Asset managers will be looking for long-term track records from managers that will be able to add value to a portfolio, a quant manager claims.
WestLB Mellon Asset Management managing director Greg Vaughan said there has been a trend to select the newest manager on the block offering exceptional performance.
“In the past the track record of a manager was irrelevant,” he said.
“People have been looking at paper performance rather than consistent results from stable investment teams.”
Vaughan said a lot of investing has been based on a ‘black box’ model that will work in boom times, but is found lacking in bear markets.
“This approach to beat the market every time doesn’t happen in the long term.”
The 10-year performance of Mellon’s Australian Equity Trust shows two years of negative returns and many years of performing just below the ASX 100 benchmark.
Vaughan argued it is better to deliver consistent returns, which may not exceed the benchmark, rather than excessive performance one year and negative performance the next.
“People have been ignoring diversified core managers that deliver just alpha performance for high conviction managers,” he said.
“There have been people investing without thinking.”
Vaughan believes the skills of a quant manager will be favoured, as the systematic manager using a ‘black box’ can’t cover all stocks in a market.
Mellon has been looking at stocks that might deliver high-growth outperformance but suffer from excessive volatility.
It has also focused on the use of momentum in daily trading volumes and price changes in a sector.
“We look at a range of factors, such as earnings revisions, director’s trading and relative value, to achieve alpha, so it is a more thoughtful investment process,” Vaughan said.
“And people haven’t always asked the hard questions on stocks during the good times either.”
Vaughan said process, people and performance were still as relevant in these markets as in the past.
“This is why people will start to focus on track records again and exclude newly formed investment teams from the selection process,” he said.
