 in US data, post-1963 in US data and post-1990 in international data. The implication is that considering these jointly makes a lot of sense for investors.”

“Suppose one thinks of the long-only value strategy as buying cheap assets. When you just buy cheap assets (i.e. value only), some fraction of them could be cheap for a reason – some value firms will inevitably go bankrupt. In other words, value-only portfolios ignore the information in profitability. Similarly, when one implements a long-only profitability strategy, one ignores the information in prices – you are simply buying productive assets but perhaps overpaying for them.”

“Therefore, in isolation, pure value and pure profitability strategies commit the sin of ignoring information relevant for each other. Of course, that does not prevent investment managers from delivering such products, nor should it. Caveat emptor applies. But Eduardo Repetto and I point out in our work that this is false choice – there really is no reason for investors to ignore useful and implementable information.”

Quant investors have been subjected to a cold and dark winter in recent times. How do you perceive and frame the significant drawdown they have been experiencing since 2018?

“All investors have been subject to a cold and dark winter. But investors who have focused on factors, particularly arbitrary factors with limited economic content, have had a tougher winter. Some of the drawdowns have been quite large, but it is best to view them in the context of historic volatility.”

“There are two things that investors would be well advised to remember. First, realized portfolio volatility (and drawdown) is likely to be higher than factor volatility because it includes liquidity premiums. In other words, realizations are likely to be worse than expectations. Second, how one develops expectations of volatility and drawdowns matters. Relying on normal distributions is not a good idea. In my work with Eduardo Repetto(3), we use bootstrapping to get a sense for what the true distribution of portfolio returns might look like.”

“As to the question of if and/or when the winter will end, that is very much strategy dependent. For investment strategies with valid economic underpinnings, spring has to come simply because economic fundamentals require it. But when spring comes remains an open question.”

‘Whether factors are arbitraged away or not depends on whether the factors are genuine and they reflect mispricing or risk’

Leading on from the previous question, do you believe that factors will be arbitraged away in the foreseeable future?

“Whether factors are arbitraged away or not depends on whether the factors are (a) genuine, and (b) they reflect mispricing or risk. If they are not genuine (i.e. if they are generated via willful or inadvertent data mining), they will disappear. If they represent mispricing, they can be arbitraged away so long as the cost of arbitrage drops sufficiently. But if they reflect economic fundamentals and risk, then arbitrage cannot change the expected return series. Key factors in academia (like value and profitability) can represent mispricing and/or risk and it is very hard to tell the difference.”

Lastly, what research topics do you intend on working on in the coming years?

“There are two topics that might be of particular interest to your readers. The first has to do with opportunity costs in trading – in other words, measuring the cost of the ability or unwillingness to trade. This is a cost that is particularly relevant for large institutional investors (such as sovereign wealth funds) as their portfolios move prices. The second is ongoing work that looks at the role of intangible assets. We already know from existing work that goodwill adjustments are important to value portfolios. But preliminary evidence suggests that there is other information that is also informative. Stay tuned.”

1 Wahal, S., February 2019, “The Profitability and Investment Premium: Pre-1963 Evidence”, Journal of Financial Economics.
2 Wahal, S., Repetto, E., June 2020, “On the Conjoint Nature of Value and Profitability”, working paper.
3
Wahal, S., Repetto, E., November 2020, “The Joint Distribution of Value and Profitability: International
Evidence”, working paper.

Logo

Información importante

Los Fondos Robeco Capital Growth no han sido inscritos conforme a la Ley de sociedades de inversión de Estados Unidos (United States Investment Company Act) de 1940, en su versión en vigor, ni conforme a la Ley de valores de Estados Unidos (United States Securities Act) de 1933, en su versión en vigor. Ninguna de las acciones puede ser ofrecida o vendida, directa o indirectamente, en los Estados Unidos ni a ninguna Persona estadounidense en el sentido de la Regulation S promulgada en virtud de la Ley de Valores de 1933, en su versión en vigor (en lo sucesivo, la “Ley de Valores”)). Asimismo, Robeco Institutional Asset Management B.V. (Robeco) no presta servicios de asesoramiento de inversión, ni da a entender que puede ofrecer este tipo de servicios, en los Estados Unidos ni a ninguna Persona estadounidense (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores).

Este sitio Web está únicamente destinado a su uso por Personas no estadounidenses fuera de Estados Unidos (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores) que sean inversores profesionales o fiduciarios profesionales que representen a dichos inversores que no sean Personas estadounidenses. Al hacer clic en el botón “Acepto” que se encuentra en el aviso sobre descargo de responsabilidad de nuestro sitio Web y acceder a la información que se encuentra en dicho sitio, incluidos sus subdominios, usted confirma y acepta lo siguiente: (i) que ha leído, comprendido y aceptado el presente aviso legal, (ii) que se ha informado de las restricciones legales aplicables y que, al acceder a la información contenida en este sitio Web, manifiesta que no infringe, ni provocará que Robeco o alguna de sus entidades o emisores vinculados infrinjan, ninguna ley aplicable, por lo que usted está legalmente autorizado a acceder a dicha información, en su propio nombre y en representación de sus clientes de asesoramiento de inversión, en su caso, (iii) que usted comprende y acepta que determinada información contenida en el presente documento se refiere a valores que no han sido inscritos en virtud de la Ley de Valores, y que solo pueden venderse u ofrecerse fuera de Estados Unidos y únicamente por cuenta o en beneficio de Personas no estadounidenses (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores), (iv) que usted es, o actúa como asesor de inversión discrecional en representación de, una Persona no estadounidense (en el sentido de la Regulation S promulgada en virtud de la Ley de Valores) situada fuera de los Estados Unidos y (v) que usted es, o actúa como asesor de inversión discrecional en representación de, un inversión profesional no minorista. El acceso a este sitio Web ha sido limitado, de manera que no constituya intento de venta dirigida (según se define este concepto en la Regulation S promulgada en virtud de la Ley de Valores) en Estados Unidos, y que no pueda entenderse que a través del mismo Robeco dé a entender al público estadounidense en general que ofrece servicios de asesoramiento de inversión. Nada de lo aquí señalado constituye una oferta de venta de valores o la promoción de una oferta de compra de valores en ninguna jurisdicción. Nos reservamos el derecho a denegar acceso a cualquier visitante, incluidos, a título únicamente ilustrativo, aquellos visitantes con direcciones IP ubicadas en Estados Unidos.

Este sitio Web ha sido cuidadosamente elaborado por Robeco. La información de esta publicación proviene de fuentes que son consideradas fiables. Robeco no es responsable de la exactitud o de la exhaustividad de los hechos, opiniones, expectativas y resultados referidos en la misma. Aunque en la elaboración de este sitio Web se ha extremado la precaución, no aceptamos responsabilidad alguna por los daños de ningún tipo que se deriven de una información incorrecta o incompleta. El presente sitio Web podrá sufrir cambios sin previo aviso. El valor de las inversiones puede fluctuar. Rendimientos anteriores no son garantía de resultados futuros. Si la divisa en que se expresa el rendimiento pasado difiere de la divisa del país en que usted reside, tenga en cuenta que el rendimiento mostrado podría aumentar o disminuir al convertirlo a su divisa local debido a las fluctuaciones de los tipos de cambio. Para inversores profesionales únicamente. Prohibida su comunicación al público en general.

No estoy de acuerdo