The last year of the goat was in 2015. That hasn’t stopped goats from having a good 2017. Currently, seven states are using herds of goats to clear grass from rough terrain along highways and in medians. From the Washington Post:
The beauty of using goats, of course, is that they’re cheap and environmentally friendly. They even have a taste for invasive plants and noxious weeds. Give them a bunch of English ivy or porcelain berry vines to gobble up and, by goodness, they’re eager for more. Some become so keen on the task at hand that their minders don’t have to worry about them wandering off the job site, Hecox said. “Goats have a special talent,” he said. “They are really, really focused.”
Oftentimes we compare investors, en masse, to sheep. Maybe goats are a better analogy. As long as there is grass, “invasive plants or noxious weeds” to eat, goats keep at it. Investors similarly continue to graze certain patches of grass until they are picked clean. Of late, it seems quant strategies seem to be the latest investment field to become overgrazed.
This is due in part to the fact that strategies and tactics that were once the sole province of quant traders have in a sense been democratized. Benjamin Dunn quoted in Bloomberg recently said:
“Now every bank has a factor model,” said Benjamin Dunn, president of the portfolio consulting practice at Alpha Theory LLC, which works with managers overseeing about $200 billion. “You’ve had a democratization of a lot of data and analytics that were once the domain of very systematic quant investors. Everything is getting arbitraged away.”
So not only are there pure quants out there pursuing alpha with these tools, but discretionary managers are also waking up to the opportunity/threat. As Leigh Drogen at Estimize wrote:
Discretionary managers have woken up, and are now scrambling to understand what’s taking place and how they must change in relation to it. Many will not survive the shift. Others will take advantage and be better off for it.
Then again we shouldn’t be all that surprised. This is how Wall Street works. As soon as something begins working, the industry takes note and copies what can be copied and explains away what can’t. Josh Brown at the Reformed Broker writing about the collective quant disappointment wrote:
Listen – quant-driven strategies will be no different than all strategies: A few outlying hyperperformers and then tons of mediocrity and me-toos. But because people don’t give up quickly after launching a fund and everyone thinks they’re special, the mediocre funds will stick around, ruining the available outperformance for everyone in the end. Rinse, repeat.
This is not the first time quantitative strategies have disappointed. It was some ten years ago when the quantitative investment industry experienced a ‘quant quake.’* In a recent post Cliff Asness of AQR discusses the experience of ten years ago and looks the possibility of a repeat. The experience of ten years ago did not dissuade Asness of the value of quantitative factor strategies. That being said, investors need to go in with their eyes open. Asness writes:
We think investors should collectively educate themselves about this possibility to minimize panic and maximize rationality should it happen. We think we should all structure our investments specifically thinking about these events, knowing this is part science and part art, to survive and even be able to take advantage of them. But, ultimately, if we believe these factors are real and priced reasonably (particularly in a world where many investments, like traditional stock and bond markets, are quite expensive), we should invest in them. We should just do it with open eyes and a plan.
These underlying shifts in the industry should give us pause. The investment management industry has changed and will continue changing. None of these changes will make things easier. In a recent interview with Barron’s Joel Tillinghast portfolio manager of the Fidelity Low-Priced Stock Fund and author of the newly published Big Money Thinks Small: Biases, Blind Spots and Smarter Investing said this:
What is your advice for young people who want a career in investment management?
Don’t do it unless you really are fascinated by stock markets. Don’t do it if you are afraid to hold unpopular opinions and to contradict people. You can make a lot of money in this business, it’s true, but it’s exhausting if you don’t. You won’t be very good if you don’t hold cussed and sometimes wrong opinions. And just because you get good feedback today doesn’t mean you are doing the right thing.
Money management is contracting. There is a role for humans. Quants haven’t thought much about the long term. That’s the opportunity. It’s a great adventure and I would probably still do it. But I would have to think longer about it if I were 25.
The manager of the future is going to have to be part goat, i.e. focused and willing to eat things no one else will, but as Tillinghast says a successful manager will also need to have a long term focus. So they can know when it is time to switch plots for a more abundant supply of consumable material.
*The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson is the definitive account of this periods.