Asset management as cooking, asset classes as food, and factors as nutrients

Just like ‘eating right’ requires you to look through food labels to understand the nutrient content, ‘investing right’ means looking through asset class labels for the underlying factor risks. It's the nutrients in the food that matter. And similarly, the factors matter, not the asset labels. - Andrew Ang, Columbia University 

The Ang quote has been making the rounds of financial blogs and news for some time. I like the analogy. Asset classes are like different foods. The real value of the food is in the nutrients. We eat the food to ultimately get at the nutrients. 

Unfortunately, we often do not eat the nutrient directly. The foods and nutrients are balanced in the meals we eat. We like some foods. We have aversion to others. There are good meals prepared by skilled chefs and there are bad meals where we do not get any value. The difference is often with how the food is prepared. Asset management could be considered the cooking or the preparation of the meal. 

Asset management is about balancing risk factors and finding or generating alpha. The combination or choice of foods and factors and their preparation create alpha. The nutrients are out there, but some managers are able to bundle or find them better than others. Similarly, a bad chef can have access to foods and nutrients but actually deliver them poorly. We are underwhelmed with the preparation of some of our meals.

There is a price for food and those nutrients. We will not pay a premium for poorly prepared food and we should not pay a premium for poor asset management. Those managers that can deliver the right balance of factors should be paid a premium.

You never want to go too far with any analogy, but the skilled manager who effectively uses asset classes and factors is no different than a chef who uses well food and nutrients.