When a king and godfather sing off the same hymn sheet it might be worth listening.
Both investors, who are known as the bond king and smart beta godfather respectively, are repeating warning they have made in the last month as the CBOE Volatility Index (VIX), Wall Street’s gauge of fear in the market, has fallen to historical lows.
‘People don't lose money due to risk because they are ready for it. People lose money when they believe they are invested safely,’ said Gundlach.
‘For now, it's okay to dance the risk dance but make sure you dance near the door,’ said Gundlach, DoubleLine chief executive and CIO, who compared the current market environment to that of 2006.
His comments echo those he made on a conference call earlier this month when he warned that the days of low volatility would not last forever and cautioned investors to prepare for a summer correction in US equity markets, while still being bullish long-term.
‘The days of low volatility are probably numbered,’ he said at the time. ‘If you're a trader or a speculator I think you should be raising cash today, literally today. If you're an investor you can easily sit through a seasonally weak period.’
Arnott, founder and chairman of Research Affiliates, spoke at the same conference about the dangers of chasing trends and buying into low volatility funds.
‘Most investors already practice a form of factor timing, a form of market timing, it’s called performance chasing, it’s in the wrong direction,’ he said.
‘If instead of doing this, we emphasize factors or strategies that are trading cheap relative to their own history [rather] than emphasizing factors or strategies that are trading rich, we have an opportunity to add some value.’
Arnott (pictured above) said even institutional consultants could be guilty of trend chasing and argued they should place a greater focus on alpha and skill rather than historical returns.
‘If the manager has underperformed by 3% a year for the last three years and is on a watch list but they are trading 20% cheaper than they were three years ago, that’s a buy not a sell,’ he said. ‘If a manager has outperformed by 3% a year and is trading 20% rich relative to where they were three years ago, that's a sell not a buy.’
Arnott said investors who bought low-volatility strategies at the moment were falling into the same trap.
‘If you are paying twice as much for low-beta stocks than for high-beta stocks, how much cushioning of the downside risk do you really think you are going to get if you pay twice as much for those stocks,’ he said.
In an interview with Citywire, Arnott made similar comments, encouraging investors to buy value funds and steer clear of low volatility strategies. See the full interview here.