Crunched to crumbs
Remove human subjectivity and replace it with the objectivity of a computer programmed to identify factors determining share price performance.
It is an approach to active management that has come to be known by the awe-inspiring name of quantitative (quant) analysis.
“Quant analysis gives you a disciplined and structured approach to analysing a market,” says Grant Irvine-Smith, manager of the Investec Active Quants Fund.
In the US in particular, a growing number of management firms are using quant strategies to revive the flagging popularity of actively managed funds.
Only about 20% of US active funds beat their index benchmarks.
For the world’s biggest asset manager, BlackRock, which boasts assets under management of US$4.3 trillion, it is vital to get and understand big data.
“The data explosion is a great opportunity for asset managers,” says Ronald Kahn, BlackRock’s global head of scientific investment research.
BlackRock is throwing big 400 money at big data.
“We hire a lot of maths, stats and data science graduates,” says Kahn. “We compete with the likes of Google and Facebook for staff.”
This has given BlackRock the ability to analyse vast quantities of data. It scours 6,000 broker reports daily, for example, to identify changes in analysts’ sentiment.
Taking data mining even further, the asset manager’s sources include satellite images of big retailer parking lots and online search terms as lead indicators of consumer spending trends.
But is this giving BlackRock the edge it seeks?
That’s not clear. In the 2015 ranking of US fund families published by Barron’s, BlackRock came in 18th overall over one year and 28th and 34th in the US and world equity categories, respectively. Over five years it ranked 22nd overall and over 10 years 17th.
SA quant managers are sticking to a more conventional approach, with variations.
“Our model looks at the factors driving the market leaders,” says Warren McLeod, co-manager of Old Mutual Managed Alpha Equity Fund. “If it is profitability, for example, we will tend to be overweight in high profitability shares.”
But the human factor in decision making is not ignored.
“We do not go overweight a