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As active managers, we are constantly looking to get an ‘edge’ on markets to target alpha returns. In recent years, the landscape for how active equity investors can do that has evolved quite dramatically.
Historically the active equity market has been dominated by fundamental managers – those who look to discretionally allocate their portfolios. However recent technological improvements and increased data availability has brought quantitative or systemically focused investors, such as the State Street Global Advisor Active Quantitative Equity Team, to the fore.
Average pair-wise correlation of monthly excess returns between quantitative managers is just as low as those between fundamental managers.1
At a high level, quantitative and fundamental approaches tend to achieve comparable levels of returns, but quantitative managers tend to have lower risk.2
Quantitative managers tend to have more consistent outperformance across market environments.2
While there are many differences between Quantitative and Fundamental approaches to active equity investing, there are also a lot of similarities between them. By understanding the common myths and misconceptions between the two approaches of investing, we hope investors will be able to make better decisions when it comes to blending managers with complementary investment processes.
Myth: Quantitative managers use ‘black box’ processes, with decisions made by machines, and they lack conviction & accountability
Reality: Human judgement is used heavily in the design/implementation, ongoing monitoring, and revision of active quantitative strategies. The investment manager is completely accountable for achieving risk/return targets.
Quantitative managers rely on ‘process’ to generate excess returns – applying the same signals across a set of comparable stocks, while fundamental managers may rely much more on single-stock ‘stories’. However, good stories can lead to analysts becoming overly attached to a particular aspect of a company that may/may-not be priced-in already.
One of the key difference is a quantitative manager’s greater focus on achieving behavioral advantages, versus a fundamental manager’s greater focus on achieving analytical advantages (through a deeper focus on the unquantifiable).
Myth: Quantitative Investing is just another form of Smart Beta
Reality: True active quantitative strategies should be highly differentiated from smart beta strategies. Investors should be able to identify significant ‘active management’ and ‘accountability’ from an active quantitative manager. For example, true active quantitative strategies use signals that are proprietary & differentiated. Smart Beta typically use well-known factors.
Reality: There are material differences between quantitative portfolio designs and factors used. This is evident in both portfolio characteristics and returns. Historical returns show that fundamental managers have a similar level of correlation in returns amongst one another as quantitative managers.
For more than 30 years, research and innovation have been at the core of our efforts to deliver outperformance for our clients.
Contact your State Street Global Advisors relationship manager, or email us to learn how to invest in AQE.
1. Lakonishok, Josef and B. Swaminathan (2010), “Quantitative vs Fundamental”, Canadian Investment Review. The study computed the average pair-wise correlations of excess returns of Institutional large-cap and EAFE money managers monthly excess returns (with respect to the relevant Russell large-cap or EAFE benchmarks) during the period January 2000 to September 2009.
2. McQuiston, Karen, H.Parikh and S.Zhi (2017), “The Impact of Market Conditions on Active Equity Management”, PGIM Institutional Advisory & Solutions.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
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