Quantitive managers can deliver performance at lower cost and lower risk

With the cost of professional asset management services in the spotlight, particularly in the context of government’s drive to reduce the impact of fees and expenses on retirement benefits, managers with a quantitative approach to investments are likely to find growing acceptance in the South African market.

Sometimes misunderstood, quantitative investment managers, unlike traditional asset managers, do not indulge in forecasts or undertake site visits. Instead, "quant” managers look at current market pricing with a view to buying assets that their valuation methodologies deem offer value.

Eldria Fraser, Chief Investment Officer of Prescient Investment Management, says that a lack of understanding about quantitative management has led to incorrect perceptions of complexity.

"While generating valuations is what all managers do, as a quantitative investment specialist, we go about the process in a more mathematical way,” she explains, noting that Prescient is not a "black box” investment house.

"What makes us different is that we truly manage risk. Our approach means we're able to calculate how an investment will react under different market conditions to ensure that we structure portfolios that don't breach risk tolerance as defined in the client mandate – usually a capital loss in absolute or relative terms.”

Quantitative investment managers tend to have smaller investment teams, allowing for lower costs to be passed on to clients. Additional savings come from not having to pay analysts to undertake fundamental research, while in Prescient's case, costs are also contained by controlling portfolio transactions.

"We're able to offer very competitive fees that are lower than the average range in the market. This represents a direct saving for clients who should scrutinise fees in the context of performance.”

Referring to the group's controlled trading strategy, Fraser notes that if a retirement fund manager trades a portfolio every month at a cost of 10 basis points, the reduction in benefits for members due to direct costs is 1.2% a year.

"We're also differentiated by sophisticated trade cost analysis performed to ensure best execution. This is done via a service provided by Prescient Securities. Our knowledge of derivatives means we can execute certain trades in the derivatives market more cheaply and efficiently than in the physical market,” says Fraser.

She adds that quantitative investing lends itself to the development of simple and cost effective equity, interest bearing and balanced products. These can be used on their own as stand-alone solution funds, or in combination with other funds to construct a well-diversified balanced portfolio. These portfolios generally blend well with traditional portfolios due to their focus on risk and capital preservation, low or negative correlation with other portfolios, and lower costs.

An active beta strategy can also be applied where allocations are made away from a benchmark, using a pragmatic approach which includes valuation and behavioural-based strategies in order to deliver out-performance of the index. This is a way to make back the cost of investing and more.

"When markets look expensive, as the equity markets do now, then Prescient's focus on risk is reassuring,” says Fraser:

"Our approach as risk managers is to protect clients against falling markets while capturing upside growth. We manage risk in line with the benchmark and will structure and de-risk portfolios when risk adjusted pricing indicates that this is necessary.

"By avoiding the demands of having to recover from capital losses, the idea is to make money from a secure base and benefit from the mathematical power of compounding, especially positive compounding.”

Fraser says there is a strong role for quantitative investment in the context of retirement fund reform because managers are able to create cost-effective, broad-based and simple products.