Quants: The Hunt for New Ideas
Despite exciting developments in the world of non traditional ways to predict share price movements (Twitter can predict the Dow Jones movements as discussed yesterday), it remains the case that value, growth and momentum remain the core factors. Many funds who are masters at screening financial information assembled at the FactSet (NYSE:FDS) Investment Process Symposium in Florida this week to discuss and share their views on the state of investing. Quant style investing has had a tough few years, but this event proved they are rebuilding their models, which are set to pay dividends.
FactSet Research Systems (consolidators of financial and economic information to support the investment process) were the hosts and re-invigorated an event that had taken a 2 year sabbatical. We were there to speak and participate in a place where many of the United States’ largest asset managers had gathered. Most attendees worked for companies who lent their shares, but very few were major short sellers. Some had launched 130:30 funds but the consensus was that these strategies were facing an uphill struggle at present.
It is worth repeating one or two of the messages given by Blackrock’s Managing Director, Ronald N. Kahn in his opening address, since these themes ran through the whole event. He laid bare the lessons that people are trying to learn after the credit crunch. There is a tacit understanding that quantitative investing has struggled ever since the redemption-led wobble in August 2007. Fortunately, the momentum gained by the steady and strong returns achieved from this group in the years prior ensure that they retain the faith of many investors.
Clearly, moving away from running a “generic” model is key but this is not as easy as it sounds according to Mr Kahn. Incorporating an element of ESG (environmental, social, governance rating) into stock selection was put forward by Trillium Asset Management as ethical AND profitable, but it did not sound like this was yet the norm given how few data providers exist in this area. As luck would have it, Green Mountain Coffee Roasters (NASDQ:GMCR) are a top ethical pic AND rose 40% this week! Acadian made a case that quant investing in emerging markets is very possible and given the incredibly interconnected world we live in, it seems likely that more and more models will take account of sentiment in these economies.
I enjoyed the Blackrock speaker’s anecdote about how the machine became more important than the man in recent times – just because running a back test is fast and furious doesn’t mean one should test a factor if you cant articulate why it would be additive in the first place. Thinking harder is what it is all about and mastering tools like Factset leaves fund management firms more time to do this.
On the subject of thinking harder, Dan Berenbaum cut through the hype surrounding semi-conductor companies with a tour de force. This was particularly insightful given how little we know about how the Japanese disaster will affect this industry, seeing as they are major players in this area. Another footnote was the suggestion that people who are making tablet sales predictions (iPad, etc.) often have no recourse to how many computer notebooks are being bought each year.
Day 1 was rounded off with an excellent talk by Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Economics, Harvard University. He was the first person I met at the conference straight off a plane from London and little did I know that he was the IMF’s chief economist a few years ago and one of Sweden’s key advisors. One of the many interesting predictions was that Portugal will default this year, but this will not be contagious since, after all, most major economies have defaulted many times when you look over the past few hundred years. He is also skeptical that China will overtake the US as the world’s largest economy any time soon.
An interesting two days indeed.
