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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