In this episode, I am joined by Tammira Philipe and Elena Khoziaeva, both of Bridgeway Capital Management, a quantitative asset manager founded in 1993 offering systematically managed equity strategies.
But that’s not how Tammira or Elena would describe it. And that’s what this episode is all about: communication in the realm of quant.
As President and CEO of Bridgeway Tammira provides us with a perspective of why effective communication is so important for building an enduring asset management firm and why quants, in particular, face an up-hill battle.
Elena, who serves as head of US equities, offers us insight from the PM seat and provides some practical advice on how to best communicate difficult quantitative ideas.
We discuss both the importance and difficulty of on-going investor education, smart beta’s impact on industry comprehension, and ideas for how quants can better communicate in the future.
Corey Hoffstein 00:00
Are you ready to go? All right 321 Let’s do it. Hello and welcome everyone. I’m Corey Hoffstein. And this is flirting with models the podcast that pulls back the curtain to discover the human factor behind the quantitative strategy.
Corey Hoffstein Is the co founder and chief investment officer of new found research due to industry regulations. He will not discuss any of new found research funds on this podcast. All opinions expressed by podcast participants are solely their own opinion and do not reflect the opinion of newfound research. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of newfound research may maintain positions and securities discussed in this podcast for more information is it think newfound.com.
Corey Hoffstein 00:53
In this episode, I am joined by Tamra Felipe and Elena Jose Eva, both of Bridgeway Capital Management, a quantitative asset manager founded in 1993, offering systematically managed equity strategies. That’s not how Tamra or Elena would describe it. And that’s what this episode is all about. Communication in the realm of quant as president and CEO of Bridgeway Tamra provides us with a perspective of why effective communication is so important for building an enduring asset management firm and why quants in particular face an uphill battle. The Lena who serves as head of US equities, offers us insights from the PMC and provide some practical advice on how to best communicate difficult quantitative ideas. We discuss both the importance and difficulty of ongoing investor education, smart betas impact on industry comprehension, and ideas for how quants can better communicate in the future. Mara, and Elena, thank you for joining me today. I think this is going to be a really fun conversation.
Tammira Philippe 02:05
I’m pretty excited. Good morning.
Corey Hoffstein 02:08
Good morning. This one’s going to be a little different than the other podcasts that I recorded in some of the past past season as well as this season, we’re going to talk a little bit more about the business side of quant rather than going strictly into the nitty gritty investment nuances. And in particular, what I’m really excited to talk about today is the idea of effective communication for a style of investing that is really often admonished as being very, quote unquote black box. And I know none of us feel that way. But that’s very common perception in the industry. So I’m excited to talk about ways in which we can overcome that as a community. And I think it’s a particularly timely conversation because the last 12 months have really been a difficult period for a lot of the traditional style premia. And even going back further than that, categories, like systematic value and trend following have really struggled over the last five or 10 years. So I think it’s a really timely conversation. One I know you guys are gonna bring a lot of expertise to. So to kick it off, I was hoping both of you could give us a little bit of a background as to who you are, and your roles at Bridgeway.
Tammira Philippe 03:15
Great. Well, I’ll start off. I’m Tamra Philippe, and I am the president and CEO of Bridgeway Capital Management. I’ve been in that role since March of 2016. I’ve been at Bridgeway for 14 years, in a couple of different roles before that head of client service and marketing. And before that, what I call the strategy and operations role, which was my job to myself was whatever it takes to help us grow. When I first started in 2005. Before that I actually have a computer science undergrad, an MBA from Stanford, I worked at McKinsey and Company doing strategy consulting, had a little stint in the middle at a startup around global telecommunications. So that’s a little bit about me, I have my dream job at Bridgeway. And I’m very glad to be working with Elena. My teammates. I’ll let her tell you a little bit about herself. Sure. Thank
Elena Khoziaeva 04:11
you. My name is Elena has over. And I have an honor of working with amazing partners at Bridgeway and leading our investment management team. So my roles My responsibilities include Portfolio Management Research, communicating with clients, and currently, I’m ahead of the of us equity at Bridgeway. I’ve been with Bridgewater close to 20 years now. I have two homes. One is United States of America and another one is Belarus. So I came to the States while ago and I have the privilege of getting my education here. I went to the University of Houston. Whenever I graduated, I was fortunate to find Bridgeway and gradually found me and so now I grew up professionally this firm and became my second family.
Corey Hoffstein 05:01
So Bridgeway has a long history. You guys were founded back in 1993, which is really early days for quants. How has the perception of quant changed since then? And were there any catalysts that you can point to that really highlight that change over time?
Tammira Philippe 05:17
Absolutely. And I’ll go ahead and betray my Texas roots here and say that every time I get asked this question I think about a 1981 song by barber man drill there was I was country when country wasn’t cool and Bridgeway was definitely quant when quant wasn’t cool. I think about quantitative investing in really three major phases. And I think the first phase was, you know, started before Bridgeway was was founded, but really lasted all the way through, like pre 2007. And that was where, you know, quantitative investing was not, was really used in the hedge fund world. And in a very limited way, in the mutual fund world, our founder and current Chief Investment Officer, John Montgomery saw that opportunity and really thought, you know, the evidence was compelling, and that humans in general, because of our behavioral biases are really bad investors. So he thought, you know, quantitative methods were a superior superior way of investing, and that he wanted to make those investments available to more people. So that’s why when he originally started Bridgeway, he started in the mutual fund world, and that continued to proliferate, were there more and more asset managers like us started launching quantitative driven strategies, but then 2007, a lot of people refer to that as the quant quake. And there were definitely some problems with a number of quant strategies that were closely related. And that I’d say, threw us into the next phase of quantitative investing. And I like to joke that quant was a four letter word from about 2007. Till, you know, in the meetings that we were having probably the 2013 2014 timeframe. And it was during that timeframe, where Bridgeway really refined how we described our style of quantitative investing. And we started referring to it as statistically driven, Evidence Based Investing. And that was really to spark a conversation about our differences from our closest quantitative peers. Because as I mentioned, you know, during that quant quake that that did affect some quantitative managers, specifically, we Bridgeway do some things very differently than some of those people are those managers that were affected. But we dealt with that that brush got painted across all quantitative investing, after from, like I said, from about 2007, through 2014. But, you know, we tried to address that with our communications. And then in the, I think, in the 2013 2014 timeframe, is where we pivoted into the phase that I think we are in now, which is, you know, much broader acceptance and understanding of the variety of quantitative strategies, that we’re not all the same, even though we all have some underpinnings in similar beliefs, most notably that humans are really bad investors at the really worst times. And I think that’s something that unifies most quants. But for example, you know, there’s so many different flavors, you know, from one end of the spectrum, high frequency to the other end of the spectrum, which I would put Bridgeway in and much more long term oriented, translating traditional fundamental methods into systematic approaches is kind of our flavor. But this phase we’re in now, I would say, I’m personally very excited about it. I think we’re, if you think about the Technology S Curve of adoption, I think quantitative investing has moved into we’ve sort of crossed that chasm of, hey, this is not going to work at all, or get wide acceptance. And we’ve moved into what people refer to as the early majority phase. And the next phase is being, you know, late majority, and then full adoption. But in that early majority phase, we’re still, you know, a very small portion of what I think our total potential is, in terms of adoption and understanding of quantitative strategies. So those are some of my thoughts about the eras. And then, you know, the catalysts as you asked about, you know, I really think the number one catalyst that will continue to support us and all of all the other managers out there who are building approaches that are systematic and quantitative is the search for better methods. I think that’s something that unifies us and unifies our clients in wanting to have investments that are really using the best methods possible to create their financial security. And then computing power has been of course a huge capitalists for quantitative methods. I mean, we can do things today that we couldn’t do even five years ago. And that’s that’s contributed to more understanding on the professional manager side. I think Moneyball, I mean, you might make me some people that was actually a catalyst. And you know, there was the book in May of 2003, by Michael Lewis, and then, you know, a movie. I mean, come on, Brad Pitt, like may 2011. And that just put the idea of quantitative methods, of course, applied to sports. But the idea that you could use these methods to beat a human intuition started to become more and more in the common vernacular. And just overall proliferation in sports, I think has helped most of us are many of us, including myself are sports fans. And so, you know, when we see something working in that world, it’s like, oh, wait, maybe we can apply this to other worlds. And then I think fee pressure has been a big catalyst for quant I think most people would agree that people have sought more efficient ways of investing. And quantitative methods can do that at times. And that, you know, the final I kind of talked about, you know, frankly, we’ve struggled as quants, as a whole to communicate better. And I do think that, you know, the introduction, and I’m not a huge fan of the term, but the introduction of better terminology, smart beta, being one of them in that 2013 2014 timeframe of something that, you know, whether you like it or not, did get widespread understanding. And we go into conversations today, having a lot less to explain than we did pre that period.
Corey Hoffstein 11:41
So I want to talk about something you said there, you mentioned the phrase statistically driven, evidence based as a phrase that you guys like to use to really differentiate yourself from other quants. And really, when we think of the landscape of quant, it’s, it’s a big, big landscape, everything from your high frequency traders, to your firms that are a little more shrouded in secrecy like your rentex, to derivatives pricing at banks to your more sort of traditional buy side equity factors. Can you talk a little bit about how you came up with that phrase? Why you think it’s important to use that phrase? And maybe how you think it helps differentiate you from other quant firms in your space?
Tammira Philippe 12:23
Absolutely. Well, we started using that terminology, really around 2010. And it was in response to questions that we were getting externally. And just this idea that the use of quantitative methods and investing had really expanded and evolved. And there were lots of different approaches that were some of them very different from the way we think about ourselves. And so like everything at Bridgeway, we arrived at that phrase through a team effort, a lot of vigorous discussion around the team. And, you know, it’s not one that we think is completely perfect. But what we have found since 2010, is that it does get us into the right conversations with the people that we want to understand us the best. So it gets people asking us the right questions about what is statistically driven, Evidence Based Investing. And I’ll let Elena elaborate a little bit more about what we do that is different from other quants from an investment perspective. But I’ll launch her into that by saying, you know, the other thought that we’ve arrived at that we borrowed from a woman named Sally Hogshead, who focuses on the science of fascination is this idea that different is better than better. And that’s something that ever since I heard her say it, I just see it and see examples of it everywhere around Bridgeway. And just out in the world of, of how really thinking about being different is better than better. So, Elena, Would you elaborate a little bit more about our particular style of quantitative investing and how how you see the application of that statistically driven evidence based,
Elena Khoziaeva 14:07
I would say that the choice of the descriptions statistically driven evidence based, was done mainly to highlight the basis for our decision making. The decisions within the investment process at Bridgeway are made based on the numbers and statistics and of course, having an underlying theory behind that that’s where the word evidence comes from. And as Tim mentioned, it starts the conversation and then we explain where we fit on the spectrum of the quants. It is a very large spectrum. And the way we describe our process, it’s a systematic approach to processing fundamental data and price data in being very discipline driven. And using this combination of the numbers theory and expertise of the team to make decisions and then we’ll also talk about this execution being a very disciplined process, almost like following the orders of the doctor’s prescription orders. Whatever research tells us to do, this is what we execute in the implementation process. What I
Corey Hoffstein 15:15
find really interesting, one of the things you said there was that this phrasing, you use this statistically driven evidence base with something that was actually a response, something that you came up with in in 2010, as a team, after the 2008, and 2007 quant crisis and evolution of how you want to describe what you do. And that’s, you know, 17 years after the firm was already founded, and up and running. And I think it speaks to the need for a firm to continually evolve its presence evolve its communication, I was hoping you could maybe speak a little bit about what it takes to build an enduring firm, you know, I think this is a really difficult space to just survive, not even thrive, but really just survive. It’s highly competitive. Bridgeway has obviously been able to do so with great success. And even in an era where quant was really not as well known or favored. So as you look at taking Bridgeway into the future, what do you think the keys are for, for continuing that enduring success and building an enduring firm?
Tammira Philippe 16:23
Well, I’d like to talk about this really in two parts. Number one, you know, when I think about building an enduring firm on in quantitative investing, number one is investing. And I’m definitely very interested in passionate about this topic. But I believe that asset management, as a whole is facing some very serious disruption. And a major question that we ask ourselves, and we believe everyone should be asking, and for the most part, I say are asking is, will we evolve fast enough. And as a computer science geek, undergrad and former McKinsey consultant, I think about this a lot, and I’m really an Andy Grove disciple talks about only the paranoid will survive. And I definitely think about that, and have really been able to get my Bridgeway colleagues to rally around that concept with me. And I just passionately believe that not just Bridgeway, but every investment firm, as an industry that we have to get more focused on our clients, and the nobility of why we exist, like what are we trying to achieve for our clients and trust is a major problem in our industry. I don’t know how many of your listeners follow the Edelman Trust Barometer or some of the work that the CFA Institute has done around trust, but final financial services and asset management within that the specific research that has been done that we are dead last compared to all the other sectors that have been studied separately. And not as surprise which is interesting is technology in the Edelman Trust Barometer is, first in terms of what people say they they trust technology as an industry, not necessarily technology in its application. And part of that is that they’ve been able to talk about and get to the source of what are they really doing for their clients or customers, and to really build that trust. And in this industry, I hear way too many of our peers and even ourselves, sometimes I have to include myself in that losing sight of, we have to make sure that we are here and that we love our jobs because of the service we provide. And the value that we create for clients putting our investors interests first, I hear a lot, way too many selfish reasons of why people are attracted to this industry, whether it be the money or intellectual challenge. And those selfish reasons, from my point of view, are a recipe for the disruption that we’re facing. And that’s a major problem of building an enduring firm, just in asset management or investing in general. When I go deeper and think about a quant firm, specifically, I both get excited because at at the most optimistic view of how much of this industry’s assets that we hold, it might be a quarter of the assets. And I think we have an opportunity to hold way more than that in terms of how many investors are invested in investment strategies that are driven by quantitative methods. And we’ve grown a lot but keeping a big picture. There’s a lot of opportunity ahead. But there are major challenges and some of the challenges that I See, our right now we have more competition than ever. In quantitative investing this is back to what we were talking about in the eras, we’re in an era where you know, quant has gotten kind of cool, I think that actually will wane with another bump in the road. But quality data is critical, particularly for clients. And that’s been a hurdle. But I think that’s getting better and better. The search for talent. I talked earlier about the proliferation of quantitative methods in sports. And when I recently read the book, Astro ball by Ben reader, and when I finished it, I thought, why would a super quant ever go into finance instead of sports, it’s just sounds like a lot more fun to apply these methods to sports. But you know, that kind of impacts our our search for talent, which is a challenge. And the last one, one of my favorite topics of challenges, but also opportunities is building trust, which is where I started about the problem for the industry. And this is where I get really bullish about quants. So I adopted a view of trust that I think I heard from the Center for Creative Leadership like over 10 years ago, and that there are three components, there’s character, you build, you have to have character to as a basis of trust, capability, and then communication. On character. Basically, you’re not going to survive unless you’re putting the client’s interests first. And, you know, we we think and talk about that a lot at Bridgeway. And, and frankly, the best peers that I know in this industry are focused on that. And then, secondly, capability. This is where I do think cones have a huge advantage. I mean, all you have to do is pull up, resumes or talk to talk to a few clients. And capability is definitely not lacking in terms of our education to be able to do what we do for clients. And as well as our experience, quantitative investing has been around for over a quarter century now. So there’s a lot of people who’ve been doing this for a long time. And that but the third communication has been our biggest hurdle. And when I think about building an enduring firm on quantitative investing, the topic we’re talking about today, communication is number one on the list, we’ve just got to do a better job. And we work really hard. And back to your original question. That’s why we’ve continued to look at how we’re communicating about what we do. And and we’re willing to evolve and refine our message. And when we know better, we do better.
Corey Hoffstein 22:31
So on the topic of communication, I find that education is this really, really important concept in communication. And one in which I will say that I think I struggled personally, as it relates to quality education, I very much tried to be on the forefront of continued education. But I think there’s some very nuanced topics that can make ongoing education difficult. And so the example I give is, it’s almost like teaching chemistry. And when you’re younger, and you get your intro chemistry classes, you learn the Bohr model of an atom, and you have this nucleus where you have your electrons going around in this nice orbit, you almost think of it like a planet with the planets rings. And then you get into higher level classes in college, perhaps and you learn well, no, they’re actually probability clouds. And everything you learned in the past wasn’t right. And I, I find, at least in my own experience, that that very often happens that re education happens almost at the wrong time that when you introduce someone to an investment strategy, you’re giving them the basic foundation, they need to have an understanding. And then when performance deviates from that understanding, you have to re educate. And it can all too often feel like moving the goalposts. So I’d love to know. And Elena, particularly from you, as a portfolio manager, how do you think about striking this balance between education understandability ability for someone who’s coming to a product for the first time, and providing enough transparency, that they do build that trust and don’t eventually feel betrayed by any performance that might be different than their expectation?
Elena Khoziaeva 24:09
That can be just the topic of the podcast on its own? I would say three things come to mind. One, repetition matters. Two would be know who you’re talking to know your audience. And three, be prepared in advance. What are the levels of your conversation of your disclosures? And so let me talk about those three. Repetition matters. This one’s interesting. I was just at a meeting with a group of advisors in Chicago and one of those advisors said the stage kind of really well for me, she said that she just read the research where it stated that it takes an individual seven times to hear the information to remember it. So it takes seven times to remember something. So I’m like great. And here we go. Even though they know our process, they learned it before I’ve started the conversation about performance. It was a performance update. But I’ve started revisiting our process. What are the research findings? Why we have this multiple models in the strategy driving to deliver? And how are expectations about the process that come in. And before I even got to the performance, I felt like the audience remembering, and they were not in the know, they were not in in the room. And they were, they were so prepared now for talking about performance. That made it easier for me, regardless whether the performance was good or bad. But knowing the process and remembering the objectives, and what are we delivering, it was crucial. So all that was doing is repeating what I’ve done previously, but that repetition matters. Number two, audience matters. So knowing who you’re talking to, whether it’s a board of directors, that may not have no quantitative concepts, or it may be a group of consultants, that have all kinds of designations, and they know exactly what I’m talking to, you know, to the level of the variables, and be prepared in advance with, what is the language that you’re using. And so that, that is experience that is learning your client learn in your audience in advance. And so with time, I’ve learned to talk about factors at a high level using proxies using analogies and talking about maybe a price to earnings ratio in general as the way to define value, versus using our Bridgeway valuation metric, which is a custom field that has a combination of various facts or variables in it. So knowing what is the audience so that we can speak the same language, it’s important. So we talked about repetition matters, audience matters. Preparation matters. That’s actually a big one. And thinking about disclosures and your communication strategy in advance, rather than on the fly has helped us a lot. It didn’t come easy. We’ve had meetings where the clients or consultants desire for transparency, and just not being they’re not getting it was not helpful. And there is an assumption that if we deliver all the detail variables and coefficients that it would make it easy to understand the process. But actually, that’s a false assumption. It’s not about specific variables. It’s more about that concept and objectives and how we talk about the crosses, that matters much more. So we realize that there is this tension between desire for transparency and our desire to be transparent, but at the same time, our responsibility to protect the confidential information in our trade secret. So we’ve struggled for some time. And then again, kind of evolving along the way, we’ve approached this very systematically, we’ve formed a committee, which is basically a group of partners in charge of the project, we’ve developed policies and procedures around our confidential information and trade secret. And then we’ve put it in writing, we put in writing various disclosures of all of our strategies at different levels. So that was credibly helpful in knowing what to communicate how to communicate, and who will be communicating that we went a step further, and then we’ve kind of, you know, segregated maybe in a way or we designated partners on the various levels of disclosures. Therefore, whoever goes and facing the clients knows, that person has clarity of what to talk about what not to talk about, you know, the boundaries on your disclosures that is incredibly helpful to know, you feel very confident in those conversations, because this is what I can tell you. And this is where I’m going to use examples. And, you know, maybe a proxy for a conversation, because I cannot go there, that confidence in knowing what you can or cannot disclose is very, very, very helpful in conversations. It also makes the conversations consistent consistency in whether it’s me talking about the strategies, or Tamra or our CEO, John Montgomery, that consistency helps remove all the confusions. And you know, what are you talking about? What is the definition, so that was very helpful. And lastly, it made it very effective to get the new partners up the learning curve, and help our new whether investment professionals or client service and marketing professionals get up to speed and learn to communicate and have that basis for their education and move them up the learning curve faster. So, repetition, know your audience and be prepared in advance. I think the combination of those three approaches help find that balance. You know, it’s a work in progress, but I think we’re way closer to that balance than we used to be.
Corey Hoffstein 29:58
So I want to stick with that. repetition idea, because I think it’s what’s really interesting and I always find a challenge in this industry is that there tends to be a big appetite for initial education. But the appetite for ongoing education often dwindles once an investment partner adopts a strategy. And often that ongoing education can be some of the most important, at least in my experience. And one of the things I always sort of keep in the back of my mind was this little story, I heard that Apple when they actually have an important security feature they need to release on their on their iPhones, they won’t do a software update as a security feature, because no one will actually download the software update, they’ll actually do something like release the new emoji pack, and hide the security update in that new emoji pack. Because everyone will download the new emojis and get the benefit of the security update. But they won’t necessarily just download the security update on its own, and often find it sometimes a little bit difficult to just get people to sit down and talk about education. Because the partners we have in this industry are busy with so many other aspects of their business. How do you think about delivering ongoing education? And what are some of the strategies you use to make sure that your partners do continue along that education curve to better understanding how your strategy works in practice?
Elena Khoziaeva 31:14
I would say several, several approaches one, you know, going back to this into the example that I gave about, start with their investment process and you know, repeat yourself in a way we do this, I would say all the time, we start our conversation with clients, buy, let me remind you, what are we doing in our strategies? Let me talk at the very high level of our investment process. But even that high level reminder, start the conversation going and they start asking questions, you know, what does that model remind me about this combination? And why do you have that? So interjecting that at the high level tends to bring up more questions. And then we do in this ongoing education in the beginning of the presentation. Another way that, you know, I find it very helpful the way if we go into the ongoing client meetings and performance updates, we we’ve developed a way to talk about our attribution that’s tied to our investment process. So it was a very creative way of you know, we can talk about sectors, we can talk about individual securities. But that’s not how we manage strategies. We manage, for example, our some of our strategies by this combination of different models. So we’ve designed an attribution to reflect that their attribution report. So I will tell the audience that before I get into the attribution, I talk about performance. Let me explain why this is this is designed that way. And so again, I’m reminding them about that. And then kind of get connected, get reconnected on the process. And last will be where we are disciplined at following the plan. But at the same time, we are open and flexible about changing the plan. If we feel like there is a need for that, for example, the 2,018/4, quarter 2018 There were some unusual conditions in that period. And we knew that we need to deliver something different to clients and to help them understand what happened. So we’ve developed new graphs, and we’ve talked about the general performance of the factors before we got to our factors. We’ve used proxies, we’ve kind of expanded our while a presentation materials. And I think that being a small firm allows us for that flexibility in that efficiency, we can turn around the new marketing materials very quickly, and make sure that we are relevant that we satisfies the requirement of the compliance, but at the same time we deliver updated and relevant information to be most helpful to our clients.
Tammira Philippe 33:42
I just wanted to add and build on what Elena was saying and around ongoing education and your comment, Corey about the challenges the audience’s face in optimizing their own time. And this is an area that I think has been a real success in our industry, but also in particular, for quantitative managers is just making our research available. I would say that Bridgeway ourselves, we have a long ways to go. But I would just applaud our peers in this just the amount of research that it’s available in the industry, white papers, research papers on SSRN just everything that’s being made available to people to access when they want it on their own terms that I think is extraordinary and again, has contributed to the success that investment managers are having today. Those of us who are I believe going to have success surviving the disruption that we’re facing is because we’re communicating in an ongoing way, but not always on our own schedule. So making research available, like I said, as an example for Bridgeway but I think our peers are doing a way better So I’ve been in a lot of ways, but our head of research, Dr. Andrew Birkin has co written a couple of books that the Incredible Shrinking alpha as well as the complete guide to factor based investing with Larry swedroe. I think both of those are great references that we can build from, to make our in person conversations shorter and more direct, that we can build on and let people know that they if they want more depth, they can reference the ideas in those of the same thing. And we see you do this Cory, many of our peers, and we find ourselves referencing papers from others. And I just think the collective knowledge that’s being built and you know, raising the bar on giving clients and prospects access to information outside of an in person meeting is really, really good. And that’s the critical part of ongoing education. And then the cap that off on Elena was talking earlier about transparency. And I mentioned a book that I highly recommend, and not just because I’m a Houston Astros fan, but as a quantitative investor, the book Astro ball by Ben Rader, he’s profiling, Jeff luneau talked about trans them trying to become the most transparent front office in baseball. And he has this great quote that I think we’ve applied at Bridgeway, developing our own communication, and we have a long ways to go. But you know, is there a risk, we end up giving away some company secrets, possibly, this is a quote from from just, but we feel the benefit of having fans in his case. And clients in our case, that feel like they’re involved in the process is important. And we just spend a lot of time collaborating on that at Bridgeway. The culture that we’ve developed at Bridgeway is really helpful to that because people are very humble, everyone’s always trying to get better. We’re working on consistent terminology. I’ll save that for later. Corey, if you want to dive into my soapbox of is value a factor or is PE a factor that things like that we spend a lot of time working on that at Bridgeway. And I can see from what’s out in the public domain that a lot of our peers do, as well. And I think that’s to the benefit of investors. Well, let’s,
Corey Hoffstein 37:16
let’s actually dive into that a little bit. Now that whole value is a factor of PE a factor. And it sort of ties into a broader conversation about the quick ramp that we’ve seen in the quant space. And I think it is something you touched upon earlier, which was I think smart beta personally has been a huge conduit for introducing quant ideas, but I think has potentially also created a bit of confusion. And we as a community maybe haven’t been as clear as we should be around terminology. So as you brought it up, maybe you could sort of get on your soapbox for a bit and talk about how you think about it, and maybe ways in which we can better communicate this as a community.
Tammira Philippe 37:58
Absolutely. So I would just chime in and say we’re not fans and don’t use it for ourselves the term smart beta, per se. But do I think it’s helped? Absolutely. It’s definitely allowed us to save time in meetings and have a starting point for differentiating what we do from you know, what a typical Smart beta strategy would do. So I largely, I think smart beta has helped investors and anything that helps investors I believe is in in in our firm’s interest. So but building on that on terminology, this is something that I just am a champion of and I’ve really tried to rally us around is that ourselves and our peers don’t do don’t do ourselves any favors when people can talk about factors as a zoo that isn’t helping the client, the investor, and that isn’t helping us as quantitative managers. I mentioned Andy Birkins book with Larry swedroe, I think they strived to simplify. And I would put out there that I’m a big fan and champion of the idea that value is a factor, and that there are a variety of ways to measure it. And if we could all be more aligned on that and simplify things. I don’t know how many of you follow Carl Richards, I’m a fan of him. He’s the sketch artist. He makes these tools, simple Sharpie sketches on napkins, and he has one around that simplicity is on the other side of complexity. You start with simple you go through all the complexity and then you get to simplicity on the other side. And that we as quantitative investors are just at the beginning innings of that and we need to work harder at that. But for me, consistent terminology and the more we can talk about things the same, like value is a factor and price to earnings is always demand Jarrett and price to cash flow is a way to measure it. And even data in enterprise values. You know, those types of things I think would be good. We make mistakes all the time, we have a mantra at Bridgeway, that mistakes are the tools from which we learn and grow. And we try really hard to do that. And I myself, even though I’m the biggest champion for what I just said, you know, I make mistakes. And I really have great colleagues around me who point those out. And we’re all aligned on trying to do better and better in the interest of investors.
Corey Hoffstein 40:32
What is a tough communication problem, because at least I find in the, in the quant space, so much of our language is tied back to mathematical concepts, like even the word factor itself. And you go back to sort of betas and alphas, these all come from the concepts of linear regression and that sort of stuff and, and they maintain this mystique, but somewhat unnecessarily so and when you come from the background of that space, you’re like, well, it’s just an intercept and all line, but somehow it everyone’s pursuing it. But the broader point for me, I guess, is like trying to change this language going forward, is potentially important. I’ve actually even tried to stop using the language of factors and prefer to try to do style, instead trying to demystify the math and just say, Hey, this is a style of investing. And just like any discretionary manager, verse quant manager, you know, this is what we’re trying to achieve. But again, mistakes are made, I drop into the language factors all the time. And it’s easy shorthand, but I do try to go with the style, Staying on the topic of smart beta, though for a second. One of the things again, this idea that smart beta has really been a great conduit for bringing quant into sort of the maybe the main investing ecosystem. One of the areas in which it’s done a fair degree of at least disruption for me is disrupting the idea of the star manager, and has in many ways taken the human factor out of investing. And in this is inherently a human business. And, Tamra, I know you talked a lot about trust. How do you how do you think about maintaining the human value factor in investing that human factor and trust versus the potential benefits of a quant based system and keeping humans quote unquote, out of out of the investing process?
Tammira Philippe 42:22
Well, I’ll kick off with a couple of ideas. And Elena has some great thinking on this. And going back to Astro ball, which is clearly one of my favorite books of the year. I think the big idea that resonated with me in that book that has been a central part of Bridgeway, his approach is to humans are actually really bad investors. That’s, we make mistakes a lot. We have biases. But what we strive to do in and this is, is to make the human element as systematic as possible. But also remember, and this, we’ve seen this in our 25 year history, just because you can’t quantify it right now, doesn’t mean that it doesn’t exist. And I’ll let Elena build on that really talk about our collective views on how do you get the human out of the process where you want to get them out, and keep the wisdom in the process, where it’s really beneficial.
Corey Hoffstein 43:23
And if I can interrupt Elena, I would love for you to talk about something we were chatting about offline here, it just came to my mind this, this idea of humans in the research process, and you know, this friction of where to stop, when to stop.
Elena Khoziaeva 43:37
I do want to say that even though humans make mistakes, humans are amazing. So just you know, I started with that. So I am a very social person, you know, it’s human interaction is incredibly important. But here is what what it what it is when it comes to investing. The emotions are pitfalls of investing. And so the way Bridgeway collectively things, and I strongly believe in is that we should absolutely strive to eliminate those emotions in the biases from investment process, but we should absolutely keep the human element. And numbers are just numbers. Numbers are give you a great foundation for decision making. But numbers are not enough. And I would say you know, I’ve been asked whether our, you know, investment policies is a combination of art and science. And I wouldn’t say it’s art and science, but it’s a expertise in science. It’s this diversity of opinions, and views and skills from the humans that allow us to process all this outcomes from the research, you know, this numbers, make sense of them, find the theories of why we would believe that the factor continued to perform in the future and make objective decisions in the research. So it’s the objectivity that we’re after. versus automation. Automation can be an implementation make my lives efficient. But the humans and their ability to process information and make those objective decisions is just incredible. I would say, you know, the way I think of it as machines are great at making things fast and producing the numbers fast, and and they are incredibly helpful. But humans are great at asking why. And that question why if you if you stop asking the question, it’s it’s another dangerous that if you asked me about dangers of quantitative investing, you know, where the challenges that I see is, if we stopped asking why, why did the factory perform, why we see the historical performance like that, why it performed in such a pattern in a value period where we expect the opposite? What’s happening in sample out of sample, if we stop asking why we’re just going to be doing that data mining, and that’s, you know, the most kind of famous concept and the problem in statistics. Because if you keep looking for a relationship, you’re gonna find that relationship. Later, you can find out there was just a coincidence, if you didn’t ask why. So that’s an invite. That’s our approach, I strongly believe in that. So humans is something that allowed us to process this numbers and develop our process. Going back to your second point about, you know, with we’ve talked offline about when to stop this is when I thought of when we talked about challenges of quantitative investing in something that came to mind to me, and I didn’t realize that, you know, until I got more experience in the researchers, the reason you also want to have a diversity of opinion and collaborative team and with various levels of expertise and backgrounds is to look at the research results. And interestingly to know, to know when to stop knowing when to stop the research and when to kind of implement and knowing that that’s sufficient, and then it gives you enough conviction. That’s where you also need that human element and expertise. Because the research can be ongoing, you can keep going, you can always connect, you know, another layer, another layer. And so you need to have great expertise and collaboration from the team to know when to stop the research, when to reject the research and celebrate that, and when to actually implement. So kudos to all of those humans in a quantitative investment world that making it possible.
Corey Hoffstein 47:35
I love this phrase you use. Emotions are the pitfalls of investing. And I know we sort of just talked about that from from the side of the table of managing money. But it strikes me as being very important for the other side of the table as well. So a phrase I like to use a lot is that the optimal portfolio is first and foremost, one that someone can actually stick with, or our friend Wes Gray likes to use the phrase sustainable Alpha requires a sustainable investor. And it seems to me that a lot of the emotions flare up during periods of negative performance. And I’m very biased here. But it always feels to me like quants end up being held to this higher standard of criticism. And, and Tamra, maybe it goes back to what you were saying earlier around the trust issues, trust of the blackbox trust of the quants. And maybe there hasn’t been the trust built that discretionary managers are given. All too often were lumped together as a cohort, and we’re sort of blamed as for market dislocations is sort of this Boogeyman. What can we do better as a community either as a community or individually as managers to have these conversations about performance, have these conversations around dislocations and better build trust going forward, so that we can create more sustainable investors who can actually reap the benefits of the removal of emotion from the investing process?
Elena Khoziaeva 49:07
It’s such an ongoing topic for us, because we get sometimes questions, you know, do you really know what’s happening? And then then, you know, from when the client comes in, I think that different standard comes in from Do you really know what’s going on? And I think then, being transparent, being able to explain exactly the performance where it’s coming from, is very important for that. Another part is I kind of follow the rule of no surprises. I want the client or the prospect not be surprised with performance. And that is goes back to the ongoing education and being transparent and being thorough in the explanations in advance. So setting the expectations explaining, however many times we can say that the underperformance happens, it sometimes can come as a surprise, So minimizing those surprises and explaining in advance our combination of factors or objectives, what are we delivering is important, and never position the client in a situation that they would be surprised or feel that they’ve been, you know, something being held back from them. Because then that feels that feeling of not trusting enough. And then it’s really, really, really hard to regain that. So, you know, expect the periods of underperformance but do all the work before that, to be sure that your client understands the process. And they’re prepared for those periods. And when those periods come, give the facts, explain the performance in the transparent and don’t lose that trust.
Tammira Philippe 50:44
What I want to add is really to acknowledge the people, some people that I’ve learned from the most on this topic, as, as I’ve thought deeply about it for Bridgeway. And our clients and prospects is, number one, Elisabetta basilico appear in our business, wrote an article, I believe it was in April of 2018. And talked about algorithm aversion. You know, we just, we’re humans, and we, we trust people like us, we’re more more apt to trust other humans. And it’s harder for us to quote unquote, trust a machine. And she, in her article in city wire Elisabetta, summarized a recent paper by three scholars from the University of Pennsylvania that basically confirmed that we tolerate human errors at a higher rate compared to machine errors. And I think that’s the source of what you were talking about, Cory? Is this, quote, higher standard that we have? Yes, we are held to a higher standard. As quants, I think what we’ve done over time, is to embrace that. Because we can, collectively we can, we can hold up to that higher standard, we have the character, and we have the competence behind us. We’ve struggled with the communication part of that, but we’re collectively getting better and better at that. But we’re always going to face I believe, because the science is behind this, people have done research on it a higher standard, because we use these quantitative mes methods, and are very systematic about what we do. That’s less relatable for an average human being. But what because there’s humans behind our process, what we can do in our communication, which is that key element of building trust, is the transparency. So making, giving people access to us, and really making that but also improving our communication, and really making that what we do much more relatable. And I just see success all around us. That’s why we’ve been growing over the last several years, collectively as a group. And it makes me really excited. But I also remain humble, and to acknowledge some other great people that I learned from every time I listen to them. BARRY RITHOLTZ hosted Michael Lewis on his podcast recently, and they were talking about why do we make decisions that are against our interests? So the way I translated that was, you know, why do investors make decisions that are against their interests? Why, even in picking managers, why don’t they pick the managers that have more science and evidence behind their processes, and the quote from Michael Lewis that I’ll never forget, that I keep reflecting on is, we are deterministic machines in a probabilistic world. And I see, of course, applications of that in our business, and for every investor who’s most like us, professionally, but I see applications of that across the entire society. And you know, any topic I think about I see applications of of that concept. But really, it’s something worth thinking about deeper and deeper at Bridgeway. And I do think this topic that we’re discussing today around communicating better is the solution. So my, my advice for myself and our company, and all of our fellow quantitative investors out there is keep calm and just keep swimming, because we’re going to do better.
Corey Hoffstein 54:33
So on this sort of topic of areas of potential improvement, you know, with this idea of being able to tolerate human errors more than machine errors. You know, we’re talking about continued education. We’re talking about continued transparency. Elena, you mentioned earlier that you guys even have your own custom attribution system that ties back to your process. But at what point again, should we think about Is there a benefit to reintroducing the human factor that if we know the other people on the other side of the table are more open to a human face a human touch in the process? Do we do ourselves a disservice by so over emphasizing the quantitative element, you know, is there a real value to having a figurehead or a great storyteller at the front of a firm? I think of people like Rob Arnott or Cliff Asness, who have really done in my opinion, the industry, great benefit and being such wonderful figureheads for quants everywhere is that something quant should focus more on on almost maybe pulling back a little bit in their communication on a focus on the numbers and the precision and the statistical robustness and focus a little bit more on the narrative. And that would actually benefit the other side of the table and have them more likely to stick with the process?
Tammira Philippe 55:57
Well, I’ll jump in, I have a strong opinion about that. And the way I would distinguish it is number one, deep respect and admiration for the individuals you mentioned. And believe that, you know, we’ve learned this the hard way ourselves at Bridgeway, that the value of someone who can translate your investment process in an understandable way to your audience is priceless. And there are so many great examples of that and how that’s getting better and better. But at the at the end of the day, when you think about building trust, it has to be authentic. And, you know, you have to have conviction in, you know, the the core process that you’re managing. So at Bridgeway, there’s no way we would introduce a human element, just because it would make us more relatable, we have to stick to the conviction we have about what the science and the evidence tells us. So we have no questions about that. At the same time, what we see is that there’s more opportunity to take some of those human insights, this is how our whole style of investing started and translate those into more systematic approaches. This is what you’re seeing with new data sets. I mean, as we get better and better. And the research that we do, some of it is to try to get at one some of those things that humans can get at intuitively, and may turn them into things that machines can get at. So I would I would say that but for Bridgeway, we would stick to our conviction around a systematic and quantitative approach. And if you ask, I mean, what I would advise is stick stick to what you have conviction in, if you’re a quant manager stick to that. But in terms of being able to have people who can stand out in front of that process, and being translators, you hear Elena and I both talked about being translators, she’s speak more languages than I do. But I joke that, you know, my gift in life is a translator, I’m like, just enough geeky enough to understand it. But just enough of a person who was the first person in my family to go to college to be able to explain it to, you know, an average human being. And so I find myself at a personal level being a translator in in lots of ways. But that’s those are just some of my thoughts. Elena, I’d love for you to build on and add in your thoughts about this question of a of a human element and the value of people being able to translate and speak publicly about a quantitative problem. I
Elena Khoziaeva 58:41
absolutely echo what you said, the the process that we have at Bridgewater, which is the systematic, systematic way of processing the information. This is something that at the core of the company, and we’re sticking to it, and we’re going to be true to that. So having the integrity and speaking and relating that to your client is important. How we talk about it, again, it’s developed over time, we are able to do to different levels, we have more people that are able to communicate that. And I think that’s a learning process. And it’s an ongoing process. The other part that’s you know, we interesting in our presentations, we start with a team. And then before we get to the process, we talk about investment team. And we highlight the expertise, we highlight the previous experience we highlighted we have new partners and we have partners that have been with Bridgewater for a long time. And we talk about the contributions from those people to the research we talk about the portfolio management team. So before we get into the kind of details of investment process, we’re intentional about talking about the team this is who is behind the portfolio’s that you’re managing. We also highlight the collaboration of the research team and how sometimes jokingly explain how research meetings are running and in Put in some humility, importance of not being defensive importance of, again, diversity on the team. So that demonstrates the value of the human elements before we talk about how we then combine that human element with the results and numbers and statistics and theories to make decisions. So definitely finding that striking that balance is important. But it’s it’s about and humans and date are not humans or data.
Corey Hoffstein 1:00:31
This idea of being translators, I find very fascinating. And something that I think is a really important role for anyone who works in the quant community and trying to explain what we do. And it actually, you mentioned being translators, it made me think of Google Translate. And I was tying that a little bit in my head to some of the custom attribution work you were talking about Elena. And this is this is how my brain works, by the way. And that made me think about a lot of the more now publicly available factor attribution tool. So this has been, I think, post, the evolution of smart beta, the adoption of smart beta, there’s been a lot of tools that have come out in support of smart data. And now you can go online and just drop your portfolio into an online factor decomposition, or there’s a lot of firms that will do it for you. And you’ll get back, you know, a nice big report that tells you your loading on these different factors. And in many ways, I think of it like just taking your portfolio and dropping it in Google Translate. And you have really, unless you’re very well educated in the language you’re translating into, you have no idea whether it’s a, you know, a good translation or a bad translation. And I think the intentions behind all these tools are really, you know, go back to this idea of transparency and giving people insight into what’s going on in their portfolio. But my concern is that without a common language, or without that base level of education, they can pinch potentially do more harm than good. And so I wanted to get your perspective on that, Elena, I know you guys have built out a custom attribution tool, do you think that these sorts of tools are useful for, you know, your sort of average partner that you guys work with? Or is this something really that we should, as the community, build for ourselves, make sure the translations happening appropriately, but maybe aren’t as applicable as as we think they are, and just throwing them out there and letting people toss their own portfolios into them?
Elena Khoziaeva 1:02:29
It’s, again, it’s an it’s an area of development, we’re ahead where we were years ago, but at the same time, there is always more that we can do, I would say, it’s important to speak, the language of your audience can say that I can do it in Russian, when I’m going to have somebody speaking Russian on the other side, I’ll actually get completely confused. But what I mean is that we can define factors our own way. But if that’s not the language that the audience is speaking with, they’re going to get lost. And we will not be able to explain our process and you know, do what we’re striving to do during the conversation. So again, this is the balance between speaking the language that the audience understands. And at the same time, explaining the unique approach of Bridgeway, and highlighting the importance of how we develop and define our effector models. One thing that I find very helpful is to start with definitions. And that’s what Timur mentioned about, you know, what is the factor, and then explain what we mean by that. So before we get into the depths of discussions, I like to start while we think of factors in this way, and I define the categories of the factors, I can use proxies to take it to a higher level, I can come up with analogies there, that is very helpful to set the stage before we get into the description, kind of move the dictionary ahead and explain what you mean by various factors. And I will wait and I’ll go into the details only after I make sure that the audience is with me on that. So I think it’s very important to be creative in finding and confirming that that translation works well. And again, what I’ve learned is, there is an assumption sometimes that you need all the details, you need all the coefficients. And I say that yes, definitions matter. And the reason we have our own unique way of defining factors and you know, kind of using certain numerators and denominators is because we’ve tested in our research that definitions matter, but they matter for us delivering the investment results, they don’t matter as much for us to communicate in our process. And so, find the way to speak the language. Finding that way is crucial.
Corey Hoffstein 1:04:48
You brought up this idea of people asking you about the coefficients a couple of times now and I I know in my own experience, I spend a lot of time in person and digitally answering questions from investors. And they’re almost always very well intentioned. But I find that a lot of them tend to miss the forest for the trees, right, that point of I need to know the coefficient. When in reality, when you’re even sitting in the pm shoes, you’re saying, well, the coefficient really isn’t the big muscle movement here, necessarily, it’s not the most important detail. But there’s almost a sense of security in knowing that detailed knowledge. There any other topics or questions like this, that you receive pretty frequently that you think maybe miss the forest for the trees? And are there any tools that you use to try to return the conversation in a more productive manner, and bring it back to process,
Elena Khoziaeva 1:05:45
give you one example, and I’m gonna maybe timber can come up with another one. We start conversation about the factor exposures in delivering deep exposure to factors in diversifying in various ways and bridges, various approaches to diversification. So we talk about all of that, and then we get the question. So tell me about your favorite position in the portfolio? Or tell me something about the particular stock? Or can you tell me if you have any large banks? And why do you have that large bank in a portfolio? So questions sometimes go to those specific examples, specific stocks. So I’ve tried different ways of kind of bringing the conversation back to the forest. And here’s what I found that works well, where I would say that there is different kind of screening ways and different ways to view in the portfolio. So for example, here’s a list of, let’s say, 90 names in their portfolio. And yes to, it can look as really just, you know, here’s a 2% position in one portfolio here is a 50 basis points position, now they’re in a certain another stock. So it can be combination of stocks. But here’s an alternative, and I can talk about them, I can, you can, oh, you can even pull up the stories on Google and see what’s happened with each individual’s stock, and what is the media that’s covering it. But then I say, that’s not why that name is in the portfolio. And that’s not how I see that name. So when I as a portfolio manager view in the same list of, say, 100 stocks, it’s like an x ray view, for me, it’s a completely different view, where I am seeing each of those stocks, as a mean as a way to bring exposure to particular factor. So to me, a stock represents a particular factor in the portfolio. And therefore, even though they may have bad or good stories behind them as represented to the media, but to me, each one of those stocks is only a way to get exposure to the factor. So I view the portfolio from the standpoint of the combination of the factors. And then I explained that back to the clients or prospects is like, look, as long as the stock is ranked, you know, by a particular model. That’s why it’s in the portfolio. It’s not because I read a particular story. So it’s creating color, I can create color, but then I, you know, gently explain that in a way, that’s not relevant to me as a portfolio manager. And maybe that’s why it may not be relevant to us as a client. And let me explain how I’m going to approach managing the strategy. And then I repeat, again, the factor exposures, diversification. And usually that takes us back to the forest and the audience agrees. So take that out from the stock level to the factor level. That’s how we talk about our, you know, in our communication and in our presentations, what do you found helpful? Tamra,
Tammira Philippe 1:08:37
I would just build on what you were saying and and talk about, I think a principle that has worked really well for us is, what what do we have conviction about that really matters? And I think you talked earlier, Elena about no surprises. But when we get into these challenging conversations, and I’ll just say upfront, it is challenging for us, we do not have all the answers and and we’re learning as we go to, but that’s what we strive to do is just get better and better each day and learn as we go. But what we’ve keep coming back to is, are we then true, what do we have conviction about that matters. And we strongly believe that if we believe it really, really matters, then we need to be communicating that to the client. But there are degrees of what matters. And that’s what you were talking about Cory? But back to like what quants need to do for ourselves and do a better job. Like if you firmly believe that that makes a fundamental difference for a client that that is going to be what drives your returns, then you better be communicating that to the client. But usually in our, in our case, we don’t do this necessarily, but I think we do this mentally is if we rank what really matters and is going to drive out comes in the portfolio, that things that are way down the list, the audience’s that we’re speaking to, they don’t have time for us to get way down in the weeds and talk about the things that are way down the list. And we focus our communication on the things that we have conviction about that really matter that are at the top of that list for the portfolios that we manage. And that’s been our guide. And that’s how we, that’s what we’ve been able to go back to when we get into these more difficult conversations. And we don’t get it right all the time. And we have a systematic way of debriefing after meetings that has allowed us to get better and better with that over time as well.
Corey Hoffstein 1:10:42
We’ve been talking a little bit here about in person meetings and conversations. And I think there’s often a luxury in an in person meeting where you can look someone in the face and get a better understanding as to whether they really are comprehending what you’re saying to them. Or they’ll hopefully if interrupt and ask a question, if they don’t understand something, that isn’t always the case in written communication, right. And, for me, I know I personally struggle with things like quarterly commentaries, knowing the depth on which to go into performance discussions, knowing how to keep them interesting quarter to quarter, when you have to write for a year, after a decade, it feels like you’re repeating yourself over and over. And maybe that is a benefit. The idea that some of your investment partners that are with you, I’ve been with you for a decade, and some of them are new this quarter, and their information level is different. How do you think about writing effective quarterly commentary that is meaningful to all of your investment partners, as well as hopefully interesting enough that they want to read it,
Tammira Philippe 1:11:49
I can hit this one real quick. And Elena, you can chime in, it’s really recapping some of what we’ve talked about. And frankly, when you get to define the quarterly commentary, we find that the simpler setting, but what we focused on is tie attribution to design, define and have conviction about what really matters to the client, despite what they want to hear, we talked about that as being kind, not nice. So even though even if the client sometimes we know, they would love for us to focus more on sector attribution, or stock stories, we can do those things. Those are lenses at which you can look at the portfolio despite how we’re building it. Yeah. But we’ve chosen to focus our communication, especially in a written form, and our quarterly commentary on what we really believe matters. And on this, I just have to acknowledge, we have a long ways to go ourselves at Bridgeway. But we see great examples throughout our industry of where our peers are doing this really, really well, this custom attribution thing, we’ve developed something that I see other peers doing things way beyond what we’ve been able to build. And that’s an area that we, as a firm will continue to invest in. But, you know, it’s just coming back to what we were talking about before trying to get to the simplicity after you have traveled through all the complexity. And we have found ourselves eliminating things from our communication. And then to your point, Korean repetition. I just have to chuckle with this. And hopefully it will give everybody something to reflect on when you are thinking about should I repeat myself or, you know, so there’s two competing ideas on repetition. Number one, you heard Elena talk about adult learners really need repetition, and maybe all learners to do I need repetition. You know, there’s this rule of thumb, I don’t know if it’s based in science, because I haven’t read all the science behind it, but that you need to hear something seven times before you, you know, really retain it. And people talked about great leaders, you know, really need to you got to keep repeating your vision, whatever, that’s great leadership, your vision and giving people direction, and you got to repeat that. So on one hand, you hear a message, that repetition is good and important. And then on the other hand, I’m always reminded of the message, that insanity is the idea of repeating the same thing over and over again and hoping for a different outcome. And so, for me, I find myself just laughing with that thought, every time I think about repeating something, I asked myself Wait, is this great leadership? Or is this insanity? And the only way to know is just intuition. And I just go with my gut on that. But it is kind of a funny thing to think about and I think would be a way for everybody to kind of think about the concept of should I repeat myself again, well ask yourself the question, is this insanity, like repeating myself and hoping for a different outcome? Or is this great leadership you’re saying it over and over again, but you’re saying it in a different way, maybe translating it into a different language that your audience may retain better?
Elena Khoziaeva 1:14:54
I will just add very briefly that the some concepts are more from To me that are very important for completing communication when you talk about performance. And the very first one is to own it, to really stay that, you know, whether you underperform, or you outperform in this pitch on the underperformance. You own it, and you don’t sugarcoat it, and it’s not, you know, barely or vaguely or something like that. Just Yes, we did. underperform by this much. And it was about quarter for us. And then so once you own it, and you don’t, you know, don’t feel it’s not about being defensive. It’s just being true. And so that is important. And I would say, then, Explain the facts and explain the facts. Explain why time to design timber is absolutely right, tied to design, coming from our conviction and our investment process of why that happened. And then sometimes we could provide some kind of historical perspective on performance, you know, how does that versus our either, you know, research our findings or historical performance, where it is and give some color on that we do have some commentary, that are going to proceed in our reports. And that’s where we involve various partners in talking about bridges. Sometimes it’s a cultural concept. Sometimes it is related to investment performance, but we bring in we keep that human element in writing as well. Because it’s it’s not always about the numbers. It’s understanding where the numbers are coming from, and what is our evaluation of those numbers. So all in it tied to design, and kind of use the simpler language in the communication. And don’t forget to talk about the people.
Corey Hoffstein 1:16:40
So as we wind down here, one of the final topics I want to talk about is this idea of evolution. And I know that you guys have some exciting innovations coming in the future. But I find that evolution can be a tough subject, particularly for quants, when we’re supposed to live in this world of statistical evidence based systematic investing. So just as an example, last year, I wrote a research piece titled factor fumble winter, where my question was, what happens if we believe a factor no longer works? If we believe something like or a measure? Tam, or I’ll use your language, like price to book no longer works? How long would we really have to wait to learn that it’s not statistically significant anymore. And doing all these simulations, I found that for most of the major equity factors, they would take decades, most of our careers would be over by the time we find out that they’re not technically statistically significant. And so it seems like to a certain degree, a lot of what we do, and beating our chests around evidence will actually make it very difficult for us to change our minds going forward. And nevertheless, I know that change is a really important part that research is always ongoing. How do you think about communicating an evolution of views to your clients? And in particular, where you guys, you know, again, your firm’s now a little over a quarter century old? How do you think about communicating those views to a more mature asset base that perhaps is really bought in to to a prior method that you’re now saying, you know, we think the evidence has changed for
Elena Khoziaeva 1:18:21
we think of that as a fourth pillar of our investment process. This continuous improvement is something that we communicate in very beginning. And we set expectations that those continuous improvements and updates and refinements is a part of our process. So we kind of on one hand, we have conviction, we have very rigorous process in making decisions in the research and implementing later sticking to the plan, the research, but at the same time, we communicate upfront that we are going on good, we are doing ongoing research that, you know, ongoing improvement of our own skills of our models of our portfolio construction is part of the process. So change for sake of change is just creates appearance of work. But change for a certain outcome that’s evidence based and statistically driven, is a part of our process and is implemented to improve results. It’s important to have a process of implementing updates. And we’ve developed that process and can continue to improve that process or at time, where it’s a very high bar for us to make an update to strategy. And that bar needs to be met with our investment standards. We have a separate committee that’s reviewing it from the views of the investors. So whether that change is justified, whether we improve in consistency or we improve in the returns or we’re mitigating the risks, whatever the reasons are, there is a very high bar Are to implement that. But we’ve learned, again, no surprises is important. So in order to avoid that situation that will, I’m surprised that you’re making an update or something that I thought was working, set that expectation upfront that the changes have been made to the portfolios or updates and give examples. So what we like to do as well, as we are explaining that concept of clients who say, this is what we’ve done in such year, this is the refinement that we’ve implemented in another year. And that kind of takes that, oh, you’re not going to be able to handle change away from the table, because we demonstrate that what what they’re looking at right now has been going through this ongoing process of updates and improvements. So we find it very helpful. And then as within deliver or inform about the updates that’s received well, and it’s like, oh, yeah, we’ve we’ve heard that before. And so now we see the demonstration of that, I’ll
Tammira Philippe 1:20:59
build on that and say that we really emphasize what our clients can rely on. And we talked about building an enduring firm, the thing that hasn’t changed and won’t change about Bridgeway is this idea that we are building an enduring firm with a commitment to our clients, our colleagues and our community. And we do make sure to emphasize those ideas early in our in our materials and indirect conversations. On the commitment to clients, all of what Elena talked about, is an expectation that we try to set early around putting their their interests first at all times, a way that we do that is having a structure and process around any updates, and that they can trust that we will let them know about what’s happening. And that they can also trust that some things will evolve. And we say it’ll be evolutionary, not revolutionary, but some things won’t. And so we talked earlier about our conviction in statistically driven Evidence Based Investing, that’s not going to change, we just strongly believe that this idea of updates and following the evidence, and being willing to to make those changes is a critical part of that process. You know, on the investment side, we love out of sample data. I love it on the business side, too. And I know I’ve mentioned it a couple of times, but just to quote Astro ball, again, of giving evidence of some ideas that we’ve applied at Bridgeway. But that come from another setting. Jeff Lunel talked about that more than half of the team’s use most of the information that the Astros use today, and that he believes and this is what we believe at Bridgeway, that their competitive advantage is having the discipline and the conviction in the information to stick with it, even when it feels really wrong. And so we absolutely focus on that. But to add to that, and I believe that he didn’t say this in the book, but I also believe he believes this. But we’re also having the judgment to update when it’s needed and to add new data, or new, you know, parts of the process is also critical for us as a manager. And I think, for most of our peers in the industry as well.
Corey Hoffstein 1:23:22
Tamarack. Can you talk a little bit about strategically how you think about implementing a communication plan for changes? When in the research process? Do you think about starting to bring it to partners and clients and what what that communication actually looks like in practice?
Tammira Philippe 1:23:40
I just have to laugh because we’ve had so many conversations about this over the years inside of Bridgeway, a board member of the Ridgeway funds in a meeting last week said that our CIO John Montgomery used me as a human shield for why he wouldn’t give him any more details about some research that they were doing. Because we are very disciplined about when and what to communicate. We have a process, as Elena mentioned, where the investment team comes to some conclusions from the research and make some recommendations. And then another committee, of which I’m a member, as well as to other people who are independent from the investment team have to review that and really validate that and we really talk about that being a part of our multi layer risk review. And and especially bringing in an external perspective is particularly of course, the investment training team tries to look at it from in from a client’s perspective and make sure they’re putting the client interests first. But that’s just another way that we at Bridgeway really add kind of a pause and establish saying is this in the best interest of our current clients before we implement an update? So back to the communication plan, we don’t share specific Next until we’ve reached that conclusion of approval, but then we are very disciplined and systematic in having a plan, thinking about what’s the best way to communicate this externally, exactly what’s changing what’s not. And we reinforce, like Elena said, anyway, at the beginning of it set expectations early, that it’s a part of our process to make updates, but to communicate them. So hopefully that that gives you some color on what we do and how we do it.
Corey Hoffstein 1:25:33
We mentioned a little earlier in the conversation, the benefits that have come in the investing side from evolving technology. When you look towards the future, and ways in which we can improve communication collectively as quants, how do you think that technology fits into that equation? ways in which we can better communicate better utilize? You know, is it webinars? Is it audio? Is it video? new creative ways? Is it social media? Do you think these should all play a role in the evolution of quant communication? Or do you think that at the end of the day, it’s nothing can replace that in person meeting,
Elena Khoziaeva 1:26:14
ah, sometimes nothing can replace an in person meeting sometimes that is crucial. And really, again, depends on the audience depends on the who you’re talking to. So there is a huge value in that and you know, traveling takes time, right now. But you know, think of it like right now even recording in podcasts, but we’re seeing each other that’s crucial, you know, the visual is important, then sometimes take it to the next level. And being together in one room is important in, you know, maybe sensing whether the prospects or clients understand the information. And body language is a crucial part of the communication. And you can you can do that with written materials, as you mentioned. So, depends, sometimes it’s important, and I don’t think anything can replace it in certain circumstances. However, leveraging the opportunities that technology provides to us is important and doing more and more education, doing more of a, maybe even behavioral finance, behavioral biases, education, using the technology is is wonderful and something taken as our audience and as the population demands that and expects that as the new generation comes in, and they’re all way more technologies savvy than I’ve been when I was in my 20s. So we need to be responsive to that we need to be adapting to that new environment and using the technology to social media to deliver the information and help either educate the audience or help talk about what we believe in about our conviction about the benefits of the say, quantitative investing, but do it in a way that is, again, creative, and leveraging the use of technology. So that would be my my view,
Tammira Philippe 1:28:05
I’ll just hone an ad to two points that I think are important. Number one, I get really excited about the future of better attribution, and visualization. And again, I think the odds are in the favor of clients on this one. But I mean, this applies to all investors, I think for clients, the best thing we can do is to have them understand what they have. And we can do better on that. And technology is already enabling that. And, Cory, I’d encourage you to have some other guests on who are way ahead of Bridgeway on that and having tools available, doing better attribution than even we do today. But at that, that’s in the future. So that and that’s all enabled by technology, and can be delivered through so many different channels, in fact, that are delivered better not in person, right, like they’re delivered better through a computer or, you know, a video that’s available or something like that. So that’s one. The second is going back to the very beginning in my, you know, passionate, favorite topic about building trust, the three pieces character, capability, and then communication. The communication piece is about, not just what you’re saying, but just access. And I think that in person, access will always be vital. We’re human beings, at the end of the day, who are making, you know, the important decisions. And the way we’re built is through Connect, you know, to make decisions based on connection and communication and story. And that piece will continue to be vital and we’ll have to use technology to make that more efficient to make that richer, but the you know, that idea of building connection is the foundation of trust. And and like I said in the beginning, I think that’s the most important part. Guess for our entire industry and every individual that is doing this for a living.
Corey Hoffstein 1:30:09
So last question for both of you. And it’s way out of left field. And Elena, I’m going to pick on you first because you’re a PM. So you should have an answer somewhat ready for this. And it is investing related, but it’s meant really to marry a little bit of personality and investing. And it’s the last question, I’m asking all of my guests. And the question is, if you had to take your investments today and liquidate all of them, you have to sell everything, and you can only invest in one thing for the rest of your life. What would it be and why?
Elena Khoziaeva 1:30:42
I would, you know, this is going to be my nature of diversification that’s going to come in. So I do have various portfolios, and I’m prone to mental accounting. So I’m guilty of that. I know it for myself. But I would say diversify. Find the most diversified portfolio that’s available. I do believe in stock investing, it’s going to be stocks. And I am quoted here saying stocks are fun, because they move. I am a stock investor. And my risk tolerance is pretty high. So it’s got to be stocks. It’s got to be a diversified portfolio of stocks. And it’s something that I, you know, I don’t have to, I wouldn’t be able to rebalance, right, because it’s only going to be one thing. So if I don’t have the luxury of rebalancing, and following what I believe in into their balance, and in portfolio construction, that is going to be something that’s diversified, you know, right there. To the degree that’s possible, though, I don’t like one thing. I like many things.
Corey Hoffstein 1:31:42
Alright, Tamra, we’re putting you on the spot.
Tammira Philippe 1:31:45
I should have totally cheated on this question, because I knew you were gonna ask it, but I didn’t think about it in advance. The best answer I can give you is that I think what I want to invest in doesn’t exist yet. But I’m excited about it existing in the future. And that would be that I would use my assets to invest in a quantitative social impact private equity strategy. So listen, I know we’re on the cutting edge of some of that private equity becoming more systematic as well. I mean, obviously, I’m a believer in, in those methods, I’d like that. And then, you know, I, I just, I just believe in that would combine all the things that I’m interested in passionate about in life. And also, you know, give me something that I can just set it and forget it, which is what I like to do with my personal investments, I just don’t want to have to worry about him, I want to like, let that sit there and be focused on other things like we’ve talked about today. So it doesn’t really exist yet. I do know that based on, you know, what I’m hearing and seeing from people. And I don’t have any personal private equity investments today. But I like the idea of those types of investments. And then using whatever assets, I have to invest in that type of thing, something that is going to both deliver a return but also have a broader view of what impact means for an investor
Elena Khoziaeva 1:33:17
I do I need to add, I just realized that I’ve missed one important item from my description of my portfolio. It’s got to be systematic. It’s got to be something that’s based on numbers, I wouldn’t feel comfortable otherwise. And that’s probably because that idea is engraved in me. So it’s whatever’s reflecting how I’m trained and how I’m running money. So I don’t know if it’s gonna be called factor based, or whatever it is. But it’s got to be systematic and using logic to make decisions.
Corey Hoffstein 1:33:47
If people want to learn a little bit more about Bridgeway. And the types of investment services and products you guys offer, where’s the best way for them to find that?
Tammira Philippe 1:33:57
Corey Hoffstein 1:33:58
Perfect. All right. Tamra Elena, thank you so much for joining me. This has been a really fascinating conversation one that’s very different than all the other podcasts we’ll have this season.
Elena Khoziaeva 1:34:09
Thank you very much for your time. Thank you, the audience. Here was a pleasure. Thank you.