Last week, I spent most of the day at the 2013 London Value Investors Conference. There was huge range of fairly brilliant speakers there, some of whom I listened to all the way through, some of whom I missed, and some of whom I missed bits of thanks to getting over-involved in a gossip in another room.
Still, there were a good many interesting moments, so I’m going to pop up a series of short posts over the next few days running through them.
First up, David Harding, the founder of Winton Capital. You might wonder why a man famous for making his £800m fortune out of what is effectively a black box trend-following fund was giving one of the talks at a value conference. I did. But the answer is pretty simple: both value investing and trend/momentum investing are part of the same “bitter war against efficient market theory”.
You can’t believe in efficient markets and be an active investor of either type, said Harding. He then showed us an enormous number of charts proving that what he does works across all markets most of the time (you’ll have to take my word and his record for it). Finally, he took a few questions.
The interesting one? Is it the case that trend following as a strategy has become harder over the last few years and will be harder in the future because of the huge market-interventions from central banks? If the authorities can intervene to change market conditions at will, perhaps it just isn’t possible to bet on trends anymore.
It’s an idea that has been floating around for a while – and it gives trend followers with lousy recent records a fantastic excuse for those records. Not Harding. He was, he said, “tempted not to dignify” the question with a response, but when he did overcome that temptation, he noted that it would “never have occurred” to him to use the macro economy as an excuse for underperforming in the stock market. That shut everyone up (if you are coming to our conference on Friday we’ll talk more about this, by the way).
I had a chat with David in the coffee break just to double check that he really feels that investors such as him should work in isolation from the macro. He does.
We also talked briefly of ‘fundamental indexing’ (see my columns on this here). Harding, like many of us, is increasingly convinced that of all the types of passive investing out there, investing in indices weighted by market capitalisation is one of the worst. If instead you add in a value measure of some kind – David suggested 50% by return on assets (ROA) and 50% by earnings yield – you generally do better. This strategy, he says, would have outperformed the market over the last 20 years.
The same goes for an equal-weighted index (whereby instead of buying more of the bigger companies and less of the small companies, you just buy the same amount of each). The fact is that whatever the value criteria you add, there is “almost no way not to beat the S&P 500”.
There’ll be more on this in the next few months – I’m arranging a proper interview with Harding for subscribers soon.