One of the things the team at 361 Capital has noticed during the pandemic is that we’ve had a lot more time to listen to podcasts while working from home. One of the programs we follow is The Meb Faber Show, so it was exciting to listen to a recent episode featuring Harin de Silva, CFA, Ph.D., Portfolio Manager for the Analytic Investors team at Wells Fargo Asset Management and sub-advisor to our long/short equity strategies.
We thought it was a great conversation on factor investing and wanted to share it with you in this week’s blog. The podcast covers the importance of factor weighting and rotation, how factor investing has changed over the last 10-20 years, and long/short investing today. It’s a must-listen for anyone currently interested in factor investing or long/short equity.
The discussion between Harin and Meb was focused largely on factor investing but a couple of topics really stood out. One was around cheap factor exposure. And, while widely available to investors today, for managers that focus on the ‘art’ of factor investing, there’s a great deal of value that can be added. One example discussed was the changing risk profiles of Netflix versus Disney. Heading into the February drawdown, the more mature company (Disney) was less risky than Netflix. However, as the drawdown began, and ultimately accelerated, Netflix became less risky, largely due to the fact that its business model (socially distant by design) was less affected during and even after, the pandemic. See the chart below for how the betas of each stock changed over that period. Source: Analytic Investors and Barra.
For a manager focused on the beta factor for example, the ability to navigate these changing risk environments (vis-à-vis a dynamic approach) can help separate that manager versus more passive approaches.
Similarly, they discussed ‘factor famines,’ or long stretches when certain historical factors, like value, fall out of favor for long stretches of time. A passive approach to factor investing can lag for a significant amount of time, depending on its tilts. So, when a factor suddenly begins to outperform, investors can miss out. They also discuss how active approaches to factor investing can be potentially beneficial by tilting towards factors that are working and away from ones that are lagging—leading to outperformance over time.
The podcast is thought provoking and a great listen for those interested in a smart conversation around investing, portfolio construction, factors and even a little bit of car racing. If you’d be interested in discussing Harin’s approach in our long/short equity strategies further, please reach out to us here.
Read more in our latest blog, The Problem with Comparing Performance to the S&P 500 >