Andrew Dyson appeared on 'Bloomberg TV: Markets: Americas' to offer perspective on value investing.
Read the transcript
- Quants are getting lashed by some of the most violent stock swings in more than a decade. This as fears of a second or continued virus outbreak fuel waves of Wall Street selling in some quarters. For more, we're joined now by Andrew Dyson, QMA's CEO and Chairman. Andrew, what's your reading of the situation for quants over the last several months? It's been a volatile market for everybody, but in general, the indices have been going up.
- Yes, it's definitely been a volatile market, as you rightly say, and as everybody knows. It's been a story of two halves. First quarter was obviously very difficult for the market as a whole. And certainly my view would be value was particularly badly hit, without real logic to it. And quants obviously we're driven by logic, not emotion, and then as markets have recovered, albeit in a sort of zig zag fashion in the second quarter, so you've seen value and quants like ourselves who rely heavily on value do much better as a result.
- What's the outlook for the rest of the year? Have you been able to take advantage of some of the swings? Have you changed what factors you prioritize, for example?
- Well, our processes generally try to lean into cycles, if you like. We're great believers in that more broadly. So what you want to do is you want to tell we're not exclusively dominated by value or by quality. We use a broad range of factors and what we try and do is tilt in more heavily as things get cheaper and cheaper. So as value got to frankly, quite extreme, as extreme as we've ever seen relative prices at the end of the first quarter. So naturally we would lean more heavily into that so we can participate more on the upswing than it cost on the downswing. And obviously we do feel that upswing has a lot further to go as well.
- Can you perhaps give us an example of a couple of trades that emanate from that kind of process, Andrew?
- Well, we can't talk about individual stock names as a generalization.
- That's a part of the rules with which we operate, but I do think you can see if you look, particularly in the smaller cap space that was hit particularly badly, just the value side more generally, you can find individual companies at significant discounts in terms of things like price to book to their longterm history, but yet are not particularly badly affected. And so you can see that there are these enormously cheap companies on the one side, and yet there are companies on the other household names where the emotion is just run ahead of itself. It's not that these companies don't have strong gross, but that they're priced for perfection and then some, in a way that that just never plays out. So, as I say I can't name them unfortunately on air, but in terms of those stories, on both sides, you can see the forgotten stocks and you can see the ones that have just got, the emotion has just run right, I would say.
- Yeah, absolutely. So you're basically talking about long trades anyway. Talk to us about this coming value mana, if you like. There are a lot of value investors out there waiting for this as well. And timing is such a huge thing with this trade. Some of the biggest names missed the last great rotation devalue, just after 2001.
- Yeah, the fascinating thing about value versus growth is that there's two components to the story. There's what's actually happening to the earnings of the companies, and then how is the market pricing those. And we know growth companies grow more quickly, but we also know the market overprices that future growth. And that's been the history of value's outperformance since it's been recognized as the star. The very interesting thing over the last couple of years is actually value has the earnings of the value companies. The gap to the earnings of the growth companies has been less than normal. So even though value has been underperforming, it's not been based on the tangible part of the process, the earnings, it's been based on the emotional and irrational part, which is how much are people willing to pay for those. And so actually you've got to expect that that gap, if you like, between reality and emotion will come through. And, and as you rightly say, for example, after the tech bubble, which has probably the most close parallel I can think of to this, that reckoning was very, very sharp indeed and more than eradicated the underperformance.
- Is there any--
- in a similar environment.
- Yeah, is there anything macro-wise that might mess with your process or your quant strategies right now? Like if, for example, we saw massive federal reserve response to the pandemic. Did that change anything for you? Or if we see more fiscal stimulus or even just the economy not reacting how the fed hopes it will, does that make you rethink any of your strategies?
- I don't believe so. The mispricing, or at least what we see as a mispricing, is very deep and very endemic. It's not located in one sector. It's not located in just a handful of stocks. It's right across the market, and the irony, and we published some recent work on this, the irony is actually, even before the pandemic, the growth stocks much more than usual were priced for perfection and were much more exposed to earnings and growth disappointments. So I don't see any individual factors that would disturb that. But what we do, I think, need to see is just some sort of normalization of the earnings that more make the revaluation clearer.
- All right. Well, Andrew, thank you so much. Pleasure to speak with you and to get your insights. Andrew Dyson is QMA CEO and Chairman. QMA, of course, a division of PGM as well. This is Bloomberg.