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Wednesday, June 15, 2016

Arnott vs Asness

News summary by MFWire's editors

When it comes to timing the market, two factor investing bigwigs recommend that you "sin a little."

Rob Arnott
Research Affiliates
Chairman, Chief Executive Officer
Research Affiliates chief Rob Arnott and AQR [profile] chief Cliff Asness took the main stage yesterday at the 2016 Morningstar Investment Conference at McCormick Place in Chicago. Ben Johnson, Morningstar's director of global ETF and passive strategies research and editor of Morningstar ETFInvestor, moderated the discussion.

Barron's, ETF.com, and InvestmentNews all covered the debate.

Cliff Asness
AQR Capital
Co-Founder, Owner
More and more asset managers are pushing into "strategic beta" (also known as "smart beta"), and such strategies are gaining a bigger chunk of the overall pie. In February Arnott and his team famously asked how strategic beta can "go horribly wrong" thanks to the effect of inflows thanks to its soaring popularity. Yesterday's Arnott vs. Asness debate delved deeper into Arnott's worries on that front.

In the M* debate Arnott urged advisors and investors to ask "what am I paying for?" and is this strategic beta strategy (favoring value, or momentum, or some other factor) "cheap relative to historic norms". Yet Asness called market timing a sin, and he and Arnott both recommended that investors "sin a little," though Asness said he prefers diversifying among different factor strategies to trying to time one factor or another.

Both Arnott and Asness talked about the importance of behavioral biases, which lead to investors suffering, for example, by buying high and selling.

Other highlights of the debate included: Asness, a former PhD student of Eugene Fama of the efficient market hypothesis fame, declaring himself "courageously in the middle" when it comes to markets' efficiency or lack thereof; Arnott calling value "the granddaddy of all factors"; Asness and Arnott using the word "wedge" to mean completely different things, and Asness apologizing for the confusion; Arnott paraphrasing George Soros to say that "correct investing is painful'; Asness declaring that "the problem is people don't give a crap" about the relative cheapness of value strategies; Arnott responding to the possibility of an all-passive nightmare future by telling an attendee "you've spent 15 years fretting over something that will never happen"; and Arnott pointing out that at the end of 2015 a low-beta strategy would've labeled Amazon, Facebook, and Netflix as low beta.

"I didn't know that," Asness replied. "I pride myself on not knowing what's in our portfolios. I'm a quant." 

Edited by: Neil Anderson, Managing Editor

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