Wes Gray Interview - Factor Strategies And Common Sense Quant For Everyone

22nd Nov '18 by Ben Hobson

12 comments 7666 reads

Wes Gray runs his boutique investment firm Alpha Architect with the determination you’d expect of a former US Marine. In a competitive industry dominated by big names, his small team of ‘quant ninjas’ are endeavouring to make themselves unkillable.

They’re doing it by bringing factor strategies and quant investing to regular investors. There’s no black box or secret sauce, and there’s no flashy office. Instead they’re leading on education - with blogs, books and research - to show how factor premiums can deliver long term outperformance - even though they’ll make your life hell at times (at least on a relative performance basis).

Alpha Architect is based at Wes’s home on the outskirts of Philadelphia. Standing among the desks and monitors in the kitchen is an eight-foot stuffed grizzly bear. Walk through to the back and it opens into a huge space, with more large stuffed animals - including a leopard. The house was once owned by a game hunter but Gray (typical for a classic value investor) bought it in a distressed sale - and the stuffed animals came for free. Now it’s a symbol of his efforts to offer transparent, marketing-free, win-win ‘affordable alpha’ with strategies that most investors can’t stomach on their own or can’t find anywhere else.

Wes and his team currently manage just over a billion dollars of client money, roughly half of which is spread across their 5 exchange-traded funds. They include US and international versions of Quantitative Value and Quantitative Momentum plus a crossover Global Value Momentum Trend strategy that was launched in 2017. The ETFs are concentrated and regularly refreshed to keep them as closely aligned to the value and momentum factors they aim to profit from.

I went to visit Wes and his team and spent three hours talking about football, finance and the epic battle they are preparing for in their mission to take more concentrated factor portfolios to the masses...

Wes, tell me about how you got into investing and your journey from being a value stock picker to a quant-driven factor junkie?

Ben Graham was my first intro to investing. I grew up on a ranch in Colorado and I came into a little money early on when I sold my 4-H steer at the county fair. My grandmother was an old-school value stock-picker and she was the only one in the family who even knew what…

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Lawman

22nd Nov '18

The 'Value' concept does not appeal to me: in part because it has not worked for some time, and in part for the reason Mr Gray gives: the volatility.

However, if you cut through the slang, swearing and hype, Mr Gray gives convincing reasons as to why it will work - at some time - and how. In particular, he goes for 'concentration'. O'Shaughnessy wrote in recent months on similar lines: that a 1000 stock Value Factor ETF will not work.

A good article for those to whom Value appeals.

Mark Penney

It would be interesting to see his investment process in action and performance since inception?

DWit199

I expect you already know the answer, but here are the published figures

Quantitative Value (QVAL) etf 21/10/2014 +11.3% S&P 500 +36.1%
Quantitative Momentum (QMOM) etf 1/12/2015 +1.8% S&P 500 +25.6%

jonesj

Generally I prefer to learn from people who succeed.
When both the value and momentum funds underperform, I will pass on this.

underscored

You can learn from both, life is trial and error.

iwright7

23rd Nov '18

Wes Gray has two excellent books which look at factors that back test well for Value and Momentum. I gather that he is recently particularly keen on EV to FCF as the best cheap Value metric.

However since he wrote the books his fund results have been mediocre. I suspect that the Value fund will work best in a falling (or recovering) market, neither of which has occured since his ETFs were launched. The Momentum ETF should have produced better results and I personally believe that both the Value and Momentum criteria could be improved by an element of Quality, to eliminate some of the dross. Did I hear QVM anyone?

Well learning from failure can be helpful. However, I still think I am doing better by following successful investors, who still value learning from failure and often give examples.

As for Wes Gray, I also listened to an "Invest Like The Best" podcast with him on it.
That was one of the less useful podcasts, but it's episode 47 for those interested.

Metatron

28th Nov '18

At the start of the year I thought it was time for hated deep value stock to do well but it has not worked out.The stockscreen threw up names like Connect and Debenhams

nemo

Whether we like it or not are not all of us fooled by randomness? Do not all successful 'mechanical' strategies eventually end in failure? Better to buy wisely and sell as little as possible, all expenses of so doing coming out of any profit...

PeterV

As a close follower of Wes I say his analytics are typically great. But the AlphaArchitect funds underperform indeed. Wes will likely point us to his 'even-god-would-get-fired-as-an-active-investor' article to convince us that underperformance is frequent even in great money-making engines. What I find puzzling is that Value is supposed to be kind of in counterphase with Momentum and yet both funds are underperforming. I'm trying to address this and find that there is massive variation between funds calling themselves Momentum or Value. Too many parameters perhaps (lookback period, holding period, but easy to forget rebalance date) so they all end up in chasing randomness indeed.

johnwmcguire

I own an ETF from Alpha Architect, the reason to own them is that they will follow the script and remove your emotions from doing the actual trades yourself. Strategies based on empirical evidence.

There is also a critical tax efficiency benefit from putting these strategies into an ETF wrapper...the investor does not deal with the capital gains tax drag from the trading.

Any strategy can lag for years at a time - like buffet for the last 10 years, I think under performed for 7 out of 10 years, but still ended up ahead of the S&P 500. Wish there was something that worked all the time, but that probably doesn't exist.

TomMK

5th Dec '18

"don't worry about the returns."

Sure!

Wes Gray Interview - Factor strategies and common sense quant for everyone

Wes, tell me about how you got into investing and your journey from being a value stock picker to a quant-driven factor junkie?

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Ben Hobson

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