MOUNT LUCAS FOCUSED
LARGE CAP VALUE
Mount Lucas Focused Large Cap Value is a quantitative strategy designed to identify stocks with a deep value profile within the S&P 500 universe. Our stock picking algorithms are backed by a track record spanning multiple market cycles and represent a robust implementation of years of academic work on the equity risk premium and applied behavioral finance.Contact US FOR MORE INFO
Please read on for more about Mount Lucas Focused Large Cap Value.
A QUANTITATIVE APPROACH TO FINDING VALUE
Mount Lucas Focused Large Cap Value's quantitative models remove human bias and may outperform the market over the long term.
We believe that the path to outperformance is applied behavioral finance. Investor decisions are tainted by bias and fear. Devoid of emotions and outside influence, the strategy seeks to capitalize on these basic human tendencies to outperform the market. Through a quantitative, rigorous selection process we buy stocks with a deep value profile, stocks that have been beaten down by the market, stocks that the typical investor can't bear to buy or to hold.
FINANCE VS PHYSICS
We do not confuse finance and physics. Mount Lucas Focused Large Cap Value is straight forward, robust, and based upon an abundance of academic research using published fundamental data. Our model is non-parametric, without specific thresholds on the variables used in the model, allowing it to adapt to differing market environments as general levels of equity valuation rise and fall.
ACTIVE AND DISCIPLINED
Our quantitative approach to stock selection allows us to be both active and disciplined. Our objective is outperformance, not similarity to the index. Our model is dispassionate about the underlying stories, newsflow, and noise that surrounds stock market investing, allowing it to stray from the safety of the crowd. Our quantitative process maintains a disciplined adherence to selection criteria, trade dates, and holding periods.
APPLIED BEHAVIORAL FINANCE
‘I think of behavioral finance as simply "open-minded finance".’
Richard Thaler (1993)
Conventional economic theories such as the Capital Asset Pricing Model and Efficient Market Hypothesis center around the idea that people are generally predictable and that they mostly act in a rational manner. However, these traditional theories do not explain or even acknowledge the irrationality that sometimes drives markets.
Behavioral finance, also known as behavioral economics, is a relatively new and expanding field of study into why people make seemingly irrational economic decisions. It combines economics and psychology to help us understand, if not explain, the irrational and illogical. In 2017, economist Richard Thaler was awarded the Nobel Memorial Prize in Economic Sciences for his pioneering work which establishes that people are predictably irrational and often behave in a manner which defies traditional economic theory.
The Mount Lucas Focused Large Cap Value strategy incorporates our understanding of behavioral finance and human irrationality to pick undervalued stocks. These stocks have strong fundamentals but are often unpopular and contrarian. Our quantitative approach enforces a strict discipline to selection criteria and holding periods in order to maximize investor alpha.Contact US FOR MORE INFO
HOW DOES FEAR CREATE A VALUE OPPORTUNITY
What drives people to sell stocks while they are undervalued? What do we know, that sellers do not know, that allows us to buy cheap stocks?
Our research into behavioral finance has resulted in the conclusion that stocks may become undervalued as a result of emotional contagions, and more directly - fear. Fear spreads easily, and when people are afraid they act irrationally. Two specific fears drive people to sell stocks at low valuations: fear of a stock going to zero and fear of losing a profit.Contact US FOR MORE INFO
FEAR OF A STOCK GOING TO ZERO
We are all subject to talking heads fueled by conjecture and headlines crafted to attract the biggest audience possible. "Retail Apocalypse" has been a common theme in financial news over the past few years, reasonably so, as retailers face a changing and challenging market environment. The retail sector, as a whole, sold off. However, not every retailer is the same. Good companies can weather bad market conditions. Best Buy (BBY) has adapted to the new market reality, strengthening their financial situation while many fellow retailers fought to maintain status quo . Our model identified Best Buy as undervalued in 2017 and through the first quarter of 2018 it outperformed Amazon, Apple, and even Netflix over the past 12 months. People get discouraged about a stock and transfer money to other investments, regardless of how strong the fundamentals look, out of fear of the stock going to zero. That fear creates value in good companies.Contact US FOR MORE INFO
FEAR OF LOSING A PROFIT
One of the key components of the Mount Lucas Focused Large Cap Value model is that momentum persists. It is well established in financial literature that buying stocks which have already increased in price tends to be a positive strategy in the long run, yet many investors sell attractively priced stocks prematurely out of the fear of losing a profit. Rising stocks are discussed in a negative light by the competition, naysayers and second-guessers. Fear and negativity permeate the minds of those who previously bolstered enough conviction about a company to invest in it. The fear of losing profit can drive investors to discount a company's strengths and fundamentals and sell it prematurely. Do you know anyone who sold Apple during any one of its numerous runups over the past decade? The Mount Lucas Focused Large Cap Value strategy not only incorporates momentum into its selection process, but invests with a disciplined holding period.Contact US FOR MORE INFO
HIGH ACTIVE SHARE AS A COMPLEMENT TO INDEXING
Many actively managed Large Cap Equity funds share a lot of similarities. They share similar holdings, have similar metrics, and of course have similar performance to each other and their benchmark indexes. In other words, they are closet indexers. While indexing is not a problem, it makes no sense to pay managers an active fee to track the benchmark.
Active Share is a measurement of the percentage of stocks held in a portfolio that differ from the benchmark. The higher a fund's Active Share, the more it differs from from the benchmark. A 2006 study by Martijn Cremers and Antti Petajisto* of the Yale School of Management introduced Active share and showed that high active share is a good indicator of fund performance. It further showed that funds with an active share of 80% or greater outperformed their benchmark. However, funds have been following a path towards indexing for years as fund managers revert to the safety of the crowd. The Mount Lucas Focused Large Cap Value strategy takes a quantitative approach to picking stocks, straying from fellow large cap value funds which tend to stick closely to the benchmark index.
We believe the Mount Lucas Focused Large Cap Value strategy pairs well with low cost passive indexing strategies to provide a complete portfolio with the potential to outperform. With a stated goal of index outperformance you can expect to see high Active Share, relatively low correlation with the benchmark, along with higher volatility and tracking error. In the past, Focused Large Cap Value has performed similar to the benchmark in down markets, but has seen superior returns in rising markets. We attribute part of the fund's past success on its high Active Share ratio.
* How Active is Your Fund Manager? A New Measure That Predicts Performance by Martijn Cremers and Antti PetajistoContact US FOR MORE INFO
IT PAYS TO BE DIFFERENT, BUT DIFFERENT REQUIRES DISCIPLINE
The Mount Lucas Focused Large Cap Value portfolio is often a plaid suit in a room full of stripes. We do not actively try to be different, but we also don't try to be the same. We reach for our best jacket while everyone else is coordinating outfits. Our focus is earning the value premium, not the value benchmark. Many Large Cap Value managers gravitate around similar holdings. There is a perceived safety of the crowd, but the price of that safety is outperformance. Our quantitative stock picking algorithms, unaware of the crowd and deaf to market noise, are designed to look for unbiased value.
Regardless of current market sentiment, our algorthms do what the literature says works over time:
- 'Value' equity outperforms
- Momentum persists
- Smaller beats larger
- Over diversifying is dilutive
These things are simple, but it is not easy to step away from the crowd. Mount Lucas U.S. Large Cap Value's quantitative approach is systematized discipline. It adheres to a strict set of stock picking criteria, as well as a disciplined trading methodology which has shown an ability to outperform the benchmark over the long term.
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The results presented below are strategy composite results.As of 5/31/2018
|1 mo||3 mo||6 mo||YTD||1
|Mount Lucas Focused LCV||1.67%||5.80%||10.98%||7.37%||26.12%||23.13%||11.18%||13.32%||12.98%||9.54%|
|S&P 500 Index||2.41%||0.19%||3.16%||2.02%||14.38%||15.92%||10.98%||12.98%||12.86%||9.14%|
|Russell 1000 Value Index||0.59%||-0.85%||-0.50%||-1.93%||8.25%||11.41%||7.45%||10.09%||10.90%||7.38%|
This commentary is intended for INFORMATIONAL PURPOSES ONLY. The information contained herein is not and should not be deemed as an offer or solicitation of any products or services of Mount Lucas Management LP (“Mount Lucas”). An investment in products or accounts managed by Mount Lucas can only be made on the basis of a Confidential Offering Memorandum or pursuant to an investment management agreement.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS and you should be aware of the risks involved with any type of investment. The effectiveness of any strategy will depend on each person’s situation and a number of complex factors. Mount Lucas does not give tax or accounting advice to clients. You should consult with your own advisor on the tax and accounting implications of any investment strategy.
Information used herein is obtained from publicly available sources which Mount Lucas believes to be reliable. Mount Lucas makes no warranties or representations as to the accuracy or completeness of the information contained in this commentary and shall not be liable for any errors or inaccuracies herein. Likewise, information contained on third party websites that Mount Lucas may link to is not reviewed in its entirety for accuracy and Mount Lucas assumes no liability for the information contained on these websites.
This commentary may not be copied or distributed without the express written consent of Mount Lucas.
Please contact us for more information about Mount Lucas Focused Large Cap Value.