We believe there is an imperfect understanding of where alpha comes from.
Rather than trying to pick winners, investors should avoid the losers.
A proven team with 20+ years of successful partnership building modern,
efficient, and dependable asset management firms.
Our portfolio solutions are designed to help you build your business and
grow your client relationships.
Our custom indexes seek to achieve a singular goal – enhance all existing
investment universes by removing the losers.
Use our H-Factor System to help avoid the losers inside your portfolio.
Partner with us to access our unique model solutions so you have more
time to focus on building your practice and create wealth for your
Our custom indexes seek to achieve a singular goal – enhance all existing investment
universes by removing the losers.
We believe there is an imperfect understanding of where alpha comes from. Rather than trying to pick winners, investors should avoid the losers.
A proven team with 20+ years of successful partnership building modern, efficient, and dependable asset management firms.
Our portfolio solutions are designed to help you build your business and grow your client relationships.
AVOIDERS – New Age Alpha’s ETF suite utilizing our proprietary H-Factor methodology.
Our custom indexes seek to achieve a singular goal – enhance all existing investment universes by removing the losers.
Use our H-Factor System to help avoid the losers inside your portfolio.
Partner with us to access our unique model solutions so you have more time to focus on building your practice and create wealth for your clients.
It may sound like a bad joke: “What do prisoners, senior citizens and market investors all have in common?” But for a certain subset of each, the answer is very real: Chronophobia, or fear of the future. Classified in the DSM-5, its sufferers are often characterized by acute anxiety or distress when pondering future events. Prisoners might understandably suffer from it due to the length of their prison sentences and senior citizens, sensing the impending end of their time on earth, might also be justified. Market investors and their irrational fear of rate hikes, however? They simply need to grow up.
Part of the problem, in our opinion, is a misunderstanding of how interest rate increases operate in the real world. Common perception is that higher interest rates make credit more expensive and, therefore, act as a tax on a borrower’s profitability. While this is largely true in the short term, it causes people to jump to a conclusion that is far from a logical tautology. You see, many investors see rising interest rates as a signal to shift from growth to value-style companies. They believe that the so-called “blue chips” are steeled against rising rates and, therefore, are more secure. And they knock growth stocks on the basis of higher loan servicing and related costs. At New Age Alpha, we contest this notion. We believe there’s a chasm-wide difference between “growth” and “growing.” Over the long term, the impact interest rates have on valuation is a much stronger force than the cost of credit. This is because stocks are worth the present value of their future cash flows. But what does “present value” mean? It means the amount of the future cash flows discounted by the interest rate (sometimes called the “discount rate.”) In other words, as interest rates go up, so too does the discounting of future cash flows, making those future cash flows now worth less. And also, the stock.
For a long time, it felt like the market was only asking one question regarding interest rates: “will they?” or “won’t they?” But this type of market forecasting didn’t account for what may actually happen after such increases. This is where we find ourselves now, amid a very large rotation from growth to value stocks. In this case, investors anticipated the rate change and effectively repriced stocks before it even occurred. This drove the price of value stocks higher while beating down growth stocks, meaning the former now required more growth while the latter required less. And who do you think is going to win that race? Worse yet, this macro-movement ignored research showing little relation between interest rates and the ability of value to outperform growth. For example, Thomas Maloney and Tobias Moskowitz, in a 2020 working paper, argue that the relationship between rates and value stocks is too complicated to pin down and any observed correlation is likely random variation. In essence, the best-case scenario for those investors flocking to value is that interest rates do, in fact, impact growth stocks and they merely overpaid for safety. But if interest rates do not have such an effect? They may have sold growth at a loss and paid a premium for value. Because, you see, that’s the most important question to ask: What is the probability a company will fail to deliver the growth implied by its stock price? A great company at a bad price can actually be a terrible investment. Meanwhile, a so-so company bought as a bargain can be a slam dunk. That’s why it’s so important to focus less on scary macro-market movements and more on a company’s probability of delivering growth.
At New Age Alpha, we put a number to this probability. It’s called the H-Factor. It’s New Age Alpha’s proprietary methodology designed to systematically measure the amount of vague and ambiguous information impounded into a stock’s price. By putting a number to this risk of human behavior—the Human Factor—we believe we can measure it and avoid it. In this way, we believe we can produce a differentiated source of outperformance in any investment universe by aiming to simply avoid the losers. As we showed recently in a companion piece about interest rates, the link between rates and future stock returns is distorted at the very least, if not utterly uncorrelated. This makes certain investors’ Chronophobia all the more bewildering. Just as most grown-ups know the boogie man isn’t real, so too do they recognize that a single action often results in varied, unpredictable actions a la The Butterfly Effect. In a complicated market full of unintended consequences, rising interest rates are merely a single action bound to result in myriad reactions. It’s downright childish to think otherwise.
New Age Alpha is ushering in a new age of asset management by applying an actuarial-based approach to investment portfolios. Utilizing these principles built by the insurance industry, we construct portfolio solutions, indexes, and tools that aim to identify and avoid a mispricing risk caused by investor behavior. Embedding well-established principles of probability theory in our investment methodology, we construct solutions that aim to avoid overpriced stocks in a portfolio—losers. We combine the alpha potential of active management with the advantages of rules-based investing to build differentiated equity, fixed income and ESG-themed portfolios that drive long-term outperformance.
Thomas Maloney & Tobias J. Moskowitz, “Value and Interest Rates: Are Rates to Blame for Value’s Torments?” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3608155, SSRN. 6/16/2020. Access Date: 4/25/22
New Age Alpha refers to the New Age Alpha separate but affiliated entities, generally, rather than to one particular entity. These entities are New Age Alpha LLC and New Age Alpha Advisors, LLC (“New Age Alpha Advisors”). Investment advice is offered through New Age Alpha Advisors, LLC a wholly-owned subsidiary of New Age Alpha LLC. New Age Alpha Advisors is an investment advisor registered with the U.S. Securities and Exchange Commission. New Age Alpha Advisors, located in the State of New York, only transacts business in those states in which it is properly registered or qualifies for an applicable exemption or exclusion from such state’s registration requirements. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security. It is not possible to invest directly in an index. We are not soliciting any action based on this material. It is for general information purposes only. Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or purchased by New Age Alpha), or an Index, product, or a referenced strategy, either directly or indirectly, in this material, will be profitable or equal to corresponding indicated performance levels. Information contained herein and used in the analysis provided by New Age Alpha has been obtained from sources believed to be reliable, but not guaranteed. It has been prepared solely for informational purposes on an “as is” basis and New Age Alpha does not make any warranty or representation regarding the information. Investors should be aware of the risks associated with data sources and quantitative processes used in our investment management process. Errors may exist in data acquired from third-party vendors. This overview is limited to providing general information about New Age Alpha and its investment advisory services. New Age Alpha’s specific advice is given only within the context of its contractual agreements with each client. Investment advice may only be rendered after the delivery of Form ADV Part 2 (an investment advisor’s disclosure document) and the execution of an investment agreement by the client and New Age Alpha. New Age Alpha’s Form ADV Part 2 and accompanying descriptions are available upon request. © New Age Alpha LLC, 2022
CC: NAA10330 | SKU: 10197