Astoria’s Founder and CIO, John Davi, presented at the annual Inside Smart Beta Conference on June 3, 2019. Here are some of the key points that John discussed:
Macro Views of the Market
- Astoria believes markets are experiencing a global growth slowdown – not a recession. The current slowdown stems from an overly aggressive U.S. Federal Reserve in 2018, China’s economic slowdown, Europe’s economic and political issues, and renewed tariff concerns.
- In Astoria’s view, an inverted yield curve (+/- 10bps) for a few weeks or even a month isn’t a complete red flag. However, we would be concerned if the curve stays inverted for 1-2 quarters.
- Most asset classes are fully valued. There are pockets of equities where valuations are providing investors with a margin of safety (i.e. U.S. Value stocks, International equities).
- The Federal Reserve is a lagging indicator and by design, it is not meant to be proactive. Focus on the economic data and earnings!
- The futures market is currently pricing in an 87% probability for a rate cut for July.
- Doesn’t anyone realize that we had a mini recession in Q4 2018? At one point during the quarter, the S&P 500 was down 20%!
Tactical Portfolio Construction Views & Factor Investing
- Astoria believes tactical portfolios should own a lot of cash, alternatives (strategies that have negative correlations to stocks), gold, high-quality stocks, and bonds.
- Astoria has been vocal about using multi-factor ETFs rather than being outright long beta. Research shows that investors can get higher up on the efficient frontier if they were to harvest a basket of factors and hold them for the long run.
- Being long beta was a great strategy during the QE induced liquidity period of 2009 to 2017. Massive flows into low-cost beta ETFs also provided a great tailwind for the beta factor.
- Going forward, we believe diversifying across factors will provide a better risk/reward for portfolios.
- Astoria began allocating to the quality factor in Q4 2018. Back then, our models had indicated that the cycle was turning (and for the worse).
- The quality factor is one of the better performing factors over time. Historically, it has proven to be robust, pervasive, and persistent across sector, region, and asset classes.
- Buying high-quality stocks and bond-like proxies has become the big trend in the investment community. Be careful here. Valuations have gotten expensive.
- When selecting ETFs, Astoria recommends utilizing risk models and portfolio construction tools to assess the risk/reward. Astoria uses a combination of risk models to ensure there are no unintended factor consequences. For instance, in our February 2019 report (click here), we pointed out that DGRW provided a higher factor loading than many of its peers. Astoria continues to favor DGRW when implementing the quality factor (2019E = 15.3 vs. 16.9 for SPY).
- Over the past five years, DGRW has outperformed SPY by nearly 300bps in a period where markets were driven by extensive QE and low interest rates. If quality outperformed during a period of rampant QE, why wouldn’t it work as the cycle turns in the years ahead?
Best, John Davi
Founder & CIO of Astoria
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