More than half of institutional investors are wary of using quantitative investment strategies, with a perceived lack of transparency registering at the top of investors’ concerns, according to new research.
Quantitative or systematic investment strategies employ mathematical analysis and computer power to trade assets, watering down the human element of asset management. They encompass a range of products from low-cost smart beta through to more sophisticated active quant funds.
We don’t have an advisory community of consultants who can actually advise us reasonably well on quant strategies
Dinesh Visavadia, Independent Trustee Services
Despite the lower fees associated with greater reliance on algorithms, opacity at the active end of this range appears to be putting schemes off. Investment manager Cambridge Associates has found that most investors currently have no plans to increase their exposure to quant strategies.
Half of institutional investors struggle to make “hiring and firing decisions” over quant managers, according to the Cambridge research.
UBS Asset Management research agrees that investors have yet to fully embrace quant investment.
While the estimated proportion of global assets managed using quantitative methods grew to 17 per cent in 2009 from 15 per cent in 2000, in 2017 the manager said that it had begun to witness “the first period of outflows from those strategies”.
No less transparent than traditional asset management
Simon Hallett, co-leader of European endowments and foundations at Cambridge Associates, said that the industry must do more to explain quantitative management.
“A lot of people say, ‘We avoid systematic strategies because they’re not transparent’,” he said.
“Partly it’s the industry’s fault, partly I think people have been asking the wrong question,” he added.
Hallett accused traditional 'fundamental' active asset management of lacking in transparency. He highlighted that quantitatively-led performance, on the other hand, can be substantiated by data.
“You know what they own, but do you know why they own it, or why they sold it, or why they sold it that afternoon?” he said.
Existing data on active management does not paint the industry in a positive light. Many active managers have been heavily criticised in recent years for their inability to outperform passive equities after fees.
Morningstar analysis found that just 36 per cent of surveyed US active managers beat their average passive peer in the year up to June 2018. In June 2017, this figure stood at 43 per cent.
Advisers do not understand quant strategies
Schemes are not the only bodies that are uncomfortable with quant management, according to Dinesh Visavadia, director at Independent Trustee Services.
“We don’t have an advisory community of consultants who can actually advise us reasonably well on quant strategies,” he said.
“There might be some niche ones,” he added, “but there aren't many of them around who can help trustees and investors evaluate quant strategies sufficiently well. And I think that all comes down to the lack of transparency”.
Visavadia sits on trustee boards that have evaluated opportunities in quant management. None have invested.
“The problem is that there are so many alternative funds which are far clearer and easier to understand from a pension scheme’s standpoint,” he said. These include traditional funds and an increasingly transparent hedge fund industry, he added.
“So therefore, why would trustees of pension schemes actually spend time trying to look at that… when you have already got choices that work for you?”
Quants should go directly to trustees
For some, quant strategies offer a more rational basis for active investment management. “Quants are the future of active management,” according to Robin Powell, a consumer campaigner and editor of The Evidence-Based Investor.
Powell encouraged providers of quantitative investment strategies to bypass investment consultancies and meet trustees head-on. Seminars and video would give schemes a greater understanding of quantitative investment, he said.
“If they use active managers at all, and there’s a compelling case for not doing so, it should be low cost, rational and thoroughly unemotional,” he added.
Members also need to understand the basics of investment strategies being employed by their pension schemes, according to Andy Agathangelou, founding chair of the Transparency Task Force.
How can we restore trust in pensions?
Analysis: Savers have long remained detached and bemused by their pension arrangements. Indeed, the success of auto-enrolment has partly depended upon consumer inertia.
Last year, the Financial Times reported that only 23 per cent of consumers trusted long-term savings products, including pensions, according to a survey by consumer group Which?.
“They don’t need to exactly understand [quant management], but they do need to understand the principles behind it, the underlying logic of it,” he said.
“Getting the average member to understand it in detail is never going to happen,” he added. “There is always going to be an inherent distrust of this kind of ‘relying on a computer’ approach”.
