relying on long-only factors are at the whim of central banks rather than
company fundamentals, two managers have argued.
Lawler and Adam Glinsman, fund managers at Swiss group GAM, warned in
a report that investing with the view that factors such as value and
quality will push up equity prices in the near-term “introduces single-factor
bet risk into a portfolio.”
factor—company and security-level fundamentals—could continue to underperform
if prices remain disconnected from fundamental drivers,” the managers wrote. “Instead,
market technicals and macro issues—namely the size of central bank balance
sheets and the methods of quantitative easing [QE]—could continue to be the
main factor in determining prices.”
Federal Reserve ended its massive QE program in 2014 after buying $4.5 trillion
of assets. Each new wave of QE sparked stock market rallies, while the decision
to end it caused yields on US treasury bonds to spike in 2013.
During the US’ first round of QE, which ran from December 2008 to March 2010, MSCI’s World Quality index gained 45% according to data from FE Analytics. The firm’s momentum and minimum volatility indexes both rose by roughly 21%. The second round, from September 2012 to December 2013, saw the three indexes rise by between 17% and 27%.
Europe, the European
Central Bank earlier this year increased its QE program by a third to €80
billion ($88 billion) a month, including corporate bond purchases. The Bank
of England reintroduced QE following the UK’s vote to leave the European
Union in June, planning to add £60 billion ($73.4 billion) of government bonds
to its balance sheet.
valuation metrics such as price-to-earnings ratios “have taken a backseat to
central bank policy in driving price determination,” Lawler and Glinsman wrote.
“All liquid assets, including equities and bonds, have rallied with the rising
tide of liquidity provided by the world’s central banks. There has not been
much reward for seeking out fundamental value. Either you were in the boat—long
equities and bonds—as the tide rose or you were not.”
Investing: Allocation vs. Integration & The
Problem with Value Investing