Oct 28, 2021
In our conversation this week, we take a deep dive into factor
investing. We are joined by the formidable Antonio Picca, Head of
Factor Strategies at Vanguard, to help us navigate this complicated
topic. Antonio is one of the largest asset managers in the world,
with over seven trillion dollars under management. Among his
credentials is a Master's in Finance and Economics from the London
School of Economics, as well as a Doctorate in Finance and
Economics from Chicago, where he was also a teaching assistant with
Gene Fama. During our discussion, we cover a broad series of
questions on factor investing, while also venturing into deeply
technical territory. We examine how one might make the transition
to factor investing after gaining confidence in passive investing
and unpack important questions around factor investing and risk.
Another fascinating topic we cover is how factor investing
resembles active investing, including some crucial distinctions.
Next, we take a look at some of the negative connotations of active
investing and investigate why those issues may not apply to factor
investing. Antonio goes on to explain why factor investing is a
natural extension of a broad equity market investing and
illustrates how it aligns with Vanguard’s philosophy, which is a
belief in low-cost, long-term focus, and broad diversification. You
won’t want to miss this excellent opportunity to gain a deeper
understanding of factor investing from one of the leading experts
in the field. Tune in today to hear it all!
Key Points From This Episode:
- Introducing today’s guest Antonio Picca, Head of Factor
Strategies at Vanguard. [00:00:17]
- How Antonio would explain factor investing to an existing
Vanguard client who's already sold on the idea of low-cost,
cap-weighted index investing. [00:03:16]
- Why clients need to be educated on factor investing, and why
factor investing is a form of active investing.
- The benefits of targeting other factors in addition to the
market risk factor. [00:05:20]
- Some of the drawbacks to a strategy that targets other factors
in addition to the market risk factor.
- How Vanguard helps clients determine whether factor investing
is the correct course of action for them.
- The role that cap-weighted investing plays in the structure of
factor products when capital forms the core of your investing, and
factor portfolios are secondary. [00:09:35]
- How investors should think about sizing their factor position,
relative to their market cap-weighted position.
- How they decide which factors to target in Vanguard's product
- Vanguard’s approach to capacity when considering factors.
- How Vanguard decided to target momentum as a standalone factor.
- More on the liquidity factor and how Vanguard is targeting it.
- A breakdown of what the value factor is.
- Why factor investors should want to be active, rather than
follow a factor index, despite the negative connotations that come
with active investing. [00:22:25]
- Why negative connotations of active aren’t applicable to active
factor investing. [00:24:27]
- The frequency with which factor funds need to be rebalanced to
effectively capture the factor premiums.
- Instances where it is possible to quantify the benefit of more
frequent rebalancing, or more flexible rebalancing.
- Some of the days in early 2020 where there were market
movements of multiple percentage points and how Vanguard made
decisions accordingly. [00:28:05]
- Antonio's thoughts on the prospect of quantifying premiums for
- The paper that Vanguard is currently working on to determine
whether it is possible to time factor premiums, or whether
investors maintain consistent exposure to them.
- How factor investing is different from traditional active
- Some of the instances where a factor portfolio can replace an
active manager. [00:35:40]
- Antonio’s experience leading the factor group at Vanguard
during a period when large-cap growth stocks have dominated so
- How Antonio addresses client concerns that factor premiums have
changed or decreased. [00:39:30]
- Antonio’s thoughts on winner-take-all companies and their
- What Antonio advises investors should be looking for when
they're choosing a factor fund. [00:45:49]
- Some insights into how Antonio’s clients are using factor
- How Antonio approaches combining multiple factors.
- Antonio shares his thoughts on do-it-yourself investors
implementing factor portfolios and why he thinks advisors are
- How Antonio defines success in life and investing.