Morningstar Advisor - October/November 2012 - (Page 50)

Morningstar Conversation Fitting Factors Into the Formula By Paul Justice Factor investing and asset allocation are two roads to the same destination, Cliff Asness and Rob Arnott say. Quantitative analysis in fund investing has well-established roots in the realm of attribution analysis. However, some of the observed anomalies that can lead to better practical results for investors have proved difficult to access for financial advisors. That doesn’t have to be the case. For this issue’s Morningstar Conversation, we talk with two quant-investing legends— Cliff Asness, co-founder of AQR Capital Management, and Robert Arnott, chairman of Research Affiliates—to gain insights on where academic theory is being practically applied in the marketplace. AQR, a hedge fund shop, recently rolled out a suite of factor-exploiting products in the mutual fund arena. Gone are the days of 2-and-20 fees for access to exotic betas a la carte. Research Affiliates, through its subadvisory of PIMCO All Asset PAAIX and its Fundamental Indexing concepts, has taken active quant investing to the masses (with strong performance, to boot). While both of these investors are renowned in both academic and practitioner circles for their cutting-edge work in quantitative analysis, they haven’t always seen eye to eye. In this conversation, we focus not on where the disagreements reside, but instead on where there is common ground. The result is some sage advice on how investors can assess and implement factor-based investing strategies today. Our discussion took place Aug. 21. It has been edited for clarity and length. Paul Justice: Let’s start with the comparison of style and size factors. For many years, investors have used models based on asset 50 Morningstar Advisor October/November 2012

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2012

Morningstar Advisor - October/November 2012
Letter From the Editor
Ill Communication
Do You Use Factor-Investing Strategies?
Practicing What She Preaches
How to Determine the True Price of ETFs
The Quant Factor
Managers Dispute the Death of Equities
Investments á la Carte
Investment Briefs
Five Inconvenient Truths of Manager Research
Health Care’s Outlook Clarifies
Exploring the World of Factors
Uncloaking the Alpha Machine
Factor Strategies Gain Footholds in Practices
Big Mo
Fitting Factors Into the Formula
Clients Have a Friend in Luther King
Less-Liquid Holdings Mean More-Solid Results
Retirement-Withdrawal Strategies Quantified
Amid Turmoil, Don’t Discount Foreign Equities
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Should I Stay or Should I Go?

Morningstar Advisor - October/November 2012