This week, Morningstar held its annual Investment Conference. Attended primarily by financial advisers, the conference is notable for both its size and its mutual fund focus (though there were sessions on other topics). This week, I’ll share some of my notes and observations. You’ll see a few articles resulting from meetings I had at the conference in future issues of the AAII Journal.
One of the topics brought up was smart beta, or as Morningstar refers to it, strategic beta. These strategies emphasize certain risk factors (stock characteristics shown to have a return premium associated with them). Rob Arnott of Research Affiliates and Cliff Asness of AQR Capital Management both cited value and momentum as factors that lead to higher stock returns. Asness does not see value, momentum and low volatility as being “arbitraged away soon.” He wasn’t sure about profitability but described it as being interesting enough to look at over the long term. Though associated with a lower risk premium, he thinks the profitability factor is uncorrelated with value.
Arnott thinks investors should check “the price tag” of what they are buying since factors can become overvalued when too many people are using strategies based on the same risk factor. He observed that people tend to pile into what has worked recently and shift out of what has hurt them recently. Arnott described this pattern as a sign that even though investors know they should buy low and sell high, they don’t do it. Arnott then added that the essence of successful investing is fighting against human nature.
More on AAII.com
- Weight by Fundamentals, Not by Price – Rob Arnott explained his approach to creating portfolios based on smart beta strategies.
- Exploring the Optimal Equity Allocation Path for Retirees – David Blanchett gave his rationale for why it makes sense to gradually reduce exposure to stocks heading into and throughout retirement.
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Highlights from the AAII Journal
- Micro-Cap Stocks Are Less Widely Followed, Offer Benefits – Michael Corbett of Perritt Capital Management makes the case for adding micro-cap stocks to a portfolio in this month’s issue.
- A Second Look at How Target Date Funds Change Their Allocations – At the Morningstar conference, Bill McNabb pointed to the success of target date funds as an example of how it’s difficult to predict what the next big innovation in the investment industry will be. Here’s an updated look at what target date funds do.
AAII Sentiment Survey
Bearish sentiment rose to its highest level and neutral sentiment fell to its lowest level since February. Even with the big jump, pessimism remains within its typical historical range. More about this week’s results.
What’s Trending on AAII
- 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses
- Why a New Allocation Approach Is Needed
- Using Cash and Short-Term Bonds to Avoid Taking Losses in Retirement
The Week Ahead
On Thursday, British voters will be asked, “Should the United Kingdom remain a member of the European Union or leave the European Union?” BBC News has a good article explaining the upcoming Brexit referendum.
We’ll get our first glimpse at second-quarter results as a group of early reporters step up to the plate. Among them are S&P 500 members Adobe Systems (ADBE), CarMax (KMX), FedEx Corp. (FDX) and Lennar Corp.(LEN) on Tuesday; Bed Bath & Beyond (BBBY) and Red Hat (RHT) on Wednesday; and Accenture Plc (ACN) on Thursday.
The week’s first economic report will be May existing home sales, released on Wednesday. Thursday will feature the June Purchasing Managers’ Manufacturing Index (PMI) flash and May new home sales. May durable goods orders and June consumer sentiment will be released on Friday.
Two Federal Reserve officials will make public appearances: Chair Janet Yellen on Tuesday and Dallas president Robert Kaplan on Thursday.
The Treasury Department will auction $26 billion of two-year notes on Monday; $34 billion of five-year notes on Tuesday; and $13 billion of two-year floating rate notes (FRN), $28 billion of traditional seven-year notes and $5 billion of 30-year inflation-protected securities (TIPS) on Wednesday.
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