A Propitious Time for the Value Investor

Christopher Woida was the lead investment strategist for BlackRock’s flagship-style factor hedge fund. This week, the now co-chief investment officer of AlphaFlow, a real estate investment platform, sat down with GuruFocus to discuss market trends. (If you remember, Point72 Ventures, guru investor Steven Cohen (Trades, Portfolio)'s venture arm, was one of two firms leading a $4.1 million seed investment round in AlphaFlow.)

What do you think happened to the equity markets last week?

Largely, I think the last week of activity in the market was really healthy. I think a lot of volatility was really driven by a lot of technical reassessments by investors. Basically, the analogy I like to give is that when interest rates are going up (like we expect) that means bond prices are going down and equity prices are going up. If bonds are going all the way to zero and equities are going to go to infinity, this is not a sustainable pattern. There has to be a technical reassessment.

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What created the volatility?

It’s really hard to say what did it. Ultimately, institutional investors tend to be dominant in terms of price action. But when you see interesting things happening in the option markets, in inverse ETFs, in non-traditional asset classes, with crypto, it (volatility) is primarily retail-driven.

How do you recommend investors prepare for such volatility?

My view, and the way we think at AlphaFlow, is we think about building portfolios; we want them to be robust and not fragile. We want them to be very well diversified across multiple risk factors in the market. When there is a specific risk factor that gets so far away from what seems like a reasonable valuation, it generally brings in a lot of tourist investors. Tourist investors tend to be a catalyst for a lot of this short-term noise and volatility.

What is a tourist investor?

Tourist investors are short-term investors who are trying to take advantage of the high momentum in the market. Academicians basically refer to this as “momentum investing.”

Can momentum investing be a good idea?

There’s been a lot of research that indicates that the momentum investor over a long period of time will actually generate positive returns above and beyond what you can get in other asset classes. A sophisticated investor will build a momentum portfolio of long winners and short losers, for example. If you look at your 200 favorite stocks, then look at which ones are winning and which ones are at the bottom or underperforming, you would concentrate giving long positions to the winners and short positions to the losers. Essentially, what you are doing is you’re trying to capture this momentum that is building. However, a lot of investors have this fear of missing out. Also, a lot of people buy winners and ignore the losers. (Don’t do that, he says.) You have to know how to ride the momentum; it has to be done in an appropriate way.

Who is able to maneuver this?

Professional hedge funds do have the skills for finding high momentum opportunities, but they know when to get out of the market. The majority of investors do not have the skills.

What about value investors? How can a value investor benefit in this environment?

We have healthy results from companies and companies continue to increase their expectations of forward earnings, couple that with the fact that equities are now discounted by 5% to 10% means that this is a good entry point. It definitely looks a lot more interesting right now.

What happens at AlphaFlow?

We specialize in real estate bridge loans or short maturity loans secured by underlying property with gross yields of 8% to 12%. Our company was incorporated in 2015. The first funds were launched in 2016. The first portfolio was open to individual investors in 2017.

How do you generate income when equities are faltering?

I believe U.S. Treasuries are an amazing asset class. They have a positive expected return and the U.S. government pays you a coupon. U.S. Treasuries are also very different than the equity markets. They don’t fall in price and, in some cases, they actually rise in price. I prefer to own Treasuries rather than equities in a falling market. REITs are also a good choice and have performed very well recently. Generally, they give investors a high dividend yield in a world where equities are struggling.

What’s next?

It’s definitely tough to say. I would not say I have a short-term crystal ball. I would not be surprised by a couple more bouts of volatility. It tends to have clustering effects in the market, but we are clearly starting to see some stability in the equity market. Things right now are reasonably stable. We’re just going to see a continued rebalancing between interest rates, inflation and equities. Volatility is very healthy for the market and for investors who have target asset allocations. If it’s 50-50, for example, you just rebalance your portfolio. That’s a somewhat passive way of taking advantage of a valuation mismatch.