Quantitative funds: a clear decision
The rise of quantitative managers
Since the late-1990s, there has been substantial growth in the amount of assets managed by quantitative managers and using quantitative investment strategies in the institutional fund management arena. In the last several years this rapid growth has continued, as client demand has bifurcated between higher octane high alpha products and lower tracking error index plus products. Fund buying professionals are clearly looking for well-managed quantitative equity funds to put at the core of their client portfolios. Such funds enable fund buyers to reliably put in place what they hope are consistent asset class returns, often outperforming index tracking products, to construct successful portfolios and investment products.
Increased appetite for quantitative funds Initially, it is often the case that many investors overlooked quantitative equity funds as being difficult to understand. They are often wrongly perceived as less transparent than traditionally managed equity funds. This is not the case, as they are not black boxes but use the same kind of fundamental research as any actively managed fund. A combination of factors have led to increased appetite for quantitative funds:
- Strong performance with higher information ratios;
- Lower volatility in equity markets making tracking error targets more difficult to maintain and alpha more elusive;
- Quantitative equity funds often have strong risk control processes;
- A move to ‘guided’ architecture with clients wanting more differentiated choices;
- Quantitative equity strategies successfully diversify client portfolios;
- Greater appreciation that a quantitative equity fund takes similar inputs and decisions to a fundamental manager, but these are applied more systematically to more stocks.
Some asset classes have been quicker to embrace this new trend than others. The general consensus is that the large cap US market is a relatively efficient one and therefore is very difficult for active fund managers to beat net of fees. Indeed, over five years the benchmark has outperformed the S&P Equity North America Sector by 2.0 per cent a year. As such, demand for quantitative or enhanced index funds in the US equity space has been very much in evidence over the last few years. Moving to the mainstream The approach to managing European equities is currently dominated by star fund managers – with different individual fund houses dominating sales each year depending upon performance – but this is highly likely to change. Quantitative equity management is likely to grow in the UK and European equity markets. Indeed, the S&P Europe 350 Index has outperformed the S&P Equity Europe sector average over five years by 1.8 per cent a year*. As professional fund buyers subject Europe’s largest equity opportunity – UK and European equities – to ever increasing scrutiny, we expect the growth trend in quantitative equity management is likely to emerge further across regional assets in the coming months and years. *Funds within the Europe mainstream incl UK sector
Source: Standard & Poors
