There are signs that the handful of computer-driven quantitative investment strategies available to retail investors are starting to regain the stellar performance that made them popular before the financial crisis.
But they could be about to be tested again by the changing market cycle.
Last month, Investment Adviser reported that the three Artemis funds driven by Philip Wolstencroft and Peter Saacke’s SmartGarp process had begun to record inflows for the first time since 2008 in the wake of a performance recovery. With the exception of a slump in 2011 for the Artemis European Growth fund, all three portfolios have outperformed their peers in 2010, 2011, 2012 and 2013.
Along a similar line, Old Mutual Global Investors’ Ian Heslop, who leads the group’s quantitative investment team, has also seen the performance of his equity funds shoot to the top of the performance charts across one- and three-year periods after enduring heavy losses in 2008.
Artemis’s funds – arguably the more high profile of the two ranges – accounted for roughly £3.5bn of assets at their peak in October 2007. All three funds had produced top-quartile performance in 2004, 2005 and 2006.
But in 2007 the process began to come unstuck: Artemis Capital and Artemis European Growth slumped to the bottom quartile of their respective sectors for 2007, and the Global Growth fund joined them in the performance doldrums in 2008 and 2009. In 2008, the three funds lost more than 35 per cent each. By May 2012 the three funds had just £550m between them, although that figure has recovered to £825m and is continuing to attract money.
Meanwhile, Mr Heslop’s team had been steadily building a consistent record of first- or second-quartile performance each year, particularly in their North American Equity fund. But in 2008 and 2009 the funds targeting Japan, the US, Asia and global equities all suffered under-performance relative to peers.
Mr Heslop says this slump was due to the “static” nature of the funds’ process – something that Artemis suffered, too.
“Value managers underperform when markets are derisking,” Mr Heslop says. “A very static quant model is going to underperform too and we had a more value-biased model. Now the model is more dynamic – we have certainly learnt our lessons.”
The Old Mutual funds’ quantitative process can now change its methods depending on what style is in favour – effectively being able to manage the cyclical nature of investment styles. The performance of the range in 2011 – which saw Global Equity, Japanese Equity and North American Equity funds return to the top quartile of their sectors – could have been “very, very bad” if the team had not adopted the changes, Mr Heslop says.
Artemis has not performed such major surgery on its funds. Instead, Philip Wolstencroft told Investment Adviser last month that the value-driven nature of markets in the years following the crisis has favoured the value bias of the SmartGarp process.
Elsewhere, Schroders has started to tentatively push its Quantitative Equity Products (QEP) quant process into the retail market, promoting its QEP Global Core fund as a ‘low-cost active’ product. Although its target of outperforming the MSCI World index by 1 percentage point a year has not been achieved since its relaunch in March 2011, it has marginally outperformed the index during this period and it managed to lose less than its Old Mutual and Artemis global peers in 2008.
The future success of quant may well be decided in the next stage of the cycle. Companies seen as ‘value’ plays have been the winners in the past one or two years, playing into the hands of the Artemis SmartGarp process. Now that some managers are repositioning for the later stages of recovery and even perhaps a return to growth, these strategies are about to be tested all over again.
