October 22, 2024 • 30 mins
The quality factor is ranked second on the BI Factor Scorecard as higher-quality companies are beating lower-quality ones against a backdrop of a more defensive market. On this episode of Inside Active, host David Cohne, mutual fund and active-management analyst with Bloomberg Intelligence, along with co-host and BI US quantitative strategist Christopher Cain, spoke with Tom Hancock, head of Focused Equity at GMO and portfolio manager for the GMO US Quality ETF (QLTY), about how the fund combines GMO’s history of integrating the quality factor in its research with the firm’s roots in value investing. They also discussed why profitability is such an important element of their quality-factor research, and how QLTY differs from its mutual fund counterpart.
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Speaker 1 (00:13):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active Research at Bloomberg Intelligence.
Today I'm joined by Christopher Kaine, us quantitative strategist at
Bloomberg Intelligence. Chris, thanks for joining me today.
Speaker 2 (00:35):
Thank you for David.
Speaker 1 (00:37):
So you wrote a note last week on the BI
factor scorecard. Can you tell our listeners what the scorecard
is and where the quality factor currently rings?
Speaker 2 (00:46):
Sure? So the design of the scorecard is to inform
let's call it tactical decision making around factors or timing factors,
if you will. Now that's a bit of a controversial subject,
no doubt about it. But some, you know, many clients
do want, you know, to be a little tactical around
the factors. So the factor scorecard really takes two broad
(01:08):
you know, variables into account. It's the the the trends
of the long short factors themselves, which has been shown
to at least somewhat predict future factor returns, as well
as the relative valuations of the long and the short
legs and how that compares the history. So of our
five main factors, which is low ball, quality, momentum, value,
(01:29):
and small size, we have a quality as the second
best or the second highest on the on the scorecard,
low volatility is number one. Now, both low volatility, as
far as long short factors, and quality have done very
well this year. You know, even though the market is
you know, coming to all time highs or making all
time highs, there is a bit of a defensive tone
(01:50):
of the market, meaning like low vall stocks are beating
high vall, high qualities beating low quality. So both of
those trends are positive. That's why they're number one and
number two. Now. Lowvall is number one because its valuations
historically are not extreme, whereas quality is a little expensive
historically when you look at the high quality verse low
(02:12):
or high quality versity index, so that does drop it
down just a notch. So quality number two. Momentum is
the middle of the pack, and in value in small
size around out the scorecard great well.
Speaker 1 (02:22):
Speaking of quality, I'd like to welcome Tom Hancock, head
of Focused Equity and a portfolio manager at GMO. Tom
manages the GMO US Quality ETF ticker qlt Y, and
a number of other funds at the firm. Tom, thank
you for taking the time to speak with us today.
Speaker 3 (02:40):
Hey David, thanks for having me.
Speaker 1 (02:42):
So I'd like to begin by asking you about your
investment background. Can you tell us how you got your
start in investing.
Speaker 3 (02:49):
Yeah, so I've been at GMO, granted maya an autoloo
for approaching thirty years now. I joined in nineteen ninety five,
and maybe not coincidentally, this is the only investment industry
job I've had. My background before GMO was actually in
computer science. I worked as a software engineer for a period,
then I went to grad school did academic research actually
(03:11):
in the artificial intelligence area, which is the time a
little bit of a sleepy backwater. And for many years
I said, I mean there were great right to rear
choice to come into investments. Now I'm not so sure,
but nonetheless I've enjoyed it for thirty years, so I
think it was still the right choice. And so with
that kind of quantitative background when I joined GMO, one
of the things GMO is known for is quantitative investing,
(03:32):
fundamental quantitative investing, things like quality factors, and that's kind
of how I got my start, initially in portfolio optimization construction,
then into the investment models, then into portfolio management. Originally
just on the quantitative side, but I've transitioned over the
last couple decades into more of a traditional fundamental role.
(03:54):
But I have that dual quantum fundamental background, that is
the background in which a lot of our stredges are managed,
including the quality ETF. It's sort of a quant fundamental hybrid.
You could say, that's.
Speaker 1 (04:06):
An interesting approach. Actually, so can you give us an
overview of the GMO approach to investig in I guess
talk more specifically about the investment process of QLTY.
Speaker 3 (04:16):
Yeah, speaking specifically to our quality strategy and the QLTY investment.
Our approach is bottom up, and we start with systematic
screening on a quality factor. Of course, everybody's quality factor
is a little bit different, but ours includes elements of profitability,
historical profitability, stability and that profitability, strong balance sheets, and
(04:40):
I should say, maybe to beat our own drum a
little bit, the having quality factors an integrade management investment
process goes all the way back to the nineteen eighty
stort GMO. So well, I'm not sure I could hold out.
Our factor is being extremely differentiated. Now we're a very
early mover in that space. That quality factor, though, is
(05:01):
just a bit of a starting point for us in
two ways. One is integrating the fundamental work. So companies
that have a great history, as measured by this approach
are probably high quality, but not all of them are
in a forward looking sense, at least in our views.
So we want to screen out a few companies that
we don't think meet that the bill looking forward. We
(05:23):
also want to be a little bit open minded for
companies that maybe are newer and don't have the history,
have all the attributes to being a quality business, but
don't fit the backward looking quant screen. That's one thing,
and then the second thing is that we integrate valuation
into our approach as well. So we don't want to
buy quality companies at any price. We want to buy
quality companies at a reasonable price. If you go back
(05:45):
through GMO's history, we actually originally were very much a
deep value manager when the firm was founded. The integration
of quality came kind of later in the game, as
the founders, Jeremy Granthams, appreciated the benefits of quality companies,
but we actually started from value. Now we do it
in the other order. We start with quality for our
strategy and then add value to it. But that is
(06:06):
I think an important differentiator from a lot of quality managers,
whether they be active or passive. Is that valuation tilt
as well.
Speaker 2 (06:15):
That's really interesting, Tom, I mean, you know, you're kind
of still in my thunder. I had some of these
questions already, but you know, one of my questions to you,
which you already answered, was is your process completely systematic
or is there some discretionary elements? Obviously there is some
discretionary elements.
Speaker 3 (06:30):
You know.
Speaker 2 (06:30):
I do speak to a lot of our customers that
do want to do something like that, right, I mean
they want to They're not pure quants, but they want
to use quant screens to maybe whittle down a universe
and then use their fundamental analysis and kind of discretionary
decision making. So can you expand on that a little bit?
Like you don't have to give specifics, but I mean,
is it more like you're screening for quality stocks and
(06:53):
you're just kind of like kicking out the bad apples
or is it more like you're you're just picking the
best ones? How does the fundamental research. And again you
have to go in specifics, but how does the fundamental
research happen with those stocks? Do you do you have
different analysts look into the companies. A little more insight
there would be really helpful.
Speaker 3 (07:10):
Yeah. I mean, I think there's a lot to that,
and it's been forever answering that question. But I think
it is mainly about bad apples or maybe not great apples.
Let's say they're not all rotten companies. I mean some
might be a company like well, not today. A couple
of years ago, Intel would have, for example, screened is
(07:31):
a very high quality, and that would be an example,
a real life example where while we didn't maybe foresee
all their problems, we would have said and did say, hey,
you know this model they had where you integrate building
the chip with designing the chip was kind of yesterday's model.
And now the actual manufacturing is so expensive and complicated.
(07:53):
It's consolidated at TSMC and the fabulous companies at the lead.
So the future isn't going to be like the past.
Would be sort of an example. One of the things
we've also found just with our quantitative scoring is sometimes
they can get fooled by a cycle. So a more
simple example kind of is just you go back to
the financial crisis, Like home builders look really great for
(08:15):
a number of years. Has just been such a long
bull cycle for them that they were scoring very well,
but we felt they at their heart weren't quality businesses.
So that's very important part of what we do. Our
portfolio is reasonably concentrated. It has about forty stocks in it,
so it's not like every stock we don't own we
(08:36):
think is definitely a bad company. There's also a portfolio
management element of sort of curating it into a basket.
That is, we have high conviction we can follow each
of these companies, we have the human capacity for that,
and yet at the same time give us diversification between
different kinds of quality stocks. And I heard earlier talking
about sort of low vall, which is different from quality
(08:58):
but sort of related. One kind of quality stock is
or of those more defensive companies. But equally, we think
the growth companies that of course have been the winner
or the last decade. There's Microsofts and so forth. Those
high quality growth companies are also high quality. And we
think even within sort of what you might think of
as a narrowly targeted group like quality, you can actually
got a fairly diversified basket of Going back to your
(09:21):
original question about what do we do, sort of fundamentally
beyond the screening, our valuation is also an important fundamental aspect,
and we're not necessarily trying to find these totally discounted
fifty cent on the dollar kind of companies that tends
not to exist in a high quality universe. We want
to at least find reasonably priced companies and avoid companies
(09:42):
where maybe the business is great, but the stock price
has just gotten way ahead of it.
Speaker 2 (09:47):
Thank you. Quality is one of those factors. I would
say it's the factor with the most let's call it
dispersion in definitions, you know, I mean I think you know,
we know what momentum is, we know about value is.
You could have your own spin on a value or
momentum factor, but it's not gonna be that different. I mean,
you touched on, you know, profitability in my experience, and
(10:11):
you're the experts, so please feel free to push back.
But profitability seems to be like the constant in almost
every quality factor I've seen. And then you usually see
things like low leverage, like you said, financial stability, things
like volatility of earnings or sales. I've always seen things
like a CRULS, so you don't have to give away
(10:31):
the secret sauce, but like, how do you like do
you equally wait those different types of descriptors, how do
you think about combining those things with your quality factor?
Speaker 3 (10:42):
And maybe to start a little bit with the history
and I'll give you kind of a long ash answer
that question because it's important. One is and when GMO
started as a value investor and we're buying things like
low price to book, low pe stocks in nineteen eighty,
what we're realized we were missing was these companies got
a high return on their investment capital when they reinvested,
(11:04):
they had growth opportunities they could invest in, they got
high return on that. Therefore they should should create a
premium valuation, and we weren't buying them. So we started
from a place of how should we adjust the valuation
target of companies to take into account these better businesses.
And the key idea for us was companies that will
deliver a high return on capital on incremental investments. And
(11:28):
that's great, of course in theory, but that's the future.
You can't see the future, can do I see the past,
so we're looking at things that were predictive about of that.
And the focus on profitability is largely because profitability past
profitability is actually pretty predictive future profitable, but it's a
relatively stable characteristic, unlike if you look at growth factors,
they tend not to persist very long. So you know,
(11:50):
you buy growth portfolio, you don't have one in three
years is kind of the risk. So I'll tell you
that the secret sauce in nineteen eighty five, kind of
the very original version of a quality factor was simply
eight year history of high return on equity, eight year
stability in that return on equity, and low debt to
equity ratio. So it was profitability, stability, and balance sheet
(12:13):
and we ranked the universe on those companies and we
average the ranks. I think the worst one got halfway. Actually,
that was it for version one point zero. The version
we use now has a similar flavor in that there's
a profitability component, a stability of profitability component, and a
balanced street sheet strength component, and they have many more
(12:35):
components beneath them, and the combinations a little bit more complicated,
but in the spirit of that original idea, one thing
that's different about us, and I think goes back to
the fact that we actually think valuation is a big
part of the return driver too. Is when we think
about an improvement to our or change to our quality factor,
does this make it better or worse than what we're
using last year? The question we're tend to be asking
(12:58):
is does this predict future profitability better? So, if we
do back testing, it's not does this generate high return
in the market just as a quality factor. It's more
do the companies identified on this metric have better profitability
ten years from now than the ones that don't. So
we're focused on the fundamentals, and that does, I think
lead us to some differences in factors we highlight. So
(13:20):
things like acrules, which are sort of maybe a short
term alpha factor, they aren't really what we think of
as a quality factor, so they're not part of our metric.
They tend not to have meaning over as long horizon.
Things like stability or like stock price volatility. It's very
predictive of defensiveness, and so if you're looking for just
(13:42):
a defensive factor, it's great, but we're not looking just
for defensiveness. We tend to get defensiveness because if you
buy businesses where the profitability is reliable, when times are tough,
the profitability will be relatively reliable. It's more of an
outcome than explicit objective in our process. And then one
thing that you mention, and you're right, quality means lots
of things to lots of people. And I've never heard
(14:04):
of manager who says their process isn't high quality. But
one thing we don't use is dividend type metrics, so
stability and dividend, dividend growth, things like that. Not that
we have anything against dividends. We like receiving them, but
what we like even better is companies that reinvest in
a high rate of return. So they think there are
a lot of great, high quality companies that don't pay
a dividend because they're growing the business. Of course, we
(14:26):
want companies that when their growth opportunities dry up, they
return capital. But it's not the only way you could
be a high quality company.
Speaker 2 (14:34):
Yeah, that's some really great insight. I mean, you know,
that was one of my other questions you kind of
hit on. It was, you know, I've seen some quants,
you know, kind of lump in low risk, low vall
low beta, even things like low idiosyncratic volatility to their
quality factor, because the thought is like they're similar ideas.
But I always view the low risk factor as a
(14:55):
as a separate factor from quality. I would it sounds
like you agree with that.
Speaker 3 (15:00):
Yeah, yeah, we do.
Speaker 1 (15:01):
Yeah, you mentioned growth, so I kind of want to
touch upon that a little bit. I'm guessing it's part
of the fundamental approach, you know, after you've screened you know,
so I'm just interested in the evaluation of growth. How
do you assess growth opportunities in these companies as part
of the process.
Speaker 3 (15:17):
Yeah, and what it is, You're right, it's part of
the fundamental approach. And now it's not because we it's
kind of because it's harder. I guess for us, the
earlier point is we haven't cracked the nut on how
to find good quantitative metrics for predicting growth over longer periods.
And I guess the one is that the obvious one
(15:37):
is high valuation. That's a very good predictor, but that's
you know, history would suggest you don't want to include
high valuation in your quantitative model. Is a positive selection criteria,
So that's not so helpful for us. So when we
think about growth. What we're really mindful of is who
has growth that is really going to be sustainable. So
(15:59):
the kind of growth we like is when there's a
secular trend that we feel a company can latch onto,
So for example, demographic trends and what that might imply
about healthcare, we are willing to the broader the trend
is the better. So we feel very comfortable with say,
(16:20):
semiconductor tech content growing broadly, and if your growth as
a company is sort of levered to that broad thing,
that's great. If it's a specific technology, that's where we
are going to be, let's say more conservatives. So honestly,
something like artificial intelligence, we're probably going to be on
the more conservative side. As that gets into a more
(16:41):
specific thing our just experiences, it's harder for us to
get that right. And then beyond the secular growth that
they might be associated with an industry, the other thing
we're asking ourselves around an individual company is they're probably
going to benefit from if they're in that industry. They'll
benefit initially because that rising tide raise all boats. The
question is do they have a competitive advantage that will
(17:04):
allow them to maintain and grow their share to get
more than their fair share of the pie. Hopefully, so
the kind of company where, because of its growth, will
pay a higher multiple four will be one that's sort
of in the participating in the early stages of a
secularly growing industry and as a super strong competitive position
(17:25):
that we think won't be dislodged. So a intuitive surgical
for example, in surgical robotics, there's not just broad healthcare trends.
There's robotic assisted surgery, which you think has a lot
of legs and their strong competitive position within that. The way,
we kind of think of that as not so much
about higher growth within the next one or two years.
(17:45):
We're more focused on durability above average growth because finding
those companies that can really outgrow the market for five
ten years that's actually pretty hard and those are pretty
rare companies, so it's not like anyone can do that.
Speaker 1 (18:00):
That makes sense. I also want to ask you about
the portfolio. You know, so if you look at the
portfolio on the website as of I don't know, I'm
guessing that's as of August. I noticed a lot of
large caps. Are you finding more quality in large caps
as opposed to more of the you know, other mid
or smaller cap companies.
Speaker 3 (18:17):
Yeah, we are, and that's not a new trend. The
large cap universe, particularly in the US market, is a
much higher quality one. Not by definition, i should say,
but also if you're a great company and a big
business you are, do you tend to get large. There's
also a value hit, not so much today, but over
the past decade or so, there's a been a valuation
(18:39):
reason in our minds too, where we found smaller cap
quality companies that tend to be at a premium. That is,
that has changed a little bit in the last couple
of years. We actually did launch. It's not not in
the ETF format. The ETF is large cap, but the
we do have a small cap quality strategy that's a
couple of years old. That's looking for kind of those
niche businesses that maybe they don't grow with much because
(19:02):
they're smaller cap. They do a specific thing, but they
do it really well. It's an important thing. So there
is quality there, but it's not it's not as prevalent.
Let's say, in the small cap universe.
Speaker 2 (19:13):
Tom, what about waiting your stocks? I mean, just looking
at the portfolio, it does seem to be market cap
weighted or at least partially market cap weighted, and please
correct me if I'm wrong. How do you think about that?
Is that kind of a function of liquidity and slippage concerns,
or how do you think about the waiting of the
stocks in the portfolio?
Speaker 3 (19:33):
Yeah, and you're right there. We're market cap weight in
the sense that we are close to S and P
five hundred type market cap, which is unusual for an
active manager. But we're not actually explicitly market cap waiting
our positions or managing directly to the benchmark for that matter.
The general framework for how we think about position sizing
(19:54):
is the quality of the business that's kind of a
maximum weight will hold in a stock, and then valuation
is a little bit of a you know, how far
through the dial should you be? So even the best
company in the world, we wouldn't hold it an expensive valuation,
et cetera, or probably won't hold unless your high quality.
So the biggest positions in the portfolio will be companies
(20:17):
that are we're convinced about black quality, and we're also
find the valuation very compelling, at least when we initially
bought the company. We do let winners run a bit
so that doesn't necessarily mean the the cheapest stock in
the world today, but they were very attractive when we
originally bought them. And then yes, liquidity matters, and there
(20:38):
are there will be a few smaller companies. Girrell hold
small or midcaps companies grow hold smaller positions, but if
you look at the top ten holdings in that kind
of name, these are obviously megacap type stocks. For liquid
is in the constraint for us.
Speaker 2 (20:50):
Yeah, because I talked to a lot of customers that
that ask me about this, like, are you, you know,
should you wait your stocks buy let's just call it
your expect did alpha of the of the of the company,
which does sound like in a way is what you're
doing or is it like a explicit you know, I
talked to other people that are it is you know,
the waiting decision is an explicit risk management thing, like,
(21:12):
you know, give me the highest expect to return for
you know, no ball over ten percent or something like that.
So I'm always interested in those the thought process behind
the stock weightings.
Speaker 3 (21:23):
Yeah, and we're maybe not as scientific of as any
of those things. I think one reason why we're not
I mentioned doing portfolio optimization earlier in my career is
I feel there's a risk that the technology around waiting
them becomes more and more sophisticated the actual precision of
the inputs, so you're kind of limited in or maybe
free if you're not that at precise in your valuations,
(21:45):
you probably shouldn't have your portfolio weights be very sensitive
to small changes in them. One thing we have changed
sort of philosophically in how we size positions is maybe
a decade ago would have been more like expected return rating.
You'd have a price target and that would feed into
what a position size should be, and we do a
(22:08):
fair amount of trading around that, and stock went up
a bit, we'd trim and vice versa. Now we think
of it a little more as kind of a corridor
of just don't take any action kind of so as
that was our earlier point about when we buy it
it has to be fairly cheap, but once it's sort
of in the portfolio, as long as we feel good
(22:28):
about the quality of the business and the company executing,
we will let it ride a little bit up and down,
and we have when characteristic you would see if you
looked at our longer term portfolio is turnover went down.
It used to be at one point about fifty percent
a year, so now it's super high but reasonably high,
and now it's more like twenty percent a year.
Speaker 1 (22:49):
I actually have a follow up question for that. You know,
you mentioned you know some stocks, you know their waitings
may increase. How do you handle risk when you might
have substantial exposure to an industry or sector, even to
a single security.
Speaker 3 (23:04):
Yeah, so everything I've talked about so far really has
been focused about individual securities. Of course, you do care
about the overall portfolio, and we certainly will trim back
positions if we think we are betting too much on
a thing in aggregate, or if there's another way I
think about as if one thing goes wrong or we're
wrong about one thing, how many of our valuations would
(23:26):
that or quality assessments would that invalidate? And well, we
don't manage a portfolio against the benchmark. We do manage
it in absolute terms from a diversification point of view.
So there's any number of things we might worry about,
obviously sector type things or you know, a thing that's
big on our mind over the last few years is
companies in entertwirement with China, and how much of a
(23:48):
risk factor that is, or any sort of macro variable
that might cut across a lot of the portfolio. We
don't really want to make calls on that. So if
we feel like we're just where we're finre stocks is
leading us in one direction, we will either trim back
on we will trim back on positions. The other thing
that will do is kind of affect our research agenda.
(24:09):
We're always you know, we have a limited human capacity
to downside of fundamental work is you need people to
do it, and that takes time and energy, and so
we want to direct it in the right place, in
the right places companies that are going to diversify the portfolio,
not finding the twelfth company in the same industry that yeah,
it may also be high quality and cheap, but doesn't
really bring anything you don't already have.
Speaker 2 (24:30):
I'm interested.
Speaker 3 (24:31):
Do you do you do?
Speaker 2 (24:32):
You do the same thing with like other factors, meaning
like let's say your portfolio for your ETF is very
you know, all the stocks are very high momentum, and
you run it through a risk model and it shows
very high exposure to to long for momentum. I'm just
I'm just making that as an example, would you do
any hedging there or would you just you know, whatever
(24:52):
quality is it is?
Speaker 3 (24:54):
So that's that is We definitely do a lot we
look at that kind of stuff. Momentum is an example
of the thing. We're all looking at our correlation with
momentum as well as sort of macro type variables. Momentum
sort of a it's a confusing, ephemeral kind of thing.
So if we saw a high correlation momentum, we'd probably
first be asking, Okay, what's going on behind that? And
(25:16):
it's probably going to be an answer something like the
markets being led by artificial intelligence stocks, those have all
the momentum. We have a bunch of those, so we
would probably the momentum would sort of be an indicator
that we should pay attention and then we peel a
few layers from the onion and then we'd say, yeah,
like we do have a lot of exposure to these stocks.
That doesn't mean we take down the risk. We might
look at them and say, yeah, we're that's a position
(25:38):
we're comfortable with. Let's we've re underwritten that. We'll hold
with it. But it's it creates conversations and sometimes we
will adjust the portfolio.
Speaker 2 (25:48):
And my last question is around rebalancing. I mean, you know,
the classic Quan portfolio is like rebalance every month, end
of the month. Is that what you do or is
it more like a dynamic rebalance skin or how does
that work?
Speaker 3 (26:02):
Yeah, so our extra trading doesn't follow a schedule. The
systematic inputs our quality factor. Yeah, it's a traditional quant
kind of thing. It's recomputed monthly. That gives us a
new screen to look at. However, it's also true that
the inputs to it are financial financial statement data that
(26:22):
almost entirely that doesn't even change even at a monthly frequency.
And then we're looking at profitability averaged over a long period. Deliberately,
we want to look across cycles, and so even if
one month changes, the whole screen can't change very much.
And so it's kind of like watching a paint dry
when you look at it every month. I would say,
by the way, that that makes it sound like qulant
(26:46):
screens are always going to be way behind the curve
and you know, too slow to react. One of the
advantages of a quant screen is because in the real world,
quality changes slowly is a fundamental analysis you may never
noticed it happening. It happened so slowly, and one of
the things over the last couple of decades it really
helped us by having the quant screening was identifying the
(27:08):
rise in tech companies, like fifteen years ago, it was
controversial to call it tech company quality. Technology is always changing,
there's always new leadership, too much volatility. But our quant
screening was saying, hey, look at these companies, like they
have high return on investments, the strong balance sheets, they
have all the signatures. Maybe something's going on there. And
(27:30):
we did fundamental work on top of that. But I
think having that quant screening really sort of dragged us
to led the horse to water. If you maybe didn't
make us drink, but certainly made us pay attention. That
was a bit of a digression from your earlier question
rebalancing the So the systematic part goes monthly, the actual
(27:51):
fundamental trading decisions are a little more at hoc. Let's say,
no calendar to that. And as I said, it's actually
relatively low level of turnover.
Speaker 1 (28:01):
So you also manage the GMO quality mutual fund aside
from the wrapper. Is there any differences between the two strategies.
Speaker 3 (28:11):
Yeah, there's one meaningful difference, which is that the mutual
fund has a global opportunity set and the quality ETF
is specifically a US quality ETF. In the mutual fund,
by weight, it's about eighty twenty between US and rest
of the world. The rest of the world stocks they're
large cap multinational, So if you're talking about NESTLEI or TSMCS,
(28:35):
know this is not hardcore international investing by any means,
but it does have that global opportunity set. And factly,
some people like that, They like that breadth of opportunity,
and some people are a little more stylebox oriented and
kind of wish we stuck a little bit closer to
our knitting to the extent people put us in a
large cap US core bucket. So when we started the ETF,
(28:57):
there are technical advantages to having just US listed US
time zone companies, but there's also a client demand for
a pure vehicle and the exposure to the US market.
So that is the difference.
Speaker 1 (29:10):
Okay, no, it makes sense now you have one.
Speaker 3 (29:12):
For each exactly I think for everyone.
Speaker 1 (29:16):
So my final question before I let you go, what
you note today that you wish you knew twenty years
ago in regards to investing.
Speaker 3 (29:25):
Yeah, well, if I think about my twenty years ago self,
it was a lot less sophisticated on the fundamental side.
It was a more skilled quantitatively, but I'd say generally
it was a little too much of a cynic and
too much of a contrarian and value based investor. And
that would be that would apply, you know, a factor
point of view, just too much in love with like
(29:46):
low multiple stocks, and maybe from a sort of sentiment
point of view, too much just too much of a contrarian,
like if everybody thinks something that most of the time
they're not wrong about it, right. So I think that's
something that based on my natural personality is softened a
little bit with age, and I think that's help helped
my investing results.
Speaker 1 (30:08):
Great, well, this is a great discussion. Tom, thank you
again for taking the time today.
Speaker 3 (30:13):
Yay, well, thank you, thank you, and I've enjoyed it
very much.
Speaker 1 (30:16):
And Chris thanks again for being my co host this week.
Speaker 2 (30:19):
Thank you David, and thank you Tom very much.
Speaker 1 (30:21):
Until our next episode. This is David Cone with Inside
Active
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active Research at Bloomberg Intelligence.
Today I'm joined by Christopher Kaine, us quantitative strategist at
Bloomberg Intelligence. Chris, thanks for joining me today.
Speaker 2 (00:35):
Thank you for David.
Speaker 1 (00:37):
So you wrote a note last week on the BI
factor scorecard. Can you tell our listeners what the scorecard
is and where the quality factor currently rings?
Speaker 2 (00:46):
Sure? So the design of the scorecard is to inform
let's call it tactical decision making around factors or timing factors,
if you will. Now that's a bit of a controversial subject,
no doubt about it. But some, you know, many clients
do want, you know, to be a little tactical around
the factors. So the factor scorecard really takes two broad
(01:08):
you know, variables into account. It's the the the trends
of the long short factors themselves, which has been shown
to at least somewhat predict future factor returns, as well
as the relative valuations of the long and the short
legs and how that compares the history. So of our
five main factors, which is low ball, quality, momentum, value,
(01:29):
and small size, we have a quality as the second
best or the second highest on the on the scorecard,
low volatility is number one. Now, both low volatility, as
far as long short factors, and quality have done very
well this year. You know, even though the market is
you know, coming to all time highs or making all
time highs, there is a bit of a defensive tone
(01:50):
of the market, meaning like low vall stocks are beating
high vall, high qualities beating low quality. So both of
those trends are positive. That's why they're number one and
number two. Now. Lowvall is number one because its valuations
historically are not extreme, whereas quality is a little expensive
historically when you look at the high quality verse low
(02:12):
or high quality versity index, so that does drop it
down just a notch. So quality number two. Momentum is
the middle of the pack, and in value in small
size around out the scorecard great well.
Speaker 1 (02:22):
Speaking of quality, I'd like to welcome Tom Hancock, head
of Focused Equity and a portfolio manager at GMO. Tom
manages the GMO US Quality ETF ticker qlt Y, and
a number of other funds at the firm. Tom, thank
you for taking the time to speak with us today.
Speaker 3 (02:40):
Hey David, thanks for having me.
Speaker 1 (02:42):
So I'd like to begin by asking you about your
investment background. Can you tell us how you got your
start in investing.
Speaker 3 (02:49):
Yeah, so I've been at GMO, granted maya an autoloo
for approaching thirty years now. I joined in nineteen ninety five,
and maybe not coincidentally, this is the only investment industry
job I've had. My background before GMO was actually in
computer science. I worked as a software engineer for a period,
then I went to grad school did academic research actually
(03:11):
in the artificial intelligence area, which is the time a
little bit of a sleepy backwater. And for many years
I said, I mean there were great right to rear
choice to come into investments. Now I'm not so sure,
but nonetheless I've enjoyed it for thirty years, so I
think it was still the right choice. And so with
that kind of quantitative background when I joined GMO, one
of the things GMO is known for is quantitative investing,
(03:32):
fundamental quantitative investing, things like quality factors, and that's kind
of how I got my start, initially in portfolio optimization construction,
then into the investment models, then into portfolio management. Originally
just on the quantitative side, but I've transitioned over the
last couple decades into more of a traditional fundamental role.
(03:54):
But I have that dual quantum fundamental background, that is
the background in which a lot of our stredges are managed,
including the quality ETF. It's sort of a quant fundamental hybrid.
You could say, that's.
Speaker 1 (04:06):
An interesting approach. Actually, so can you give us an
overview of the GMO approach to investig in I guess
talk more specifically about the investment process of QLTY.
Speaker 3 (04:16):
Yeah, speaking specifically to our quality strategy and the QLTY investment.
Our approach is bottom up, and we start with systematic
screening on a quality factor. Of course, everybody's quality factor
is a little bit different, but ours includes elements of profitability,
historical profitability, stability and that profitability, strong balance sheets, and
(04:40):
I should say, maybe to beat our own drum a
little bit, the having quality factors an integrade management investment
process goes all the way back to the nineteen eighty
stort GMO. So well, I'm not sure I could hold out.
Our factor is being extremely differentiated. Now we're a very
early mover in that space. That quality factor, though, is
(05:01):
just a bit of a starting point for us in
two ways. One is integrating the fundamental work. So companies
that have a great history, as measured by this approach
are probably high quality, but not all of them are
in a forward looking sense, at least in our views.
So we want to screen out a few companies that
we don't think meet that the bill looking forward. We
(05:23):
also want to be a little bit open minded for
companies that maybe are newer and don't have the history,
have all the attributes to being a quality business, but
don't fit the backward looking quant screen. That's one thing,
and then the second thing is that we integrate valuation
into our approach as well. So we don't want to
buy quality companies at any price. We want to buy
quality companies at a reasonable price. If you go back
(05:45):
through GMO's history, we actually originally were very much a
deep value manager when the firm was founded. The integration
of quality came kind of later in the game, as
the founders, Jeremy Granthams, appreciated the benefits of quality companies,
but we actually started from value. Now we do it
in the other order. We start with quality for our
strategy and then add value to it. But that is
(06:06):
I think an important differentiator from a lot of quality managers,
whether they be active or passive. Is that valuation tilt
as well.
Speaker 2 (06:15):
That's really interesting, Tom, I mean, you know, you're kind
of still in my thunder. I had some of these
questions already, but you know, one of my questions to you,
which you already answered, was is your process completely systematic
or is there some discretionary elements? Obviously there is some
discretionary elements.
Speaker 3 (06:30):
You know.
Speaker 2 (06:30):
I do speak to a lot of our customers that
do want to do something like that, right, I mean
they want to They're not pure quants, but they want
to use quant screens to maybe whittle down a universe
and then use their fundamental analysis and kind of discretionary
decision making. So can you expand on that a little bit?
Like you don't have to give specifics, but I mean,
is it more like you're screening for quality stocks and
(06:53):
you're just kind of like kicking out the bad apples
or is it more like you're you're just picking the
best ones? How does the fundamental research. And again you
have to go in specifics, but how does the fundamental
research happen with those stocks? Do you do you have
different analysts look into the companies. A little more insight
there would be really helpful.
Speaker 3 (07:10):
Yeah. I mean, I think there's a lot to that,
and it's been forever answering that question. But I think
it is mainly about bad apples or maybe not great apples.
Let's say they're not all rotten companies. I mean some
might be a company like well, not today. A couple
of years ago, Intel would have, for example, screened is
(07:31):
a very high quality, and that would be an example,
a real life example where while we didn't maybe foresee
all their problems, we would have said and did say, hey,
you know this model they had where you integrate building
the chip with designing the chip was kind of yesterday's model.
And now the actual manufacturing is so expensive and complicated.
(07:53):
It's consolidated at TSMC and the fabulous companies at the lead.
So the future isn't going to be like the past.
Would be sort of an example. One of the things
we've also found just with our quantitative scoring is sometimes
they can get fooled by a cycle. So a more
simple example kind of is just you go back to
the financial crisis, Like home builders look really great for
(08:15):
a number of years. Has just been such a long
bull cycle for them that they were scoring very well,
but we felt they at their heart weren't quality businesses.
So that's very important part of what we do. Our
portfolio is reasonably concentrated. It has about forty stocks in it,
so it's not like every stock we don't own we
(08:36):
think is definitely a bad company. There's also a portfolio
management element of sort of curating it into a basket.
That is, we have high conviction we can follow each
of these companies, we have the human capacity for that,
and yet at the same time give us diversification between
different kinds of quality stocks. And I heard earlier talking
about sort of low vall, which is different from quality
(08:58):
but sort of related. One kind of quality stock is
or of those more defensive companies. But equally, we think
the growth companies that of course have been the winner
or the last decade. There's Microsofts and so forth. Those
high quality growth companies are also high quality. And we
think even within sort of what you might think of
as a narrowly targeted group like quality, you can actually
got a fairly diversified basket of Going back to your
(09:21):
original question about what do we do, sort of fundamentally
beyond the screening, our valuation is also an important fundamental aspect,
and we're not necessarily trying to find these totally discounted
fifty cent on the dollar kind of companies that tends
not to exist in a high quality universe. We want
to at least find reasonably priced companies and avoid companies
(09:42):
where maybe the business is great, but the stock price
has just gotten way ahead of it.
Speaker 2 (09:47):
Thank you. Quality is one of those factors. I would
say it's the factor with the most let's call it
dispersion in definitions, you know, I mean I think you know,
we know what momentum is, we know about value is.
You could have your own spin on a value or
momentum factor, but it's not gonna be that different. I mean,
you touched on, you know, profitability in my experience, and
(10:11):
you're the experts, so please feel free to push back.
But profitability seems to be like the constant in almost
every quality factor I've seen. And then you usually see
things like low leverage, like you said, financial stability, things
like volatility of earnings or sales. I've always seen things
like a CRULS, so you don't have to give away
(10:31):
the secret sauce, but like, how do you like do
you equally wait those different types of descriptors, how do
you think about combining those things with your quality factor?
Speaker 3 (10:42):
And maybe to start a little bit with the history
and I'll give you kind of a long ash answer
that question because it's important. One is and when GMO
started as a value investor and we're buying things like
low price to book, low pe stocks in nineteen eighty,
what we're realized we were missing was these companies got
a high return on their investment capital when they reinvested,
(11:04):
they had growth opportunities they could invest in, they got
high return on that. Therefore they should should create a
premium valuation, and we weren't buying them. So we started
from a place of how should we adjust the valuation
target of companies to take into account these better businesses.
And the key idea for us was companies that will
deliver a high return on capital on incremental investments. And
(11:28):
that's great, of course in theory, but that's the future.
You can't see the future, can do I see the past,
so we're looking at things that were predictive about of that.
And the focus on profitability is largely because profitability past
profitability is actually pretty predictive future profitable, but it's a
relatively stable characteristic, unlike if you look at growth factors,
they tend not to persist very long. So you know,
(11:50):
you buy growth portfolio, you don't have one in three
years is kind of the risk. So I'll tell you
that the secret sauce in nineteen eighty five, kind of
the very original version of a quality factor was simply
eight year history of high return on equity, eight year
stability in that return on equity, and low debt to
equity ratio. So it was profitability, stability, and balance sheet
(12:13):
and we ranked the universe on those companies and we
average the ranks. I think the worst one got halfway. Actually,
that was it for version one point zero. The version
we use now has a similar flavor in that there's
a profitability component, a stability of profitability component, and a
balanced street sheet strength component, and they have many more
(12:35):
components beneath them, and the combinations a little bit more complicated,
but in the spirit of that original idea, one thing
that's different about us, and I think goes back to
the fact that we actually think valuation is a big
part of the return driver too. Is when we think
about an improvement to our or change to our quality factor,
does this make it better or worse than what we're
using last year? The question we're tend to be asking
(12:58):
is does this predict future profitability better? So, if we
do back testing, it's not does this generate high return
in the market just as a quality factor. It's more
do the companies identified on this metric have better profitability
ten years from now than the ones that don't. So
we're focused on the fundamentals, and that does, I think
lead us to some differences in factors we highlight. So
(13:20):
things like acrules, which are sort of maybe a short
term alpha factor, they aren't really what we think of
as a quality factor, so they're not part of our metric.
They tend not to have meaning over as long horizon.
Things like stability or like stock price volatility. It's very
predictive of defensiveness, and so if you're looking for just
(13:42):
a defensive factor, it's great, but we're not looking just
for defensiveness. We tend to get defensiveness because if you
buy businesses where the profitability is reliable, when times are tough,
the profitability will be relatively reliable. It's more of an
outcome than explicit objective in our process. And then one
thing that you mention, and you're right, quality means lots
of things to lots of people. And I've never heard
(14:04):
of manager who says their process isn't high quality. But
one thing we don't use is dividend type metrics, so
stability and dividend, dividend growth, things like that. Not that
we have anything against dividends. We like receiving them, but
what we like even better is companies that reinvest in
a high rate of return. So they think there are
a lot of great, high quality companies that don't pay
a dividend because they're growing the business. Of course, we
(14:26):
want companies that when their growth opportunities dry up, they
return capital. But it's not the only way you could
be a high quality company.
Speaker 2 (14:34):
Yeah, that's some really great insight. I mean, you know,
that was one of my other questions you kind of
hit on. It was, you know, I've seen some quants,
you know, kind of lump in low risk, low vall
low beta, even things like low idiosyncratic volatility to their
quality factor, because the thought is like they're similar ideas.
But I always view the low risk factor as a
(14:55):
as a separate factor from quality. I would it sounds
like you agree with that.
Speaker 3 (15:00):
Yeah, yeah, we do.
Speaker 1 (15:01):
Yeah, you mentioned growth, so I kind of want to
touch upon that a little bit. I'm guessing it's part
of the fundamental approach, you know, after you've screened you know,
so I'm just interested in the evaluation of growth. How
do you assess growth opportunities in these companies as part
of the process.
Speaker 3 (15:17):
Yeah, and what it is, You're right, it's part of
the fundamental approach. And now it's not because we it's
kind of because it's harder. I guess for us, the
earlier point is we haven't cracked the nut on how
to find good quantitative metrics for predicting growth over longer periods.
And I guess the one is that the obvious one
(15:37):
is high valuation. That's a very good predictor, but that's
you know, history would suggest you don't want to include
high valuation in your quantitative model. Is a positive selection criteria,
So that's not so helpful for us. So when we
think about growth. What we're really mindful of is who
has growth that is really going to be sustainable. So
(15:59):
the kind of growth we like is when there's a
secular trend that we feel a company can latch onto,
So for example, demographic trends and what that might imply
about healthcare, we are willing to the broader the trend
is the better. So we feel very comfortable with say,
(16:20):
semiconductor tech content growing broadly, and if your growth as
a company is sort of levered to that broad thing,
that's great. If it's a specific technology, that's where we
are going to be, let's say more conservatives. So honestly,
something like artificial intelligence, we're probably going to be on
the more conservative side. As that gets into a more
(16:41):
specific thing our just experiences, it's harder for us to
get that right. And then beyond the secular growth that
they might be associated with an industry, the other thing
we're asking ourselves around an individual company is they're probably
going to benefit from if they're in that industry. They'll
benefit initially because that rising tide raise all boats. The
question is do they have a competitive advantage that will
(17:04):
allow them to maintain and grow their share to get
more than their fair share of the pie. Hopefully, so
the kind of company where, because of its growth, will
pay a higher multiple four will be one that's sort
of in the participating in the early stages of a
secularly growing industry and as a super strong competitive position
(17:25):
that we think won't be dislodged. So a intuitive surgical
for example, in surgical robotics, there's not just broad healthcare trends.
There's robotic assisted surgery, which you think has a lot
of legs and their strong competitive position within that. The way,
we kind of think of that as not so much
about higher growth within the next one or two years.
(17:45):
We're more focused on durability above average growth because finding
those companies that can really outgrow the market for five
ten years that's actually pretty hard and those are pretty
rare companies, so it's not like anyone can do that.
Speaker 1 (18:00):
That makes sense. I also want to ask you about
the portfolio. You know, so if you look at the
portfolio on the website as of I don't know, I'm
guessing that's as of August. I noticed a lot of
large caps. Are you finding more quality in large caps
as opposed to more of the you know, other mid
or smaller cap companies.
Speaker 3 (18:17):
Yeah, we are, and that's not a new trend. The
large cap universe, particularly in the US market, is a
much higher quality one. Not by definition, i should say,
but also if you're a great company and a big
business you are, do you tend to get large. There's
also a value hit, not so much today, but over
the past decade or so, there's a been a valuation
(18:39):
reason in our minds too, where we found smaller cap
quality companies that tend to be at a premium. That is,
that has changed a little bit in the last couple
of years. We actually did launch. It's not not in
the ETF format. The ETF is large cap, but the
we do have a small cap quality strategy that's a
couple of years old. That's looking for kind of those
niche businesses that maybe they don't grow with much because
(19:02):
they're smaller cap. They do a specific thing, but they
do it really well. It's an important thing. So there
is quality there, but it's not it's not as prevalent.
Let's say, in the small cap universe.
Speaker 2 (19:13):
Tom, what about waiting your stocks? I mean, just looking
at the portfolio, it does seem to be market cap
weighted or at least partially market cap weighted, and please
correct me if I'm wrong. How do you think about that?
Is that kind of a function of liquidity and slippage concerns,
or how do you think about the waiting of the
stocks in the portfolio?
Speaker 3 (19:33):
Yeah, and you're right there. We're market cap weight in
the sense that we are close to S and P
five hundred type market cap, which is unusual for an
active manager. But we're not actually explicitly market cap waiting
our positions or managing directly to the benchmark for that matter.
The general framework for how we think about position sizing
(19:54):
is the quality of the business that's kind of a
maximum weight will hold in a stock, and then valuation
is a little bit of a you know, how far
through the dial should you be? So even the best
company in the world, we wouldn't hold it an expensive valuation,
et cetera, or probably won't hold unless your high quality.
So the biggest positions in the portfolio will be companies
(20:17):
that are we're convinced about black quality, and we're also
find the valuation very compelling, at least when we initially
bought the company. We do let winners run a bit
so that doesn't necessarily mean the the cheapest stock in
the world today, but they were very attractive when we
originally bought them. And then yes, liquidity matters, and there
(20:38):
are there will be a few smaller companies. Girrell hold
small or midcaps companies grow hold smaller positions, but if
you look at the top ten holdings in that kind
of name, these are obviously megacap type stocks. For liquid
is in the constraint for us.
Speaker 2 (20:50):
Yeah, because I talked to a lot of customers that
that ask me about this, like, are you, you know,
should you wait your stocks buy let's just call it
your expect did alpha of the of the of the company,
which does sound like in a way is what you're
doing or is it like a explicit you know, I
talked to other people that are it is you know,
the waiting decision is an explicit risk management thing, like,
(21:12):
you know, give me the highest expect to return for
you know, no ball over ten percent or something like that.
So I'm always interested in those the thought process behind
the stock weightings.
Speaker 3 (21:23):
Yeah, and we're maybe not as scientific of as any
of those things. I think one reason why we're not
I mentioned doing portfolio optimization earlier in my career is
I feel there's a risk that the technology around waiting
them becomes more and more sophisticated the actual precision of
the inputs, so you're kind of limited in or maybe
free if you're not that at precise in your valuations,
(21:45):
you probably shouldn't have your portfolio weights be very sensitive
to small changes in them. One thing we have changed
sort of philosophically in how we size positions is maybe
a decade ago would have been more like expected return rating.
You'd have a price target and that would feed into
what a position size should be, and we do a
(22:08):
fair amount of trading around that, and stock went up
a bit, we'd trim and vice versa. Now we think
of it a little more as kind of a corridor
of just don't take any action kind of so as
that was our earlier point about when we buy it
it has to be fairly cheap, but once it's sort
of in the portfolio, as long as we feel good
(22:28):
about the quality of the business and the company executing,
we will let it ride a little bit up and down,
and we have when characteristic you would see if you
looked at our longer term portfolio is turnover went down.
It used to be at one point about fifty percent
a year, so now it's super high but reasonably high,
and now it's more like twenty percent a year.
Speaker 1 (22:49):
I actually have a follow up question for that. You know,
you mentioned you know some stocks, you know their waitings
may increase. How do you handle risk when you might
have substantial exposure to an industry or sector, even to
a single security.
Speaker 3 (23:04):
Yeah, so everything I've talked about so far really has
been focused about individual securities. Of course, you do care
about the overall portfolio, and we certainly will trim back
positions if we think we are betting too much on
a thing in aggregate, or if there's another way I
think about as if one thing goes wrong or we're
wrong about one thing, how many of our valuations would
(23:26):
that or quality assessments would that invalidate? And well, we
don't manage a portfolio against the benchmark. We do manage
it in absolute terms from a diversification point of view.
So there's any number of things we might worry about,
obviously sector type things or you know, a thing that's
big on our mind over the last few years is
companies in entertwirement with China, and how much of a
(23:48):
risk factor that is, or any sort of macro variable
that might cut across a lot of the portfolio. We
don't really want to make calls on that. So if
we feel like we're just where we're finre stocks is
leading us in one direction, we will either trim back
on we will trim back on positions. The other thing
that will do is kind of affect our research agenda.
(24:09):
We're always you know, we have a limited human capacity
to downside of fundamental work is you need people to
do it, and that takes time and energy, and so
we want to direct it in the right place, in
the right places companies that are going to diversify the portfolio,
not finding the twelfth company in the same industry that yeah,
it may also be high quality and cheap, but doesn't
really bring anything you don't already have.
Speaker 2 (24:30):
I'm interested.
Speaker 3 (24:31):
Do you do you do?
Speaker 2 (24:32):
You do the same thing with like other factors, meaning
like let's say your portfolio for your ETF is very
you know, all the stocks are very high momentum, and
you run it through a risk model and it shows
very high exposure to to long for momentum. I'm just
I'm just making that as an example, would you do
any hedging there or would you just you know, whatever
(24:52):
quality is it is?
Speaker 3 (24:54):
So that's that is We definitely do a lot we
look at that kind of stuff. Momentum is an example
of the thing. We're all looking at our correlation with
momentum as well as sort of macro type variables. Momentum
sort of a it's a confusing, ephemeral kind of thing.
So if we saw a high correlation momentum, we'd probably
first be asking, Okay, what's going on behind that? And
(25:16):
it's probably going to be an answer something like the
markets being led by artificial intelligence stocks, those have all
the momentum. We have a bunch of those, so we
would probably the momentum would sort of be an indicator
that we should pay attention and then we peel a
few layers from the onion and then we'd say, yeah,
like we do have a lot of exposure to these stocks.
That doesn't mean we take down the risk. We might
look at them and say, yeah, we're that's a position
(25:38):
we're comfortable with. Let's we've re underwritten that. We'll hold
with it. But it's it creates conversations and sometimes we
will adjust the portfolio.
Speaker 2 (25:48):
And my last question is around rebalancing. I mean, you know,
the classic Quan portfolio is like rebalance every month, end
of the month. Is that what you do or is
it more like a dynamic rebalance skin or how does
that work?
Speaker 3 (26:02):
Yeah, so our extra trading doesn't follow a schedule. The
systematic inputs our quality factor. Yeah, it's a traditional quant
kind of thing. It's recomputed monthly. That gives us a
new screen to look at. However, it's also true that
the inputs to it are financial financial statement data that
(26:22):
almost entirely that doesn't even change even at a monthly frequency.
And then we're looking at profitability averaged over a long period. Deliberately,
we want to look across cycles, and so even if
one month changes, the whole screen can't change very much.
And so it's kind of like watching a paint dry
when you look at it every month. I would say,
by the way, that that makes it sound like qulant
(26:46):
screens are always going to be way behind the curve
and you know, too slow to react. One of the
advantages of a quant screen is because in the real world,
quality changes slowly is a fundamental analysis you may never
noticed it happening. It happened so slowly, and one of
the things over the last couple of decades it really
helped us by having the quant screening was identifying the
(27:08):
rise in tech companies, like fifteen years ago, it was
controversial to call it tech company quality. Technology is always changing,
there's always new leadership, too much volatility. But our quant
screening was saying, hey, look at these companies, like they
have high return on investments, the strong balance sheets, they
have all the signatures. Maybe something's going on there. And
(27:30):
we did fundamental work on top of that. But I
think having that quant screening really sort of dragged us
to led the horse to water. If you maybe didn't
make us drink, but certainly made us pay attention. That
was a bit of a digression from your earlier question
rebalancing the So the systematic part goes monthly, the actual
(27:51):
fundamental trading decisions are a little more at hoc. Let's say,
no calendar to that. And as I said, it's actually
relatively low level of turnover.
Speaker 1 (28:01):
So you also manage the GMO quality mutual fund aside
from the wrapper. Is there any differences between the two strategies.
Speaker 3 (28:11):
Yeah, there's one meaningful difference, which is that the mutual
fund has a global opportunity set and the quality ETF
is specifically a US quality ETF. In the mutual fund,
by weight, it's about eighty twenty between US and rest
of the world. The rest of the world stocks they're
large cap multinational, So if you're talking about NESTLEI or TSMCS,
(28:35):
know this is not hardcore international investing by any means,
but it does have that global opportunity set. And factly,
some people like that, They like that breadth of opportunity,
and some people are a little more stylebox oriented and
kind of wish we stuck a little bit closer to
our knitting to the extent people put us in a
large cap US core bucket. So when we started the ETF,
(28:57):
there are technical advantages to having just US listed US
time zone companies, but there's also a client demand for
a pure vehicle and the exposure to the US market.
So that is the difference.
Speaker 1 (29:10):
Okay, no, it makes sense now you have one.
Speaker 3 (29:12):
For each exactly I think for everyone.
Speaker 1 (29:16):
So my final question before I let you go, what
you note today that you wish you knew twenty years
ago in regards to investing.
Speaker 3 (29:25):
Yeah, well, if I think about my twenty years ago self,
it was a lot less sophisticated on the fundamental side.
It was a more skilled quantitatively, but I'd say generally
it was a little too much of a cynic and
too much of a contrarian and value based investor. And
that would be that would apply, you know, a factor
point of view, just too much in love with like
(29:46):
low multiple stocks, and maybe from a sort of sentiment
point of view, too much just too much of a contrarian,
like if everybody thinks something that most of the time
they're not wrong about it, right. So I think that's
something that based on my natural personality is softened a
little bit with age, and I think that's help helped
my investing results.
Speaker 1 (30:08):
Great, well, this is a great discussion. Tom, thank you
again for taking the time today.
Speaker 3 (30:13):
Yay, well, thank you, thank you, and I've enjoyed it
very much.
Speaker 1 (30:16):
And Chris thanks again for being my co host this week.
Speaker 2 (30:19):
Thank you David, and thank you Tom very much.
Speaker 1 (30:21):
Until our next episode. This is David Cone with Inside
Active
Host
Gina Martin Adams
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