New approach combines the best of fundamental research and stock selection with powerful quantitative analysis – helping investors tackle challenging markets.
Australian financial advisers were this week introduced to a modern investment approach to help investors tackle the twin challenges of market volatility and low growth rates: quantamental investing.
Local fund manager Pengana Capital hosted a series of adviser lunches which discussed the future of active investment management, and showcased global trends. Advisers heard from leading global quant expert, Dr Eric Sorensen, CEO of Boston-based PanAgora Asset Management, and Matt Olsen, CEO of Lonsec Research, on how to navigate the plethora of investment tools and strategies to achieve the best outcomes for investors.
Quantamental is a name given to investment strategies whereby investment managers incorporate both fundamental and quantitative management techniques. The aim is to simultaneously capture the depth of analysis and human insight normally associated with fundamental managers, along with the breadth of analysis and unbiased discipline associated with quant.
Dr Sorensen, a former fighter pilot prior to embarking on a 40 year investing career, likened this approach to the combination of creativity, human analysis and information processing required to succeed in battle.
He suggested anyone unsure of quantamental integration need only look to the Second World War, when Air Chief Marshal Hugh Dowding built a system of integrated information using radar, human observations and a dedicated phone system to overcome an enemy with roughly equal fire power.
“We try to build expert systems that do what fundamental analysis can do, but with the help of technology, we can do it better,” Dr Sorensen said. “This combined approach allows managers to generate stronger returns across a broader stock universe.”
Search for real returns
Lonsec Research CEO Matt Olsen said the current environment of low interest rates, increased volatility and lower world growth rates meant investors and their advisers continue to search for new ways to improve portfolio diversification – so that they can achieve meaningful returns across a variety of market conditions.
“Managing portfolio volatility is always a key consideration for conservative investors. Considering unique approaches within an asset class may be a way to achieve increased diversification. True alpha sources are valuable to a portfolio not only as a return source, but also as a diversifier as they are not correlated with bond or equity market beta.”
He said advisers and their client needn’t be put off by the term ‘quant’.
“Both fundamental and quantitative approaches have their place in a portfolio. Quant approaches can access fundamental insights in a systematic way. They often also offer greater breadth via either applying those fundamental insights systematically across a wider opportunity set, or via higher turnover.”
In 2015 Pengana announced a partnership with PanAgora Asset Management, a $50bn global quant leader which already manages around $2 billion in institutional mandates for Australian superannuation funds. The partnership enables Australian advisers and retail investors to access PanAgora’s distinguished and proven approach directly as well as via a range of local platforms.
The first strategy available to local retail investors is the Pengana PanAgora Absolute Return Global Equities Fund, a market neutral strategy which helps investors achieve consistent returns despite changeable market conditions.
Classified as an ‘alternative investment’, the fund uses a quantamental approach to invest both long and short positions in a comparatively large number of highly diversified global stocks, through a bottom up stock selection process. As part of the selection process, the strategy focuses on reducing/eliminating the impact of macroeconomic events and providing a portfolio where returns are not related to, or dependent on, market movements (beta).
Pengana’s Head of Distribution, Damian Crowley, said the fund was garnering strong market support as investors searched for market neutral strategies in the current unpredictable environment.
“Investors are seeking stable returns that are uncorrelated to equity markets, but also uncorrelated to other equity or asset class strategies t