KEY TAKEOUTS

• Changes to Reg 28, have significantly opened up opportunities available to local investors and fund managers, with a global universe of stocks providing better diversification than our local universe.
• Given the scale of global information facing investors, the rise of quantitative investing is starting to take root, with an increasing shift towards global quantitative strategies expected to continue over the coming years.
• A diversity of ideas is the key to OMIG’s global quantitative success, demonstrated through the Old Mutual Global Managed Alpha Fund, which has delivered gross composite returns of 8.1% since inception, versus the Benchmark at 6.5%.

Among local investors, there has long been a historical bias towards fundamental asset management, particularly when it comes to venturing into offshore markets. Yet local fundamental investors have faced the challenge of analysing the global universe, given the sheer scale of the market.

A world of opportunity

With the recent change in Regulation 28, however, where a Reg 28-compliant portfolio can now invest up to 45% of the fund in offshore assets, it appears that policy makers have recognised the need to open up opportunities for increased diversification for local investors and the investment approach of local managers is changing. The local equity universe has significantly shrunk over the past two decades and so has the opportunity set for local managers. Many of the locally listed companies make a significant portion of their revenue in the global space too.

This regulatory change significantly opens up the pool of opportunities available to the local investors and fund managers by orders of magnitude. Ultimately, a global universe of stocks provides better diversification and better liquidity than our local universe, as well as providing diversified exposure to growing economies not currently available in South Africa. Yet how do investors navigate and process the level of increased data offered by these markets?

Processing the constant torrent of global data

Given the ever-increasing barrage of information facing investors, the rise of quantitative investing is starting to take root, with an increasing shift towards global quantitative strategies expected to continue over the coming years. Quantitative (or quant) investing is a term that is used to describe a wide variety of mathematical models and strategies implemented systematically by asset management firms to construct and manage client portfolios. The growth of quantitative investing started in the 1970s, with its research explaining the risk premia driving excess market returns roughly over the last 50 years. Over time, it has evolved to be used in both active and passive portfolios, employing repeatable, sustainable and evidence-based analyses of large amounts of data to manage diverse and risk-cogisant portfolios in a scalable and effective manner. A few data scientists and computers are also very cost effective compared to an army of fundamental analysts and portfolio managers that would be needed to cover the entire global equity universe.

The amount of data, the interactions between companies, sectors and countries and the effects of macro-economic factors massively increases the scale of the coverage needed for global markets. As such, quantitative investing provides an edge here. The size of a fundamental team would need to increase as the size of the investible universe increases, because each company would have to be researched and compared against other companies. In contrast, the shift from a local to a global quantitative team only needs the addition of computation power for processing of the data. Scale is a massive advantage in the quant space, and it provides a competitive advantage when it comes to delivering consistent alpha at a reasonable cost.

An evolving skillset

Locally, we have seen a massive increase in the number and variety of index funds, that track their benchmarks and keep fees low, also become quantitatively managed. We believe that active equity investing will follow a similar trend as investors get more comfortable with quantitative investing and the ever-increasing pressure on fees reaches a boiling point.

A different set of tools and skills are required for quantitative fund managers, and this is where the good investors can easily differentiate themselves from the bad. Strong research and analytical skills are the bedrock of good quantitative asset management. The high volume of data required to compete on a global scale means that skills like data cleaning, management and engineering have become crucial.

Quantitative investing depends on systems and data infrastructure to combine speed and accuracy to implement good portfolios. What’s more, there is very little room for human bias in a quantitative process. That’s not to say that the human element is no longer necessary. Humans are needed to build the robust systems that will handle client funds in a consistent and systematic manner, but ultimately, a skilled and curious research team that takes an integrated approach with strong data infrastructure will be the future for local asset managers who wants to benefit from the global universe.

A committed quant approach yielding demonstrable results

At Old Mutual Investment Group, we have been implementing quantitative strategies for over 20 years and we continue to provide a variety of strategies that cover different universes. Our first local quant funds launched over 15 years ago and, since then, we have expanded our research into global markets by launching a range of globally focused quant funds. Our quant capability is supported by a well-balanced team of highly experienced quants and younger talent that keeps us at the forefront of quant and data research. We believe that our more junior analysts have as much of an advantage as the more experienced quants do, given the role of the new and rising frontiers of statistical techniques like machine learning and artificial intelligence, which are increasingly being factored into the evolution of quantitative strategies.

The balance of new and old, experience and energy, and a diversity of ideas is the key to our global quantitative success. This is demonstrated through the performance of our global quant portfolio offerings, in particular, the Old Mutual Global Managed Alpha Fund. The fund uses a proprietary systematic model to evaluate six broad market drivers or factor buckets – value, growth, quality, momentum, size and volatility (risk) to take a style-agnostic approach.

Since its inception in December 2017, it has delivered a solid track record, with gross composite returns of 8.1% of versus the Benchmark at 6.5% over the same period. Over one year it has delivered 23.4% versus the Benchmark at 20.8%, over three years 8.6% versus the Benchmark at 6.9%, and 7.9% over five years versus the Benchmark at 6.5%.This performance showcases the compelling advantage offered by quantitative investing for local investors looking to diversify their exposure offshore. By harnessing the power of data-driven analysis and mathematical models, we can continue to develop quant investing to achieve a systematic and disciplined approach to investing that transcends geographical boundaries. As the world continues to evolve, embracing global quantitative investing is a testament to the adaptability and innovation of local asset managers, who are increasingly positioned it to deliver superior risk-adjusted returns for clients in an increasingly interconnected global market.