Excess Returns Podcast – Detailed Summary Episode: Evidence Based Factor Investing | Matt Zenz
Date: October 4, 2025
Guests:

• Matt Zenz, Longview Research Partners
• Hosts: Jack Forehand, Justin Carbonneau

Episode Overview

This episode is a deep dive into evidence-based factor investing with guest Matt Zenz, who discusses both the philosophy and practical realities of applying academic insights in real portfolios. The conversation explores critical factor definitions, portfolio construction, implementation challenges, and future trends, blending academic rigor with real-world investment experience. The tone is candid, engaging, and occasionally humorous, with practical takeaways for investors at all levels.

Key Discussion Points & Insights

1. What is Evidence-Based Investing?

• Definition:
  Zenz defines it as a rules-based, systematic, transparent approach grounded in empirical data with a high expectation of long-term success.

  "To me, an evidence-based structured approach is something that's systematic, meaning rules-based, transparent, you know what they're doing and you have a strong confidence that this will work in the future." – Matt Zenz (07:30)

• Misconceptions:
  Many managers claim to be evidence-based by touting lots of data and process but operate more like traditional active managers.

  "There's a lot of active managers who are moonlighting as evidence-based investors by saying we have lots of data, we have a good story...for me that's no different than the traditional active managers." – Matt Zenz (07:55)

2. What Makes a Good Factor?

• Characteristics:

  • Sensible economic rationale
  • Robust long-term, multi-market data
  • Implementable in real-world portfolios

  "It's got to have a sensible reason. You got to have data to back it up. And then lastly, it needs to be implementable, it needs to be realistic." – Matt Zenz (10:37)

• Analogy:
  Zenz likens factor vetting to drug approval: you need a plausible story, extensive testing, and practical usability. (09:25–11:22)

3. Factor Selection and Portfolio Construction

• Core Factors:

  • Value
  • Profitability/Quality
  • Size
  • Momentum

• Avoiding the “Factor Zoo”:

  "You want to use the least number of things that tell you the most information...there's probably about five factors that actually have meaningful value." – Matt Zenz (12:43)

• How Factors Interact:
  Prefer combining factors rather than isolating them, especially value and profitability/quality, to better capture expected returns.

  "You really need to combine them...you get a more pure exposure to what you care about, which is higher expected returns." – Matt Zenz (36:41)

4. Implementation Nuances

• Price-to-Book as the Value Metric:
  Zenz defends its use for low turnover and purity, despite criticisms in the intangible economy.

  "We want to isolate value. We think price to book is the best way to do that because it has the lowest turnover...adding more variables just ends up increasing the turnover in your strategy." – Matt Zenz (15:05)

• Intangibles in Value Investing:
  Modifying value metrics for intangibles is unreliable; intangibles are hard to capitalize or value precisely, and removing them just adds noise.

  "Trying to do it just adds noise and no signal." – Matt Zenz (25:41)

• Momentum Use:
  Used primarily to inform buy/sell timing rather than as a standalone selection factor, due to its high turnover and short time effect. (40:00)

5. Market Regimes and Factor Performance

• Tech/Growth Dominance Context:
  Market already prices in widespread knowledge about dominant firms; large-caps offer lower expected returns because of lower risk premiums.

  "Everything I just said, people know that's already in the price...those large companies outperformed. But once they became those largest companies, their future returns were below the market." – Matt Zenz (16:06)

• Mean Reversion:
  History shows high-growth and high-margin companies eventually revert to the mean, but periods of deviation are normal and expected. (17:46–19:08)

• Long Cycles of Underperformance:
  It can take decades of underperformance before discarding a factor, analogous to flipping a weighted coin and encountering streaks.

  "How many more times would I have to flip tails in the future and to throw out that 90 years of data?" – Matt Zenz (21:07)

6. Practical Portfolio Management

• Factor Timing ("Passive-Aggressive Investing"):

  • Slightly increase value exposure when valuation spreads are wide ("sin a little" approach).

  "We're talking about a couple percentage points. We're not talking about huge moves here..." – Matt Zenz (35:23)

• Managing Size and Liquidity Constraints:
  Smaller and nimbler funds can exploit premiums unavailable to massive players due to liquidity and regulatory constraints, especially in small and microcap value.

  "That's really why we launched Longview Research Partners...we felt like we could do it better in a more nimble way." – Matt Zenz (48:22–51:09)

7. Industry Trends & The Role of AI

• AI as a Tool, Not an Oracle:
  AI improves efficiency in developing research tools but should not dictate strategy development—beware of data-mined "spurious factors."

  "AI is a great tool. It's not an oracle. And so I'd be very worried if you were using AI to try to figure out what the next factor premium is..." – Matt Zenz (52:48)

• Implementation is Where Alpha Remains:
  Future innovation lies in tax efficiency, cash drag, and real-world implementation, not in new factors. (54:32)

Notable Quotes & Memorable Moments

On why patience pays:

"Just staying invested in a low cost, diversified solution, sticking to the path, you're going to come out way ahead than the people who are constantly trying to change and hit home runs. A lot of singles get you ahead of the guy swinging for homers." – Matt Zenz (00:00, repeated at 57:25)

On the “coin flip” analogy for factor persistence:

"Imagine I gave you a coin ...and you flip the coin for 90 years. In that 90 year period, you got a lot more heads than tails... then after that ...you then flip the coin another 20 times and ...got more tails than you did heads..." – Matt Zenz (21:07)

On factor definitions:

"It's got to have a sensible reason ...data to back it up ...implementable." – Matt Zenz (10:37)

On large firm implementation challenges:

"When you invest with these large fund families, those are the inherent biases, those are the inherent lags, the inherent opportunity costs that you're going to suffer." – Matt Zenz (48:22)

On the 60/40 portfolio debate:

"The traditional call it 60, 40 portfolio is a fantastic portfolio. It is unbelievably diversified. It is low cost, liquid tax efficient. And to get me to move money out of that into something else, you need to have a really compelling case." – Matt Zenz (55:39)

Timestamps of Important Segments

• 00:00 – "You can't eat value exposure, right? But you can eat returns..." (Zenz's philosophy on outcome-focused investing)
• 03:21–05:06 – Zenz’s engineering background influences on systematic investing and implementation
• 07:30–08:51 – What is evidence-based investing and common misconceptions
• 09:25–11:22 – What is a factor? (pill analogy)
• 12:43–14:53 – Key factors, avoiding the "factor zoo", and how few really matter
• 15:05 – Why use price-to-book for value
• 16:06–19:34 – Market context: Large cap tech and mean reversion
• 20:47–22:39 – On underperformance, flipping coins analogy
• 25:41 – Difficulty in valuing intangibles; noise vs signal
• 31:57 – Can you "time" factors? The case for mild, evidence-based tilts
• 35:10–36:41 – Practicalities of factor timing, momentum, and implementation frequency
• 40:00 – Momentum's real-world use and limitations
• 43:02–44:29 – Size premium: existence only in conjunction with value/quality
• 44:53–48:22 – Small fund advantages, liquidity, implementation, and industry constraints
• 52:48–54:15 – Impact and appropriate use of AI/machine learning
• 54:32 – Where is the next wave of innovation?
• 55:39 – Zenz's contrarian view: The underrated greatness of 60/40
• 57:25 – Final lesson: If it sounds too good to be true, it is

Conclusion and Parting Lessons

• If it sounds too good to be true, it probably is. (57:25)
• The boring, evidence-based, low-turnover, diversified approach still wins over the long run.
• Implementation matters as much as, if not more than, research.
• Beware of the factor zoo—stick with what’s robust, practical, and proven through decades.
• Factor investing requires patience, discipline, and an understanding of its long-term nature and rare but expected tough periods.

This episode blends in-depth academic knowledge with real-world pragmatism, and Matt Zenz makes a compelling case for thoughtful, patient, evidence-driven strategies—while warning against complexity, overfitting, and chasing short-term trends.