Antonio Picca: From Index Investing to Factor Investing at Vanguard (EP.173)
The Rational Reminder Podcast
Is There a Valuation Gap Between the Factors and the Market?
Vangard: I wouldn't worry about being too technical. The listeners at this podcast tend to be on the more technical sides. Aa, she see, namtises not to name names that have formalized the very same framework. But i will tell you this, without necessarily a number on factors, i'd say that in the next three to five years we are going to see higher than historical returns.
In our conversation this week, we take a deep dive into factor investing. We are joined by the formidable Antonio Picca, Head of Factor Strategies at Vanguard, to help us navigate this complicated topic. Antonio is one of the largest asset managers in the world, with over seven trillion dollars under management. Among his credentials is a Master's in Finance and Economics from the London School of Economics, as well as a Doctorate in Finance and Economics from Chicago, where he was also a teaching assistant with Gene Fama. During our discussion, we cover a broad series of questions on factor investing, while also venturing into deeply technical territory. We examine how one might make the transition to factor investing after gaining confidence in passive investing and unpack important questions around factor investing and risk. Another fascinating topic we cover is how factor investing resembles active investing, including some crucial distinctions. Next, we take a look at some of the negative connotations of active investing and investigate why those issues may not apply to factor investing. Antonio goes on to explain why factor investing is a natural extension of a broad equity market investing and illustrates how it aligns with Vanguard’s philosophy, which is a belief in low-cost, long-term focus, and broad diversification. You won’t want to miss this excellent opportunity to gain a deeper understanding of factor investing from one of the leading experts in the field. Tune in today to hear it all!
Key Points From This Episode:
- Introducing today’s guest Antonio Picca, Head of Factor Strategies at Vanguard. [00:00:17]
- How Antonio would explain factor investing to an existing Vanguard client who's already sold on the idea of low-cost, cap-weighted index investing. [00:03:16]
- Why clients need to be educated on factor investing, and why factor investing is a form of active investing. [00:04:31]
- The benefits of targeting other factors in addition to the market risk factor. [00:05:20]
- Some of the drawbacks to a strategy that targets other factors in addition to the market risk factor. [00:06:41]
- How Vanguard helps clients determine whether factor investing is the correct course of action for them. [00:08:19]
- The role that cap-weighted investing plays in the structure of factor products when capital forms the core of your investing, and factor portfolios are secondary. [00:09:35]
- How investors should think about sizing their factor position, relative to their market cap-weighted position. [00:11:12]
- How they decide which factors to target in Vanguard's product lineup. [00:12:37]
- Vanguard’s approach to capacity when considering factors. [00:15:03]
- How Vanguard decided to target momentum as a standalone factor. [00:16:24]
- More on the liquidity factor and how Vanguard is targeting it. [00:17:40]
- A breakdown of what the value factor is. [00:20:12]
- Why factor investors should want to be active, rather than follow a factor index, despite the negative connotations that come with active investing. [00:22:25]
- Why negative connotations of active aren’t applicable to active factor investing. [00:24:27]
- The frequency with which factor funds need to be rebalanced to effectively capture the factor premiums. [00:25:52]
- Instances where it is possible to quantify the benefit of more frequent rebalancing, or more flexible rebalancing. [00:27:01]
- Some of the days in early 2020 where there were market movements of multiple percentage points and how Vanguard made decisions accordingly. [00:28:05]
- Antonio's thoughts on the prospect of quantifying premiums for factors. [00:30:46]
- The paper that Vanguard is currently working on to determine whether it is possible to time factor premiums, or whether investors maintain consistent exposure to them. [00:32:32]
- How factor investing is different from traditional active management. [00:33:51]
- Some of the instances where a factor portfolio can replace an active manager. [00:35:40]
- Antonio’s experience leading the factor group at Vanguard during a period when large-cap growth stocks have dominated so powerfully. [00:36:43]
- How Antonio addresses client concerns that factor premiums have changed or decreased. [00:39:30]
- Antonio’s thoughts on winner-take-all companies and their proliferation. [00:41:47]
- What Antonio advises investors should be looking for when they're choosing a factor fund. [00:45:49]
- Some insights into how Antonio’s clients are using factor products. [00:47:15]
- How Antonio approaches combining multiple factors. [00:48:33]
- Antonio shares his thoughts on do-it-yourself investors implementing factor portfolios and why he thinks advisors are essential. [00:50:21]
- How Antonio defines success in life and investing. [00:54:38]
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