Here’s a look at some of these firms’ strategies.

Temasek Holdings: $283 billion

Singapore’s state-owned investor plans to target companies with a focus on digitization, e-commerce, cyber-security and growing sustainability, seeking to make their investors’ portfolios greener. China accounts for 27% of its portfolio, and they plan to remain bullish there in the long term, expressing optimism that Chinese stocks will rise over time, even without access to U.S. markets.

GIC Pie: est. $545 billion

This sovereign wealth fund, also in Singapore, remains positive on China as well, claiming their assets continue to offer good entry levels. The fund is paying close attention to geopolitical forces and is looking to technology and sustainability. GIC sees other exchanges in places like Singapore and Hong Kong as “vibrant” alternatives if China can’t list in America.

Future Fund: $144 billion

Due to the increasingly fraught relationship between Australia and China, this Australian sovereign wealth fund has pulled back from China. CEO Raphael Arndt believes that economic conditions are now ripe for a sustained inflation increase, and they are  readying their portfolios for that, planning to allocate stocks across value and quality-type strategies. The fund recently bought stakes in a wind farm operator and cellphone towers.

Pictet Wealth Management: $300 billion

Apply a higher risk premium and choose Hong Kong-listed options if possible, suggests this firm, which also believes that hedge funds are back in favor. Their CIO Cesar Perez Ruiz says he’s looking for picks that can weather the different stages of the pandemic recovery and to do that he’s skipping metrics like return on equity.

Norges Bank Investment Management: $1.3 trillion

Because of its huge size, this Norwegian sovereign investment vehicle has few options but to wait it out. China accounts for 5% of its allocations and regulatory concerns aren’t necessarily a reason to cut back there, pointing to tech companies as a positive business model that they still believe in.

China Renaissance: $8.8 billion

China Renaissance’s approach is to focus on growth-stage companies; looking at Chinese startups considered less susceptible to government scrutiny. They plan to invest in about 10 companies a year.

Lombard Odier (Private Bank): $347 billion

CIO Stephane Monier predicts banking, auto and energy stocks will perform well in the coming months. The bank remains bullish on China in the long term, and favors China-listed stocks that won’t have to contend with as much government intervention, pointing to banking, renewable energy, materials and industrial stocks, while cautioning against tech, property, education and health care.

DWS Asia Pacific: $55 billion

The time is ripe to invest in select Indian-listed IT service providers, says CIO Sean Taylor, who believes it could be at least a year before regulatory issues in China are figured out enough for investors to see clearly.

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Cooperman says there are no stabilizers in effect and that Wall Street ethics have been in decline for years. Investors and institutions should follow the rules in place, Cooperman added, and goes on to claim that the current market turmoil isn’t a war between the rich and the poor, and that the poor can still achieve the American Dream by coming up with an in-demand product and gaining upward mobility. Bloomberg countered that those with assets have continued to see their wealth increase dramatically under the Fed’s regime, while those without assets have missed out, and have less opportunity to achieve their American Dream.

Cooperman pointed back to 2008 when the government started providing life support to the market by creating wealth. Though that was the right thing to do at the time, he says, 80% of the wealth was owned by 20% of the people. Then the government spent the next decade taking the wealth they created away by creating an environment where there’s no return on savings.

Injecting over $1 trillion more into the economy in stimulus and conducting policy focused on getting unemployment back to pre-Covid levels, Cooperman says, has resulted in an unsustainable situation that won’t have a good ending.

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Taking the traditional definition of value as just buying the stocks with the lowest price-to-book multiples, value has wildly underperformed growth in recent years and continues to sag in the U.S., Japan and Europe even after a rally late last year. So why should we believe that this is a good time to buy?

Arnott’s argument is to look at valuation, and using that definition value looks better than growth. It has also rebounded quicker after times of financial crisis. But it hasn’t bounced back as readily this time, and so its relative valuation is extraordinarily cheap. Buying a value stock at a deep discount gives you greater opportunity to profit as they rebound.

The hotel and airline sectors provides a good example of a second bite at value stocks. After an impressive recovery earlier this year, the delta variant caused a renewed slide, making many of these stocks dirt cheap. As the travel industry begins to recover again, this second opportunity may not last long.

With a spate of recent central bank meetings and the looming possibility that more central banks will raise interest rates, as well as the sharp rise in bond yields in late September, it’s important to note that there is a solid relationship between the strength of the economy—and with it the steepness of the yield curve—and the relative performance of value. At a time when so many assets look badly overvalued, a shift to value stocks may work in the medium term.

The post Mr. Market: Take A Second Bite At Value Stocks appeared first on Validea's Guru Investor Blog.

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As of 2018, when an expose about his father’s tax returns appeared in the New York Times, Trump was estimated to have outperformed the market index by about $1 billion, making him worth $3.1 billion. He continued to stay well ahead of the S&P 500 until last year, when the pandemic turned markets upside down. It’s estimated that he lost $1 billion in a span of weeks, the article reports.

With Trump’s hotels, office buildings, and storefronts all languishing, the S&P 500 caught up and overtook him earlier this year. If Trump had simply invested his inheritance into the index, he’d be worth about $3 billion, earning him the 377^th spot for The Forbes 400. Instead, he’s been bumped off the list entirely for the first time in 25 years. Between the hundreds of million dollars in debt coming due over the next three years, his preoccupation with politics, and longtime executive of The Trump Organization Allen Weisselberg under indictment, his prospects for getting back onto the list don’t look too bright.

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Mutual funds generated tens of billions of dollars a year in fees reliably, and survived the dot-com crash in 2000. But 7 years later, actively managed mutual funds took a beating during the financial crisis. Investors started looking around for other options and ETFs, with their array of low-cost index funds that tracked broad markets, delivered investors what they wanted. Since 2007, investors have given $4 trillion to ETFs, and there are now more than 2500 of them.

ETFs are different in two ways that give them an advantage, the article contends. The first is cost: U.S.-based ETFs have a median expense ratio of 0.5% a year, as opposed to mutual funds’ 0.93% across all share classes. That difference can add up to tens of thousands of dollars over a lifetime of investing. Second, ETFs are more tax efficient since they trade like stocks and don’t stick shareholders with a tax bill if the holdings have appreciated when money is withdrawn.

With the Covid-19 sell-off last year accelerating flows into ETFs, some mutual fund companies are starting to launch their own ETFs or convert existing mutual funds into ETFs to meet growing demand. Mutual funds will still be around for a while—there’s more than $17 trillion currently in actively managed funds—but the future belongs to ETFs.

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Factor timing has always been one of the most alluring areas of investing for me. It is very clear that all factors have periods where they go in and out of favor, and if it is possible to time those periods to identify the factors to invest in (and the ones to avoid), that could be a significant source of alpha.

But despite its allure, the process of timing factors is much more difficult in practice than it might seem in theory. It not only requires a system to identify the factor to over or underweight. It also requires a system to get the timing right enough to take advantage of the signals. For example, it might have been easy to identify that value was cheap in 2018, but it was much harder to time an entry point to take advantage of that given that its underperformance continued for a long time after that.

Given how difficult factor timing is, I think any discussion of the methods that can used to do it should be prefaced with two major questions:

[1] Can Factors Be Timed?  

There has been substantial research done in this area with mixed results.  AQR looked at timing using valuation in their paper 2017 “Contrarian Factor Timing is Deceptively Difficult” and concluded that it is much harder than it looks. They found better results using momentum in their 2019 paper “Factor Momentum Everywhere”.  Research Affiliates found strong results using valuation in their 2016 paper “Timing “Smart Beta” Strategies? Of Course! Buy Low, Sell High!”. And in their 2021 paper “Factor Timing: Keep It Simple”, they found that a system that combines value and momentum works best and were less optimistic about factor timing based on macroeconomic variables.  

So can factors be timed? I think the best answer I can come up with based on the research is “probably, but its complicated”.

Which brings me to the second important question.

[2] Should Factors Be Timed?

On the surface, it would seem the answer to these two questions should be the same. After all, if factor timing can increase returns, then why wouldn’t you do it? The answer to that lies in the difference between the academic world and the real one. In academic research, an investor always follows their investment strategy. They never panic when it loses money. They never alter their approach when they underperform.

But the real world doesn’t work that way. And the one thing you see in the factor timing results across the board is that sticking to these types of strategies is very hard. To understand why, think back to my value investing example from earlier in the article. Value became cheap well before it showed any significant outperformance (and its underperformance still dwarfs the bounceback). Although value investors saw strong results in the wake of the latest bear market, investors trying to time it had to sit through a lot of pain to get there. Most investors have a difficult time doing that. And this is true of the other approaches to timing as well.

The Three Major Timing Approaches

If my attempt to rain on your factor timing parade in the first half of this article didn’t deter you, I will use the second half to look at the different approaches in more detail and the results we have seen with each of them in our factor timing models.

Value

Value is probably the most widely used approach, and it is the one that makes the most sense to many investors because it involves trying to buy low and sell high. Generally, factor timing using value is done by looking at valuation spreads. Spreads are just the gap between the cheapest group of stocks using the factor and the most expensive group. When that spread is wide, the factor is seen as cheap and exposure is added to it.

This can be used to build a portfolio in different ways, but we generally prefer to always maintain exposure to multiple factors. For the reasons I talked about earlier, going all in on one factor can be dangerous and very difficult behaviorally. We also like to use a composite of all the major value factors to limit our exposure to a single factor. In the history of our factor timing models, which goes back to 2006, value has worked as a timing factor, but the additional performance it has generated has only been marginal.

Momentum

Factor timing using momentum is exactly what it would seem. Additional exposure is added to the factors with the best intermediate-term momentum (most systems I have seen use something between 3- and 12-month momentum).  Just like with value, with our system we use multiple time frames to limit the risk that we pick the wrong one, and to smooth returns. Momentum is probably the most supported approach to factor timing in the academic research and we have found the same thing in our models, with momentum outperforming both value and macro factors by a fairly wide margin.

Macroeconomic Factors

Using macroeconomic factors can be more complicated than the other two. It requires that two different decisions be made correctly. First, you need to identify which factors work best in which environments (i.e high growth, inflation, recession etc). Second, you need to identify which environment you are in at any given time, which can be more challenging given that economic data typically has a significant delay to it. For our system, we use two primary indicators. The first is a quadrant system similar to that used by other practitioners that tries to identify the current stage of the cycle by looking at the rate of change in GDP growth and inflation.

The second is a series of more one-off type indicators that look for certain situations that favor a specific factor. For example, Verdad has found that high yield spreads can be used as a predictor of good times to invest in value. Or research has shown that the change in the slope of the yield curve can help to identify favorable conditions for value. The end result of all of this, however, tends to also support what the academic research has found, which is that timing factors using macroeconomic data is probably the least successful approach. The model we track that only uses these factors has underperformed the market since 2006. But we have found that when used in a composite along with value and momentum, macroeconomic factors can enhance returns.

The Challenges of Factor Timing

When I ask other factor investors I talk to about factor timing, I typically get two responses. First, they talk about the research that shows that factors are typically very difficult to time. But second, they also talk about how they actively do it in their own portfolio. And I do the same thing. So it is hard for me to sit here and discount the approach when I have used it myself throughout my investing career. But what my experience tells me is the same thing the academic research shows. And that is that the benefits of factor timing are likely small, and the challenges of implementing the strategy in the real world are likely large. For investors who can sit through the bad periods, it may make sense, but for most investors, the benefit may not be worth the cost.

Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at Validea.com and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.

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The trio predicts that cryptocurrency is headed for a huge crash and tech stocks are a bubble that will soon burst. It would be easy to bet that they are right, especially with investors allowed to bet against a variety of stocks, short ETFs and trade options and futures through an array of discount brokers and trading apps. But the dark side of shorting is that while it’s safe to assume that the market will drop eventually, it’s impossible to know when. Timing is everything in shorting, and if it’s not precise, it’s costly.

Taking the long view has two key advantages, the article contends. In going long, time is on an investor’s side; the longer the investor is in the market, the better the odds that they’ll make a profit. And because there isn’t a cap on how high the market can climb, investors have more to gain than lose. At worst, they’ll lose only what they invested. Buying a wide range of stocks is one simple approach that is likely to pay off over time because the U.S. economy should continue to expand.

Legendary investors like Warren Buffett tend to take the long view, and even the star short trio of Einhorn, Burry and Paulson haven’t been able to recreate their one-time successes. Einhorn shorted Tesla and Netflix, only to be dealt huge losses as those stocks remain high, and Paulson wound up closing his fund last year. As Kaissar writes in the article, “I’m not aware of a single investor who has been able to consistently make money shorting.”

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In recent days, bitcoin has rallied, jumping about 10% despite the persistent threat of regulatory crackdowns from governments across the globe, as well as misgivings about its large environmental footprint. However, in the U.S. both the Treasury Secretary Janet Yellen and SEC Chair Gary Gensler have said they do not plan to impose restrictions on cryptocurrency trading, the article continues.

Bitcoin isn’t rallying alone. Ether’s price has tripled this year so far, jumping from $1000 to $3000. But many professional investors see bitcoin as just another bubble. According to a recent survey, 74% of those polled believe bitcoin is on highly speculative ground.

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Many investors find analytical models that value future cash flows too speculative, and rely instead on shorthands such as applying multiples of price to earnings. This might save time, but multiples lack clarity by conflating drivers of corporate value like profit margins, investment needs, and sales growth.

Instead, taking an “expectations investing” approach may help overcome the disadvantages of a model that uses multiples. The strategy has 3 steps, outlined in the article:

• Reading price-implied expectations. An open-minded investor can do well if they start with price to then discern the market’s expectations for a company’s value drivers.
• Apply strategic and financial analysis to determine if expectations are too high, too low, or just right. The point here is to determine which driver of value is most important, in order to develop scenarios of probable outcomes.
• Lastly, compare the expected value to the stock price in order to make an informed decision to sell or buy.

This approach provides a measured, thoughtful way to make investment decisions.

The post Investors Should Look Harder At Expectations appeared first on Validea's Guru Investor Blog.

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Most stock trading takes place between 9:30am and 4pm Eastern Standard Time on weekdays only, with exchanges closed on holidays. But 24 Exchange would operate continuously, like foreign-exchange and cryptocurrency markets. Led by Dmitri Galinov, a 20-year veteran of electronic trading, 24 Exchange is 3 years old and already offers trading in FX and crypto. Though its parent company, 24 Exchange Bermuda Ltd., is incorporated in Bermuda, the proposed 24/7 stock exchange would be run by a U.S. subsidiary.

As noted in the article, Galinov recently said that, more and more, individual investors are demanding stock trading outside of standard business hours, especially given the round-the-clock nature of crypto. If there’s a big news item over a weekend, investors can’t really pounce on it until the next business day.

24 Exchange would also cater to international investors with an eye on trading U.S. stocks. But there’s no guarantee that the SEC would approve its proposal, and even if it did it would be well into 2022 before the SEC gave its final decision. Some analysts think the plan faces an uphill battle; despite some desire to have 24-hour trading, professional traders also like having the ability to go home and have a life after the market closes.

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