Wesley is also the author of “EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army” and “Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.”
Insights from Wesley Gray
Wesley Gray: Nate Silver’s data-driven evidence-based approach is exactly what we do, but in the context of financial markets. One could consider us “quants,” but really, we are fundamental investors that happen to use quant tools to provide discipline and a repeatable investment process. “Quantitative” is often considered to be an opaque mathematical black art, only practiced by Ivory Tower academics and practitioners with their heads in the clouds. Nothing could be further from the truth. Quantitative, or systematic, processes are merely tools that value investors can use to minimize their unavoidable instincts. Quantitative tools serve two purposes: 1) to protect us from our own behavioral errors, and 2) to exploit the behavioral errors of others. Our tools do not necessarily need to be complex, but they do need to be systematic. On our website, www.alphaarchitect.com, you can get the full description of our process.
MutualFunds.com: In getting ready to launch your firm’s new products, you are a proponent of active management styles. While your targeted focus is primarily in the ETF space, you would probably agree that investors who buy mutual funds do gain an advantage with a fund manager who actively rebalances fund holdings on a regular basis.
Wesley Gray: We are a proponent of affordable active management – managers that hold portfolios of less than 50 securities and deliver a high-conviction portfolio at a cost that allows both the investor and the manager to win. We prefer ETFs because they are cheaper to operate and more tax efficient for investors (especially with rebalancing). That said, assuming someone is tax-indifferent and the all-in fees were exactly the same, an investor would likely be indifferent between an ETF or a mutual fund. For smaller cap strategies, where liquidity is an issue and daily transparency might cause problems for a manager, the mutual fund vehicle could be advantageous relative to an ETF.
MutualFunds.com: Can you bring us behind the scenes and tell us exactly what products the firm will be rolling out and what type of investor you’re targeting?
Wesley Gray: We don’t view anything we do as a “product,” rather, we aspire to educate our investors and provide them with the tools they need to achieve their goals. In fact, our firm’s mission is to empower investors through education. As a firm, we want our investors to understand how and why our strategies work. Once they have clarity on their goals, the solution is pretty straightforward: systematic, evidence-based, transparent strategies. Our current focus is to deliver what we call “affordable, active, alpha.” We focus on identifying what we believe is the best way to capture the value anomaly and the momentum anomaly – the two most robust return drivers identified in academic literature. But the strategy is only half of the equation. The next step is to deliver the high-conviction, high-performance, active management solution at an affordable cost to the investor. We keep costs low by going directly to the consumer and avoiding the middlemen that erode investor returns.
MutualFunds.com: How does the recent volatility play out in how you and your team are currently scanning for favorable entry points?
Wesley Gray: Our entire approach is systematic and evidence-based. If there was a robust, evidence-informed reason to allocate based on volatility signals, then we would do so … Unfortunately, we have never been entirely comfortable using volatility signals to time markets. Simply put, we just haven’t seen a compelling analysis to change the “story” into fact. Over the past few weeks, many of these signals suggest that it is a bad time to be invested in the stock market. Whether that story actually plays out is anyone’s guess.
MutualFunds.com: Being data driven, does your firm pay much attention to what the Federal Reserve and/or leaders in Washington are contemplating?
Wesley Gray: No. I hardly ever turn on CNBC, and I rarely, if ever, pay attention to macroeconomic or political events. That might seem puzzling, but remember, we only do things based on robust evidence. Currently, there is no convincing evidence that macroeconomic factors can predict asset price moves. We simply can’t find convincing proof. Similarly, we have never identified a way to predict what politicians are going to do … so why even waste time thinking about it? As Nate Silver’s book suggests: “Separate the signal from the noise.” As humans, we can quickly get overwhelmed with the inordinate amount of noise being provided in the marketplace. The danger is we interpret this noise as signal. What we should be doing is focusing on the actual signals. It just so happens that quantitative and statistical tools are built to do just that – keep us focused on the signals that matter. Nate has been successful using these tools in the political realm, and we see no reason why they can’t succeed in the financial realm.
The Bottom Line
DISCLOSURE: The views and opinions expressed in this article are those of the author’s, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.