Investing: The 4th Source of Alpha With Shaun Morgan

This faith and finance podcast is underwritten in part by Eventide Investments. They believe that investing is more than just returns. It's an opportunity to partner with companies that align with your values and are making a positive difference in the world. Learn more at eventideinvestments.com If you're a fan of active asset management, you're going to love today's program. Hi, I'm Rob West.

And even if you prefer a more passive approach to investing, you're still in for quite an education. Sean Morgan joins us today to talk about the fourth source of alpha. Sounds mysterious, doesn't it? That it's on to your calls at 800-525-7000. That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, we want to welcome Sean Morgan to the program.

He's the director of education at Eventide Asset Management, an underwriter of faith and finance. Sean, great to have you with us. Thankful to be on the show.

Well, we're delighted to be able to talk about this. We're talking about, as you know, the fourth source of alpha today. But first, I think you'd better give us the definition of alpha when it comes to investing and perhaps the first three sources of it.

Sure. So alpha is when an investor makes higher returns than the rest of the market. So if an investor is investing in a lot of stocks and their goal is to beat the returns of the S&P 500, alpha would refer to the excess returns that they generate above what the S&P 500 generates. There was a paper written over 20 years ago now by an investor named Russell Fuller. And in it, he explained how there are essentially three ways that investors believe that they can beat the market and achieve alpha. And as I explain these to you, they'll make sense. So you'll probably think of every investment strategy that you've ever heard, and you'll tie it back to one of these three advantages that investors claim that will help them beat the market.

Okay. First, there's this camp of investors that believe they have an advantage by having access to superior information. So this may be in a professional setting where you have analysts sitting at computers and mining company reports and listening to earnings calls. But sometimes this superior information that investors believe that they have is more grassroots, like the classic example of going to a mall and seeing which stores are packed full of customers and then buying stock in those companies. So the first source of alpha is this. It's access to superior information. And we call these investors fundamental investors.

Okay. Now, there's a second source of alpha that Fuller explains. And this source of alpha is when investors might say, hey, we all have access to this same information, but we have an advantage because we have a better model for processing that information. These are the people that you picture with like two giant computer screens looking at patterns and stock charts, and they buy and sell stocks without even knowing the names of the companies that they're buying and selling.

These are called quantitative investors or quants. Now, there's a third source of alpha that Fuller explains. And this is when investors identify the irrational behavioral biases in other investors, and they take advantage of them by investing against the grain. This is the example of being fearful when others are greedy and being greedy when others are fearful.

You've probably heard that before. So those are the three sources accessing superior information, processing information better, and then identifying behavioral biases. And generally, that's how investors believe that they can beat the market. Well, Sean, that makes complete sense. But obviously, the folks at Eventide now say there's a fourth source of alpha. So share that with us.

All right. So if you think about it, what's interesting about the first three sources that I explained is that they each refer to an advantage investors have in what they do. So they do deeper research or they process or they identify behavioral biases. Now, we believe the fourth source of alpha actually comes as a result of having a proper understanding of how the world works. So we come from a biblical worldview. And within this worldview, we believe that everyone is created with intrinsic dignity and worth. And we believe the Bible calls us to love God and love our neighbors in everything we do, which includes business and investing.

Yes. So instead of starting with what we do as investors, we actually start with why we invest. We invest to love God and love our neighbors.

So then we ask, how does this play itself out in investing? Well, we believe the purpose of a business is to provide something of value to its customers. So we ask, like, does the business's product or service contribute to human flourishing or do we believe that it's actually harming people? And we believe it's good business to offer something that legitimately helps people. Now, one step further, we also believe it's good business to care for all the business's neighbors, its customers, its employees, suppliers, host communities, the environment and society more broadly. So that's how we look and apply our biblical worldview as a fourth source of alpha in how we invest. This is so good. Well, we're going to continue to unpack this around the corner, including some examples of companies that create value for shareholders using this fourth source of alpha.

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This institution is not federally insured. Great to have you with us today on faith and finance. I'm Rob West. We're delighted to have you along with us today as we talk about the fourth source of alpha. That is how you invest generally breaks down into these three sources of alpha accessing superior information or processing information better or perhaps even identifying behavioral biases. This is what's going on behind the scenes when someone's investing on your behalf.

Well, we're talking today with Sean Morgan. Sean is the director of education at Eventide Asset Management, an underwriter of faith and finance. And Eventide is a faith based investing mutual fund.

And Sean introduced us to this fourth source of alpha. Sean, before we dive into some examples, just recap for our listeners that fourth source. So the fourth source we believe is actually asking why we invest in the first place and applying a worldview to it. So we come from a place of having a biblical worldview that believes the purpose of a business is actually to serve people. And so we believe that looking at businesses and how they serve people is actually a good way to examine businesses.

Yeah, that's exactly right. Now, obviously, we need to be able to apply that and see how it really works as you're investing. So perhaps you can share some examples of companies that create value for shareholders and maybe some that don't.

Oh, sure. So it's actually a really good question. And I'll give you one good example and one bad example here. So there are plenty of obvious examples of companies that are creating value. So a lot of times we think of biotech companies that are curing rare and orphan diseases. But I'll actually give you a less obvious example of a company that on the surface seems pretty mundane. So there's a company that manufactures lab instruments.

And if you're in a biotech lab or in food production, you have definitely heard of this company. They have a reputation like Apple for being high quality and innovative in their space. Now, what's interesting, here's their secret to success in a business world that is very transactional, like where labs are simply buying their equipment from these different manufacturers. This company has stood out because of their commitment to invest in their employees and serve their customers and create raving fans. So they invest heavily in training their employees and they give them iPads to help them train their customers.

And they send them to the sites of their customers to make sure their equipment is working properly and train them on how to use their instruments more effectively. They have the biggest service crew out of any of their competitors. They're the only ones investing to this level into their service crew of employees that go to their their customers. Now, while they're on site, they discover future needs of their customers and send those ideas back to the headquarters and they create new solutions that meet the needs of their customers. So their employees feel valued and invested in. These employees often say, and this is a career for me, and they feel like they feel like they're doing something important because of the way the company treats them. And this translates into their customers getting excellent service and better, more intuitive products. So we ask, is this good for business?

Absolutely. It's a creating value type model. Now, on the contrary, we'll go back a few years, there was a pharma company back in 2010 that determined they were going to grow, not by creating value.

That's the language they use. They would say that they're creating value for their shareholders, but they were actually extracting value from from their customers, their employees. And really, they extracted value from all of society. What this company would do is they would buy out small drug manufacturers and they would fire the R&D departments.

And then without changing anything about the drugs, they would hike the prices to astronomical levels. And this company, again, they would say that they're creating value for their shareholders. And for a while, investors bought into the story and their share price soared for years until 2015. It plummeted like a house of cards because they weren't actually creating value. They were merely extracting value and reallocating it. And they would say, hey, we're creating value, but they they were just taking it from people and then just giving it to their shareholders.

And this happens more than you think. Think of a cigarette company whose very product extracts from the health of its customers or social media companies whose profit model is built on addictive and harmful messages to teens. Once you apply your worldview and in our case, a worldview that's that's predicated by the Bible, it really inspires you to want to avoid investing in companies that are merely extracting value and get far more excited about the companies that are successful by truly creating value.

This is so helpful, Sean. So let's then talk about how Eventide uses this. Alpha, of course, is how well investments are outperforming their benchmark or the market. So how does Eventide then use this value creation lens you're talking about to help investors achieve alpha? Because a lot of folks think that to invest with these values in mind, you have to actually give up performance.

But you're saying the reality is just the opposite. So we believe that it's a false dichotomy to biblical virtues like kindness, humility and servant leadership. Some of these qualities that we really value. People have started putting these at odds with business success. And it's been interesting to see recently how many business consultants and academics have been circling around and even using the language that Christians have historically used to describe how we should interact with the world.

And even people that don't look to the Bible as their source of wisdom are discovering the validity in how we believe God designed the world to work. And they see these things as just good business practices. Whereas 60 years ago, it might have been more common to believe a public company needs to cut its spending on its employees and have cutthroat, ruthless company cultures. There's a much bigger emphasis now on how important it is for the success of a business to create a culture that honors the dignity and worth of everyone working there. Now, what's notable is that a lot of investors still don't look at these aspects in companies when they invest. So for us, we believe we have an advantage by seeing the ways that companies treat their customers, employees, suppliers and other neighbors. And we factor that into how we value a business. And then later, if I say if not all the time, but if these things lead to better performance by the company, that's when other investors jump in.

So we believe that our source of alpha comes as a result of our worldview and our calling to love God and love our neighbors and how we invest in businesses. Yeah. And you're saying this doesn't have to be a zero sum game. In fact, you know, one person benefiting doesn't automatically have to lead to someone else losing, right?

That's exactly right. It's a grow the pie type mentality that when you look at the different neighbors of a business, you say by making good investments and making sure that each one of those neighbors are benefiting, it actually leads to a more sustainable business model for long term success than a more myopic focus on short term results that oftentimes causes businesses to just cut costs at the expense of a lot of their stakeholders and their neighbors. So we actually believe that a more sustainable way to run the business is simply loving your neighbors.

I love it. Well, that ultimately leads to what you all say, and that is investing that makes the world rejoice. Unfortunately, we're out of time today, Sean. But how can folks get more information? So you can go to our website, which is eventideinvestments.com. Awesome. Eventideinvestments.com.

And I know you have a great article on the fourth source of alpha on your website. We'll also put a link to that in today's show notes. Sean, thanks for stopping by.

Thanks, Rob. That's Sean Morgan, director of education at Eventide Asset Management. Again, to learn more, go to eventideinvestments.com. Well, your calls are next. The number 800-525-7000. This is Faith and Finance.

We'll be right back. We're grateful for support from Eventide Investments on the Faith and Finance Program. Eventide's approach to values-based investing is grounded in the belief that humankind was created in the image of God with intrinsic dignity, value, and worth. Eventide calls this investing that makes the world rejoice. More information is available at eventideinvestments.com.

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Welcome back to Faith and Finance. I'm your host, Rob West. The number to call is 800-525-7000. I'm looking forward to hearing from you as we take your calls and questions from across the country.

In fact, let's head to Fort Lauderdale. Tara, thank you for calling. Go right ahead. Hi. Thank you for taking my call. Yes, ma'am. My question is regarding the student loan repayment option plan.

Yes. There are two options, so I am not too sure about which one would be the best. There's one, which is income-driven repayment plan, and there's another one that is a term base. But for the income-driven repayment plan, the loan cannot be forgiven at all. And for the term base, you have like a fixed payment, and that loan can be forgiven.

So I was wondering if you could give me maybe some advice and see what would be the best. Yeah, which loan forgiveness program were you trying to qualify for? I actually am done with school. Now it's the repayment.

I have to repay my student loan. Okay. Right. And so how much do you owe on the student loans? It's a lot. Close to $100,000. Okay.

All right. Well, with the income-driven repayment option, it ties the amount you pay to a portion of your income, and then it extends the length of time you're in repayment to 20 or 25 years. And then when the term is over, you can get income-driven loan forgiveness for your remaining debt.

The standard repayment lasts 10 years and is the best one to stick with to pay less in interest over time. But the key is whether or not you can afford to do that. Does that standard repayment fit into your budget? No, it's really too high.

That's the reason I was considering the term base, which is a little bit more affordable. But because the loan cannot be forgiven at all, and I also teach, so I was a little bit concerned about that. Do you qualify for the teacher's loan forgiveness program? Not yet. Not yet. So I need more time. But you will at some point? Yes, I hope.

I'm hoping maybe in five years. Okay. Well, I think that's the key. I mean, you have to teach full-time for five consecutive academic years in a low-income school. So that's not for all teachers. Would you qualify for that forgiveness? No, I don't think it's a low-income school. So that really removes my concern. Yeah, so I think what it probably, I mean, you'd need to check with the Department of Education, but do you just need to make sure that you would qualify for one of the loan forgiveness programs out there?

And if you don't, then that kind of takes that off the table. So if not, then I would just look probably at the income-based option, which would ensure that it fits into your budget. Now, the extent to which you can get that payment back up to what it would normally be is a good thing, because that'll just help you pay it off quicker, which means less interest paid. But if you're looking for loan forgiveness, you need to read all the fine print and make sure that you actually qualify for it before you were to allow that to help you make this decision.

Otherwise, I think I would pay as much as you can, but if that standard payment doesn't fit into your budget, that's the benefit of the federal loan program is you have the ability to reduce that payment down to something that fits into your income. Okay. Thank you so much. I appreciate your time. All right, Tara. Thank you for your call today. We appreciate it.

To Florida. Hi, Caleb. Go ahead. Hi there. I appreciate you taking my call. How are you? I'm doing great.

Thanks for your call. We appreciate it. My wife and I, we just recently had a baby. It's our first one, and we have about $5,000 worth of medical bills, and I just started listening to your station last week, and I know how much you talked about your emergency fund. I don't know if it would be best to save up and pay off the medical bills or get divided up and pay it in segments and do the hospital bill and build an emergency fund. Yeah. So you have $5,000 saved, is that right? Or that's the total for the bill? That's the total for the bill, yeah.

Okay. What do you all have in savings right now? Oh, we probably got a couple grand. Okay, about $2,000. And how much margin do you have extra per month without paying anything toward the hospital bill?

How much do you typically have left over? Oh, we probably have $1,000 a week extra, so about four grand. I just got a better paying job. Okay, that's great.

Yeah, I love that. Well, if you have $4,000 a month in surplus and you guys can limit your lifestyle, you know, the tendency here, Caleb, is that as your income increases, your lifestyle increases with it, and you just have to guard against that, especially with you trying to pay this bill off and fund the emergency fund. So I'd probably ask them if you could get on a repayment plan. If you were to call them today and say, listen, I'm going to pay you a couple of thousand dollars a month over the next three months until this is paid off, they'd be thrilled. And they probably wouldn't charge you a dime in interest because if you're a cash payer for that $5,000 and you'd pay that amount per month, they would be ecstatic. And that would allow you then to direct maybe a couple of thousand a month toward building up that emergency fund and a couple of thousand toward this bill. Now, if they said they were going to charge you interest or they didn't go for it, well, then I think you're only 30 days away, perhaps, from paying this whole thing off. And because you have so much in the way of discretionary income, as long as you just really focus on getting that emergency fund built up as your next step, then you'll be well on your way to having both this debt paid off as well as that three to six months' worth of expenses. You should have that in no time, just given how modestly you're living. Does that make sense?

Yeah, it makes perfect sense. So what did he say to tell the hospital? I would just call them and say, listen, I'd like to get on a payment plan with you and I can send you $2,000 a month over the next 90 days until this is paid off. And I'm pretty sure they're going to tell you, great, let's do it, if you're willing to do that. And just confirm that they're not going to charge you any interest.

But hospitals are really, and doctors' offices are willing to work with you, just because so often they don't get paid and there's very little recourse because they have limited impact even on impacting your credit if you don't pay it. So the fact that you're willing to pay it off in that short of a time period, they'll be thrilled to work with you. Well, that sounds great. I really appreciate it. All right, Caleb.

Hey, we appreciate your call. Congrats on that little one. Is it a little boy or a little girl? It's a little boy. He's about eight months now. Oh, wow. What's his name?

Carter. Awesome. That's great. Well, congrats.

Nothing better than being a dad. So appreciate you calling the program and listening to the program. May God bless you and your wife, and thanks for calling today.

Well, that does it for us today. I'm Rob West. Thanks to our amazing production team and to you for listening. I hope you'll join us again next time right here on Faith and Finance. Faith and Finance is provided by Faith Buy and listeners like you.