The world of quantitative investing is changing. A lot has been written about the integration of quant techniques with fundamental research. But it’s more than that. As George Mussalli says: “The race in the quant world is getting shorter and shorter.”
Mussalli is the CIO and head of research for Boston-based global manager PanAgora Asset Management, who visited Australia last week with colleagues Yosef Zweibach, head of business strategy and investor relations, and Jesse Huang, head of Asia Pacific sales and relations.
Mussalli joined PanAgora in 2004. He had previously worked at John Hancock as a quant in the fundamental team and at Putnam Investments. He set about to build up the quant team so that its work included fundamental insights, which is fairly standard now but not then. The team itself was different to most other quant teams. He recruited from other firms going down the integration path, such as Fidelity and Wellington. He could have added other big names such as State Street and BlackRock. He recruited a medical doctor and “a guy from Google”.
He said: “It’s about understanding what metrics are right for each industry. Once we put the data together it becomes a systematic process.” So, the integration should be done at the data collection stage, not just as oversight by the fundamental analysts at the end result.
Huang says that you start with an insight or observation that you need to quantify. If the data is not available commercially then you have to find a way to build your own database.
This goes to one of the fears investors have about pure quant shops, which can look more like trading houses than institutional investors. If all the quants in the world get the same signals the risk of crowding is much greater.
One of the biggest scares in recent years took place in August 2007. No-one seems to know for sure what happened but the consensus is the market suddenly tipped over the edge because of weight of money. The scare didn’t last long – only a couple of weeks – but it was enough to give the industry a wake-up call.
Mussalli says that the investor concerns have faded because everyone is on the lookout for potential crowding and Zweibach adds: “Quants get blamed whenever there’s a one-day meltdown and no-one knows what happened.”
With the August 2007 blip, it was not just about money chasing alpha all going in the same direction, it was also about portfolio construction. For example, if you put all the information in an optimiser you can get the same direction from different sources even if the signals themselves are not correlated.
Mussalli says that while there are all sorts of technological wonders being developed outside of finance but with data “it’s a bit different”. You need data to capitalise on algorithms, he says. You need lots of independent observations and you need new data so you can test it out of sample to make sure it works.
PanAgora takes a nine-month view for stocks in a portfolio, which sounds like a short time frame compared with the typical traditional fundamentalist manager of institutional money. “In the quant world, nine months is a long time,” Musalli says. “For some others, one week is a long time. For those managers, the CIO becomes less important than the CTO [chief technology officer].”
PanAgora started to apply quant techniques to corporate governance about seven or eight years ago, he says. “We looked at company boards, accounting standards they adopted, and then moved onto the management and employees and general sentiment. There are web sites that review companies.” And many have chat rooms so anyone can have is or her say.
This has helped its ESG practices, which Mussalli says are very important for Australian and New Zealand investors. The firm launched a specific ESG fund last year. For its global core strategies ESG principles are incorporated but no sectors are excluded, he says. “Our number one priority is to get alpha.”