The Cover Jinx
From a market perspective February seems like a long time ago. Headlines were all about recession and market corrections. The global stock indices began the year with the worst January on record, and the first half of February brought no relief. With this as a backdrop, Barron’s cover featured AQR Investments, “AQR’s academic research has led to some truly alternative funds.” The article detailed strategies not just weathering early 2016, but in general doing what most firms cannot do; providing solid, sometimes spectacular alternatives to traditional stock and bond investing in a liquid cost effective vehicle.
The article received significant attention. We know advisors who were getting calls from their client base asking for these particular funds and being criticized for not suggesting them. The article pointed out several strategies that had been especially valuable diversifiers over the last 12 months using the following graph as a visual:
With help from our due diligence firm, Rocaton Investment Advisors, we originally selected these funds as components of our Diversifier Mandate, making four of the featured strategies available for our advisory clients. In February the story was simple – utilizing AQR’s strategies could truly diversify a portfolio and help your portfolio to thrive even when the markets won’t. AQR’s sales, while always consistently strong, surged higher and as one of their consultants put it “we don’t have to make any outbound calls right now.”
For those of us familiar with sports mythology we can guess what happened next. The Sports Illustrated “Cover Jinx” took effect. Since the magazine’s release date touting AQR’s non-traditional strategies, the equity markets have soared, and any attempt at diversification has been the wrong place to be. AQR strategies, like most Diversifiers, have struggled, especially when compared to equity markets which are up as much as 15% from those February lows. So the Jinx strikes again? Or is there a more reasonable explanation?
Wikipedia dissects the Cover Jinx this way: “A common explanation for the perceived effect is that athletes are generally featured on the cover after an exceptionally good performance, which might be an outlier compared to their usual level of performance. Therefore, their future performance is likely to display regression toward the mean and be less impressive by comparison. This decline in performance would then be misperceived as being related to, or even possibly caused by, the appearance on the magazine cover.”
Athletes/Investment Managers, is the curse real? How many times do we feel like we are cursed? We just know that after we buy that strategy it will stop its meteoric rise and revert. Is the real problem us waiting too long to implement the strategy to begin with? Is it our general inability to see value until other’s do? Does our herding mentality cause us to be average investors or worse? All of these questions are legitimate. It is difficult to go against the grain and develop an investment process that places recent performance below risk management and portfolio structure.
One of the built-in features of the Orion Portfolio Solutions MMS™ Three Mandate Process is that it is always allocating some portion of a portfolio to underperforming strategies. By definition, Market Movement (Strategic) will probably be a little out of sync with Diversifiers due to the emphasis on beta in our Mandate One balancing the emphasis on alpha in Mandate Three. This risk managed investment structure may keep us from constantly moving back and forth between beta and alpha during market cycles, allowing us to invest in the AQR’s of the world before, and after, they make The Cover.
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