Quant or Qual managers to weather the market storm? Russell says the answer is both
Global manager of managers warns against “fair-weather” investing
SYDNEY, 25 November 2008 – A combination of recent poor peer-relative performance and increased scrutiny over ‘black box’ modelling techniques has put ‘quantitative’ investment managers under the microscope over the past year. However global manager of managers Russell Investments is reminding investors that no investment style is able to perform well in all environments, and that a key way to weather the market storm is to diversify across manager styles.
Russell is this week hosting a series of manager luncheons in Brisbane, Melbourne and Sydney which will examine the polar processes of quantitative and qualitative investment managers. The managers under the spotlight are two of Australia’s hottest boutiques: Plato Investment Management (quantitative) and Karara Capital (qualitative).
According to new Russell figures, over the past six years both quantitative and qualitative managers have enjoyed periods of strong outperformance – yet both styles have also fallen out of favour at times [see chart].
Symon Parish, Chief Investment Officer for Russell in Australasia, said Russell expects to see a resurgence of quant manager performance once equity markets settled.
“It is fair to that say quantitative managers have had a tough time over the past year, however it is important to remember that this is simply part of the normal performance cycle. Having had a fairly strong performance over the past five years to the end of 2007, quants have slipped back during 2008, but we feel they will be back up the league tables once the environment normalises,” Mr Parish said.
Generally speaking, a qualitative manager (also know as a ‘fundamental’ manager) will tend to choose companies based on traditional fundamental stock analysis, combined with broad experience, industry knowledge and contact with company management. Quantitative managers by contrast focus their efforts on building complex mathematical models based on a range of stock factors, which combine to identify favoured securities. Critics say qualitative managers can get too emotional about a stock, often hanging on too long to losing positions. Others say quants’ clinical ‘black box’ approach often misses intuitive market insights – with complicated models unable to handle unusual or unexpected market volatility.
Don Hamson, Managing Director at Plato Investment Management and a leading quant manager, said the current market was certainly creating challenges, but urged investors not to make knee-jerk portfolio decisions.
“At Plato we select stocks by considering value, momentum and quality. Market volatility means there is no shortage of value stocks but the momentum is what’s currently lacking. We would encourage investors to take the long term value perspective - selling now would be the worst thing to do,” Dr Hamson said.
Rohan Walsh, Partner and fund manager at emerging qualitative boutique Karara Capital said the global economy and financial system was struggling under the weight of severe recessionary forces, and that the ensuing turmoil was unprecedented, fuelled partly by panicing investors.
“Following the dramatic declines in equity markets, valuations are now attractive as markets are discounting a deep and extended recession. While the outlook is uncertain, the balance of risk is shifting as authorities around the world are committed to do whatever it takes to fight the financial crisis and sustain growth. We feel the medium term outlook for equities is now the best it has been for some time," Mr Walsh said.
The Chart below depicts the performance of quantitative managers as a group over recent years and compares them with the broader Mercer fund universe "Mercer Australian Shares Universe" (largely
qualitative funds). The chart shows that quantitative funds have struggled over the last year, following relatively strong outperformance versus peers in the five years from 2002 – 2007.
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Russell’s Parish said the Chart paints a compelling story for manager diversification during times of market turbulence. “What is really interesting about this data is that, for the most part, the performance of the quant managers is quite different to the rest of the largely fundamental universe. Consequently, an investor who had their money invested in a combination of these complementary styles during this time period would have been better able to offset any depressed returns than if they had only invested in one investment style,” Mr Parish said.
Russell funds continue to feature both investment styles as the company believes that, over the long term, the case for having both quantitative and qualitative funds as part of a multi-manager strategy is strong.
Karara Capital manages 10 per cent of the Russell Australian Shares Fund (RASF), which provides investors with a highly diversified portfolio of Australian equities via a combination of differentiated best in class investment managers and strategies.
Plato Investment manages 15 per cent of the Russell Australian Opportunities Fund (RAOF), which provides investors with exposure to a diversified portfolio of Australian shares via a range of higher return seeking investment managers and strategies, many of which are not commonly available to investors.
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