Introduction
For some, such as Ian Heslop, head of the quantitative strategies team at Old Mutual Global Investors, automating many of the processes allows the managers to look at a much larger universe of stocks, while also removing some of the emotion and style bias that comes from investing as an individual.
He says: “Investors don’t necessarily make the right decisions all the time, and because of that stocks can move to prices that don’t naturally reflect what is actually happening to the stock. That’s what we’re trying to capture in the portfolio: we’re trying to understand how and why markets work. Rather than building a better balance sheet or better profit and loss statement for a stock, we try to understand why certain types of stocks outperform and, as importantly, what makes them underperform in certain times.”
He points out that the main difference between quant and non-quant processes, even those that aren’t ‘true’ quant and have some kind of selection process, is dispassionate investing.
“You are trying to diversify your stock selection risk by having multiple tools to pick stocks, and by not putting all your eggs in one basket,” he says.
Many of the big-name fund houses either run certain funds with a quantitative strategy in place, or they have specific quantitative teams dedicated to running funds, such as Swip and Schroders.
Swip says its quant team, which is part of Aberdeen Asset Management and has more than £60bn under management, has an ethos of discipline, rigour and precision. These qualities are applied across the team’s investment strategies, which aim to maximise risk-adjusted returns for investors.
Although the Schroders Quantitative Equity Products (QEP) team, established in 1996, has a mainly institutional client base, the strategies managed by the team all share a common investment philosophy. Stock selection is focused on the analysis of two key long-term fundamental drivers of equity returns – value and quality – then these insights are “scaled up using sophisticated quantitative tools to cover a truly broad global universe of over 15,000 stocks across 40 countries”.
Another quant-style strategy is Investec’s 4Factor approach, which looks at stocks based on strategy, value, dynamics and technicals. Axa Rosenberg’s investment process is often described as quant, too, as it focuses on fundamental analysis of company valuations and earnings using modelling tools.
The broad range of what can be considered a quant-type process is perhaps where some investors get confused.
Darius McDermott, managing director of Chelsea Financial Services, points out that one of the pros of a quant screen is the ability to whittle down a large universe into a manageable amount of stocks to review.
But he adds: “The con side is that if you get into a one-in-a-million scenario, they can break down completely, as many did in 2008. They can’t cope with unusual market conditions. So that is why we like qualitative work after the quant screen – a mix of both can work very well.”
As a way to diversify a portfolio, quant-based strategies clearly have a place, with specific quant teams delivering equally as strong performance as the MSCI World or FTSE All-Share indices. The important thing is to understand what the process is, how it works and what that might mean for your wider portfolio. New technology is there to improve things and make our lives easier – providing you know how to use it.
The picks
Investec Global Equity
Managed by Investec’s Global 4Factor team headed by Mark Breedon and James Hand, this £429m fund has delivered a five-year return of 96.11 per cent to July 9 2014, well ahead of the IMA Global sector average of 78.6 per cent. The Global 4Factor team uses a quantitative process that looks at four key factors – dynamics, valuation, strategy and technicals. As of May 30, the largest sector weighting in the fund is to financials, at 20.7 per cent of the portfolio, while the largest geographical weighting is to North America, at 52.1 per cent.
Axa Rosenberg Global
This £373.9m fund has been managed by Axa Rosenberg with their investment process since January 2003. It benefits from the team’s “unique investment process”, which combines in-depth fundamental research with “proprietary technology”. The fund has delivered a five-year return of 79.25 per cent to July 9, slightly ahead of the IMA Global sector average of 78.6 per cent. Its largest sector weighting is to financials, at 17.79 per cent; the largest geographical weighting is to North America, at 49.55 per cent.
Editor’s pick
Schroders QEP Global Core
This £806.3m fund is one of a series managed by the Schroders QEP Global Equities team established by Justin Abercrombie in 1996. Launched in 2000, the fund utilises the QEP (quantitative equity products) process of stock selection based on value, quality and a well-diversified portfolio, which in this case stretches to more than 1,000 holdings. The fund has delivered a strong five-year return of 103.67 per cent to July 9 2014, compared with the IMA Global sector average of 78.6 per cent. Its one-, three- and 10-year performance figures are equally impressive. The largest sector weighting is to financials, at 19.6 per cent, while the largest geographical weighting is to the Americas, at 56.8 per cent.
