The Use of Quant/Factor investing:
- Most participants had integrated some form of quantitative investing in their approach to investing on behalf of their clients, but these were not factor-orientated or single strategy allocations. One firm referred to the use of Commodity Trading Advisors (CTAs).
- Quoniam pointed out the key difference between Fundamental Quant Investing and CTAs is that Quant aims to automate the task of stock pickers whereas CTAs advise on the buying and selling of futures contracts based on quantitative analysis.
- The was concern in the group that US companies were distributing more than their free cash flow in the form of share buybacks and dividend increases therefore increasing leverage.
How can Quant/Factor investing identify the risks associated to this strategy?
- By using leverage as a number in quant analysis it warns investors about the lack of sustainability of earnings growth using excess leverage. The view was that companies with increasing debt positions to fuel their growth tend not to invest that money as well as those spending free cashflow.
- Quoniam believes the US market has risen largely due to the large-cap technology firms/FAANG and from the tax reforms. However, if you take the average company earnings, the growth has not been that impressive. In Europe, since the Financial Crisis, earnings growth has been relatively weak.
- Returns will come from dividend payers, which is acceptable to an investor in a low interest rate environment. As a result, stock with higher dividend yields have become more expensive. Many investors have increased their exposure to high quality dividend stocks fearing growth stocks won’t perform in a recession or during the trade war with China. Some technology stocks have improved on their earnings over the past 12 months so the current rise in the market doesn’t look like a complete bubble, but it is showing some characteristics of the mid-70s.
Should we not bother chasing value stocks until we see a recession?
- Normally the best time to buy value stocks is at the trough of a recession, so now is not the time. Value stocks tend to underperform in a recession because they have become expensive and are largely cyclical.
Where does Quoniam’s strategy fit in to an average investor portfolio?
- The fund is unrestrained and invests globally depending on the client preferences and their tracking error target. A lot of private clients invest via private banks using the standard three pillars of strategic asset allocation, 6-12 months tactical asset allocation and instrument selection. Quoniam is an instrument selector and fits the third pillar as well as providing a different approach to selecting stocks and another level of diversification.
Expert: Thomas Kieselstein, CIO & Managing Partner, Quoniam
Facilitator: Paddy Lewis, Partner, Sionic