Morningstar Magazine - October/November 2016 - 74
Investors
to always remember when you're doing strategic
beta is that it's not always going to outperform
the market.
Benz: Well, that's a risk-that some of the factors
that investors are gravitating to may be those
that have recently outperformed and are less likely
to outperform in the near future. Investors
might abandon ship, and then we're back into that
whole bad behavioral cycle again. For example,
low-volatility strategies are a really easy sell right
now relative to just taking a big factor bet
on value. Advisors have an easy time getting
comfy with, "Yes, we're putting these tilts
into my client portfolios." That's the potential
risk-they'll capitulate when that factor
inevitably underperforms.
Kaplan: There's another side to this, too, which
Arnott has been talking about of late. If the
strategies become too popular, the prices of the
securities that the strategies load up on
could be getting pushed up just by the demand
for the strategy. Eventually, they might come
crashing down.
Benz: So, the multifactor product attempts
to solve for this issue by bundling a
bunch of factors together. A risk of any product
like that is that it behaves a lot like the
broad market, but maybe you're paying a little
bit more for it.
Davidson: These are all different types of beta,
right? There's no best beta or worst beta.
They're really just different dimensions along
which expected returns move.
One of the things the rationalist camp has
tried to do is to isolate the unique risk associated
with these strategies, so you can form a
value-minus-growth portfolio that's market-neutral
but that still has some variance. Well, that
variance is due to that factor dimension-
the value-growth dimension. The real question
is what are the rewards for taking on
these different types of risk? Why is market
risk more rewarded than value risk, for
example, even though these are unique sources
of variance?
74
Morningstar October/November 2016
We are hard-wired for optimism, and we're
hard-wired to find the data that supports
our view, whether that be for index investing,
investing in gold, or investing in stock
futures. It doesn't matter.
Steve Wendel
Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016
Contents
Morningstar Magazine - October/November 2016 - Cover1
Morningstar Magazine - October/November 2016 - Cover2
Morningstar Magazine - October/November 2016 - 1
Morningstar Magazine - October/November 2016 - 2
Morningstar Magazine - October/November 2016 - Contents
Morningstar Magazine - October/November 2016 - 4
Morningstar Magazine - October/November 2016 - 5
Morningstar Magazine - October/November 2016 - 6
Morningstar Magazine - October/November 2016 - 7
Morningstar Magazine - October/November 2016 - 8
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Morningstar Magazine - October/November 2016 - 19
Morningstar Magazine - October/November 2016 - 20
Morningstar Magazine - October/November 2016 - 21
Morningstar Magazine - October/November 2016 - 22
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Morningstar Magazine - October/November 2016 - 28
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Morningstar Magazine - October/November 2016 - 35
Morningstar Magazine - October/November 2016 - 36
Morningstar Magazine - October/November 2016 - 37
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Morningstar Magazine - October/November 2016 - 63
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Morningstar Magazine - October/November 2016 - 73
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Morningstar Magazine - October/November 2016 - 89
Morningstar Magazine - October/November 2016 - 90
Morningstar Magazine - October/November 2016 - 91
Morningstar Magazine - October/November 2016 - 92
Morningstar Magazine - October/November 2016 - 93
Morningstar Magazine - October/November 2016 - 94
Morningstar Magazine - October/November 2016 - 95
Morningstar Magazine - October/November 2016 - 96
Morningstar Magazine - October/November 2016 - Cover3
Morningstar Magazine - October/November 2016 - Cover4
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