In this episode I speak with Jack Vogel, co-CIO of boutique ETF issuer Alpha Architect.
I’ve known Jack for some time now and was particularly excited to bring him on the show for two reasons. The first, which you will quickly learn in the episode, is his near encyclopedic knowledge of investing literature. I’ve met few investors who have both the breadth and depth of recall that he does for both academic and practitioner studies.
The second was because he helps manage a momentum strategy.
Almost every investor has, at one time or another, at least perused the pages of Graham’s Intelligent Investor and value investing is considered by most to be as wholesome as Warren Buffett drinking a Coca-Cola while eating apple pie.
Momentum, on the other hand, is often disregarded as performance chasing nonsense, with little foundation in the realm of real investing. Yet, as you’ll find in our conversation, deep care and thought goes into both understanding the anomaly itself and constructing a portfolio that can efficiently attempt to capture it.
If you are not already, subscribe to Flirting with Models here:
2:19 - Jack talks about his background as a certified high school math teacher and his path into finance.
5:16 - Jack reflects on his PhD program, the research he read, and the current p-hacking conundrum in the industry.
9:16 - The balance of data-driven evidence with a qualitative understanding of where an anomaly arises from.
12:45 - What is the risk-based argument for the existence of the momentum anomaly?
14:43 - Jack answers why he believes there are not more momentum strategies in the market-place.
17:33 - Jack discusses a recent piece of research published by O'Shaughnessy Asset Management, Factors from Scratch. Referencing Novy-Marx's 2015 paper Fundamentally, Momentum is Fundamental Momentum, Jack argues that momentum is not unlinked from fundamental growth.
20:26 - Jack dives into Novy-Marx (2015) and compares and contrasts fundamental momentum with price momentum.
24:21 - Jack describes Alpha Architect's Quantitative Momentum index.
26:45 - Jack weighs in on whether momentum can survive transaction costs. Paper references include The Illusory Nature of Momentum Profits, Are Momentum Profits Robust to Trading Costs?, A Taxonomy of Anomalies and their Trading Costs, Capacity of Smart Beta Strategies: A Transaction Cost Perspective, and Implementing Momentum: What Have We Learned?. (You can find more of Jack's thoughts on the subject here.)
32:37 - What are the size limit constraints on a momentum strategy?
35:50 - Jack discusses why – even if price momentum is technically subsumed by fundamental momentum – price momentum may be a better strategy from a diversification perspective. The discussion includes a reference to HIMCO Quantitative Insights – May 2018.
38:36 – Jack introduces the concept of Frog in the Pan and how trying to measure for continuous information may provide a better implementation of momentum.
44:08 – How different is Frog in the Pan from just a low-volatility screen?
45:44 – How different is Frog in the Pan from volatility-adjusted momentum or idiosyncratic momentum?
46:56 – Jack makes the argument for the benefits of keeping implementation simple.
49:49 – Jack discusses his thoughts behind the "recipe": the portfolio construction rules that take momentum signals and turn them into allocations.
52:20 – Corey uses a horrible pun to segue into a discussion about seasonality.
58:36 – Jack talks about whether style drift in momentum portfolios is a feature or a bug of the strategy.
1:01:05 – Is there anything that has surprised Jack in implementing a momentum portfolio in practice?
1:03:32 – Jack reflects on the biggest mistake or misunderstanding he sees investors and allocators make with respect to momentum.
1:05:11 – Jack discusses how he thinks about changing a strategy over time when confronted with new evidence or new information.
1:06:38 – If you were an investment strategy, what would you be and why?