When it comes to investing globally, South Africans tend to underrate the advantages of quantitative investing compared to more traditional fundamental global asset managers, particularly when it comes to navigating market uncertainty, says Old Mutual Investment Group (OMIG).
This is despite the approach proving to navigate uncertain markets remarkably well, a trend that is likely to continue as geopolitical, inflation and interest rate uncertainty carries over into 2024.
The past three years have seen almost unprecedented levels of uncertainty in global markets, with many fundamentally run funds taking a hammering as asset managers tried to assess whether trends set post covid would be lasting or not. However, with further risks on the horizon for 2024, including slowing growth and intensified geopolitical instability, a quantitative investment approach is emerging as better positioned to outperform during periods of market uncertainty.
“The idea of quantitative investing has not been fully accepted by the local investor community and it is often dismissed as an esoteric method of investing. Yet globally, this methodology is considered part of the mainstream, having been perfected over many decades,” says OMIG’s head of global strategy Urvesh Desai.
It helps that a systematic quantitative investment methodology is rigorous and emotionless even during periods of market uncertainty such as what we have seen during and after the COVID-19 pandemic, he points out.
“COVID-19 represented an almost total global economic stop, which was unprecedented. Many purely fundamental approaches to investing struggled in this environment, in which many companies were unable to provide guidance on their own earnings. Investment analysts tasked with forecasting companies' financials found this period extremely difficult,” explains Desai.
“By applying the same fundamental principles in a rigorous, systematic way and augmenting these with other quantitative methods, OMIG's global quantitative strategies were able to outperform during this period,” he says.
Evidencing the success of this approach, the Old Mutual Global Managed Alpha (GMA) Equity Fund (GMA Fund) has outperformed its MSCI All Country World Index (ACWI) benchmark by an impressive 350 basis points in the 12-months to September 2023. “Our GMA Fund is informed by a systematic model that determines what factors are most likely to drive market outperformance at any given time, and our investment team then tilts the fund towards the appropriate equity exposures,” says Desai. The fund boasts a 24,3% one-year cumulative return to end-September 2023, with a three-year annualised return of 8,9% compared to the benchmark’s 6,9%.
He adds that at its heart, the quantitative investing technique is not very different to that used by traditional asset managers, just far more comprehensive.
“In the typical global universe, there are about 3000 companies. Each one reports between 2 and 4 times a year providing at least 10 or 20 new data points. The amount of data and information available has exploded. To cope with this, traditional asset managers often use a simplified version of our quantitative methodology, applying simplistic screens to focus their efforts to a more manageable universe, often without necessarily testing their investment hypothesis. Fundamental managers often operate on a belief basis e.g. "We believe cheap companies outperform." Or "We believe companies with stable earnings outperform." Through quant investing, we go the extra mile by first testing these ideas and strategies to see whether they work,” Desai says.
Desai suggests that because humans find it difficult to hold more than one belief system in their heads at a point in time, fundamental approaches also tend to focus on one style of investing (what in quantitative terminology would be considered a factor or risk premium.) “However, we know that many factors, styles and variables will drive value over the long-term; and that different ones will be dominant in different periods, with different market and economic environments. Our dynamic approach has the capability to balance the weights and importance of the styles or factors that drive share selection,” Desai explains.
Looking ahead to 2024, all signs point to continued geopolitical, inflation and interest rate uncertainty, opening the door for quantitative investing to power ahead over the coming year. Desai says the methodology’s ‘edge’ comes from a deep understanding of the factors that drive market returns, and the ability to dynamically rebalance these factors to reflect overarching macroeconomic themes.
In the coming 12-months, the South African and United States (US) elections are going to be the critical geopolitical issues to watch, with the depth and duration of a US recession likely to dominate asset allocation decision making. He adds that it would be extraordinary for the US to avoid a recession, singling out this event as the single biggest macro risk entering the New Year.
Domestically, investors will be concerned about the rand’s performance against major currencies, given the degree to which the currency influences asset prices. “The 2024 elections will contribute to uncertainty locally, causing volatility in the rand; while in that environment offshore assets are likely to be preferable,” Desai says. Whatever the case, the position taken by the quantitative investment methodology is informed by the real-time data that emerges as these macroeconomic themes play out.
He adds that the quantitative investment methodology owes its success to step-changes in computing power and data analytics capabilities. It would have been incredibly difficult to run this type of fund 20 or 30 years ago. “One of the notable global developments is that data has become democratised; it was almost a natural evolution for the business to invest in this method of investing and run our global money on a quantitative, scalable basis,” Desai says.
“Asset managers with the capability to look across different factors, styles or themes – and who do not have to ‘bet the farm’ on a single investment methodology – are best-positioned to weather ongoing financial market uncertainty during 2024,” he concludes.
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