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Opinion
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At THEAM, a subsidiary of the BNP Paribas Group, our development strategy involves promoting the added value that quantitative techniques can bring to the field of asset management.
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THEAM offers investment solutions across a broad spectrum of underlying assets (equities, bonds, commodities, volatility, currencies...) through an extensive range of investment styles, from pure Beta to Alpha.
This might seem easy, given by how much the advantages of quantitative management or analysis techniques have increased in our closely connected, information-rich world. For example, most investors can now invest in ten of thousands of companies and, given the well-known principle of portfolio diversification, it would be ludicrous to limit the opportunities arbitrarily. However, no one person can know all of the world’s stocks. Even a large team of analysts and managers would inevitably come up against problems in comparing opinions or sorting out perspectives. We believe the only reasonable solutions to this conundrum are quantitative.
The volume of data available on stocks alone, which are the raw material processed by quantitative techniques, has also become dizzying. Indeed, generating a history of US stock prices using punch cards was hard work back in 1970. Today a quick Internet search is all you need to get real-time information on stock prices in all markets, as well as a vast amount of other data on company accounts and balance sheets how they’ve evolved over time, analyses or forecasts by leading analysts based on this information. You can even have the number of times the company’s name is mentioned in a positive or negative light on social networks.
Investors can be overwhelmed by such an avalanche of information which is largely redundant. Psychologists have spent many years pointing out the many poor decisions made as a result of this phenomenon.
In contrast, quantitative techniques can bring calm and transparency to the investment decision-making process, of which back-testing, which simulates the past results of a given strategy, is just one small part.
It is more useful to analyse the past or future risks of a strategy than its performance.
Admittedly, quantitative investment management has seen its share of controversy. In fact, once it began to be used for making decisions, back-testing impacted heavily on investor confidence: it made it very easy to choose, from among hundreds, thousands or even millions of possible strategies, the one that would have performed best in the past. However, this alone is not enough to provide a reason for why the strategy works or to guarantee its future results.
Confronted with the disappointments brought about by these kinds of decisions, many investors have chosen to limit themselves to styles that have done well over several years of actual management. Unfortunately, this means they forget that even real past performance, whether generated through a quantitative or fundamental approach, can be the result of biases or risks that have not been understood. The ABS crisis is proof.
The extreme complexity of strategies resulting from the use of sophisticated mathematical tools, or the opacity of some strategies, have also made investors suspicious of quantitative management – without good reason.
In this respect, the current fad for smart beta is a very interesting market development because it introduces many investors to useful quantitative concepts by adopting new quantitative strategies or indicators. Smart beta has the merit of adopting the transparency and simplicity of index investing, while "improving" the underlying benchmark under the assumption that it will behave differently than the market. Furthermore, it is interesting to see what level of market optimisation each smart beta strategy achieves. These "improvements" use fairly conventional quantitative techniques, typically filtering or optimisation. More than anything, it is simply the packaging that has changed, but there is no magic wand or new asset class, because all of these techniques already existed in quantitative funds. The buzz around smart beta can encourage people to trivialise it, given the return to overdependence on back-testing and all the dangers that this entails.
So we are cautious about the term at THEAM. We have strategies that could be described as smart beta and we take care to define and explain them well.
Above all, we have noticed a burgeoning number of strategies for which it may seem difficult to separate the good from the bad. This is why we favour comprehensive, bundled, scalable solutions with a meaningful investment logic. An asset manager’s added value comes from offering each kind of client in each kind of situation the best balance between effectiveness and transparency, sophistication and strength, and the ability to explain the reasons for his or her choices.
This approach is visible in products such as our "low volatility anomaly" solutions, with or without tracking error management. The Guru product range, with its now five-year-old strategy, also maintains the balance between transparency and effectiveness for investors who want to diversify their equity strategies. THEAM also offers solutions that aim to reconcile traditional management and reasonable quantitative strategies for asset classes such as commodities, fixed income or volatility.
Etienne Vincent , January 2014
Article also available in : English | français
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