Active fund managers, reeling from years of underperformance, are increasingly reaching for quantitative tools to gain an edge as competition from cheap passive products and looming MiFID II regulations lead them to rethink their businesses.
"It’s not about the magic sauce anymore," said Rob McCreery, founder of Libra Investment Services, a London-based provider of quant research for active managers for 14 years. Stock pickers "are becoming much more open-minded toward anything that can help with timing and screening good ideas."
Pressure is mounting on active stock pickers as a decade-long shift in investment towards lower-cost and better-performing passive products continued through 2016, according to a survey by the Boston Consulting Group. The Markets in Financial Instruments Directive, known as MiFID II, is coming into force in January and will prompt managers in the European Union to review how they obtain and use research, opening the door to alternative approaches including greater use of quants and big data.
BlackRock, BNP Paribas, Man Group and Deutsche Bank are among many firms bolstering their quantitative operations by adding resources and personnel and finding new ways to incorporate computer models and data science into their research.
A take up of more mathematical and statistical methods is far from universal. Of the 153 asset managers overseeing a total of $43 trillion surveyed by BCG, less than half of them reported using big data and analytics beyond common analysis and reporting tools.
The pressure is on. BCG found that 11 of the 15 worst-performing product categories in the U.S. were in active strategies while all the top ones were passive, with a similar trend in Europe and Asia-Pacific. That may push stock pickers to adopt more quantitative methods ranging from semantic analysis — which flags key words in companies’ earnings calls — to trading algorithms, statistical analysis and visualization tools that present data in a more meaningful way.
"Asset managers are forming quant teams that can help stock pickers improve their investment processes,” said Helene Donnadieu, principal at BCG. “For firms with over $400 billion in assets, there can be as many as 50 people structuring data to create new analysis tools for portfolio managers. There is experimentation and significant investment.”
The European Union is initiating MiFID II to bring more transparency to trading and boost returns for clients of asset managers and banks. With the introduction of the rules, funds will be setting aside budgets for broker research and assigning costs among teams, bringing closer scrutiny to their data needs and the value the information brings to each fund.
BNP Paribas Asset Management will build up its proprietary research and merge its quantitative and fundamental investment teams, it said in May. The Paris-based asset manager, which oversees $681 billion, plans to grow in a market it sees as being “polarized” between cheaper passive products and actively managed funds. The entity will oversee about $118.3 billion.
“We have started to exploit data analytics as well as artificial intelligence in our investment process as well as our coverage model," said Kai Bald, head of digital at Deutsche Asset Management. Digitalization will fundamentally change the face of the asset-management industry, he said.
BlackRock CEO Lawrence D. Fink reorganized the firm’s stock-picking division in March saying he sees computer models and data science as the future of active-equity management. The firm moved $6 billion of the $201 billion run by traditional stock pickers into cheaper quant funds and fired more than 30 people in its active-equities group.
Man Group hired William Ferreira from hedge fund Florin Court Capital as head of machine learning for its GLG unit, indicating the growing importance of quantitative techniques at a division that relies on fundamental analysis to bet on stocks and bonds. Peers such as Point72 Asset Management and BlueMountain Capital Management have also been at the forefront of the push by fundamental firms to incorporate quantitative models and big data.
Traditional active equity managers are “badly compromised” without the use of quant tools, said Geoffrey Mills, a London-based sales director at Oppenheimer. "MiFID II is an excuse for the buy-side to re-shape their models and take down costs. There will be less travel and fewer conferences. It will be more economical and less fun for the fundamental buy-side."