A good strategy starts with a good design
David Blitz, PhD
David Blitz discusses research to improve existing strategies and explains how he designs new ones. “Our mission is to make good strategies even better and to design the next generation.”
Head of Equity Research David Blitz has been at the forefront of quant investing since 1995 and is responsible for coordinating all quantitative equity research. Some of the key tools he has helped to develop are proprietary stock selection models and portfolio-optimization algorithms. He has also published numerous papers in peer-reviewed academic journals.
What do you see as your mission at Robeco?
“You could call researchers the architects of our quantitative investment strategies. Our mission is to make the good strategies already in place even better, and to design the next generation of quantitative strategies based on entirely new ideas. A good strategy starts with a good design.”
How do you look back at your time as a quantitative researcher?
“It gives me great satisfaction to see how our ideas have blossomed over the years. In the early 90s we developed the first generation of quantitative stock-selection models based on value and momentum, which were developed as a decision support tool to generate investment ideas for our fundamental portfolio managers. It was from these humble beginnings that quant started.”
‘We have been most successful in strategies that differ from those of the competition’
“We found that the real-life performance of the stock rankings was good. A Dutch institutional investor was impressed by the track records and asked us to create an investment strategy that was based solely on a quantitative stock selection model. The next challenge was to construct portfolios based on stock rankings. Therefore we developed portfolio construction algorithms to convert the ranking signals into buy and sell decisions for portfolios.”
“After this first step, we added more capabilities such as low volatility, and also quant emerging markets because we saw that our models worked well in these markets too. Our assets under management have grown substantially along the way.”
What is your explanation for the rise?
“Good stories are not sufficient. The track records are the driving force. Asset owners want to see evidence that you can actually deliver, and rightly so.”
“Another reason behind the rise is that a new generation of decision makers has come to the fore. For them, it is not such a big step to embed quant in their long-term investment strategy; they are already familiar with concepts such as value and momentum because of their university finance courses and the CFA curriculum.”
Do you face any hurdles when developing new strategies?
“We have always been given the opportunity to develop new strategies internally. Quant has created a lot of goodwill, at the top of the organization as well.”
“But there is also skepticism whenever we want to create new strategies. The question is always whether there is a market for it. This is difficult to answer when there is no peer group, there are no existing customers, and we need to sell a concept that is less well known in the industry.”
“So there are many hurdles to overcome before a new strategy becomes successful. That’s why internal education is very important. Moreover, educating our sales colleagues and account managers helps to ensure that we properly explain the concept behind these strategies to our clients and prospects.”
‘Good stories are not sufficient. The track records are the driving force’
“We have been most successful in strategies that differ from those of the competition. We call them ‘blue ocean strategies’*. These strategies help to fulfill a particular client need. Our organization has shown the ability to systematically create and capture these ‘blue oceans’ – examples of which include Quant Emerging Markets Equities, Conservative Equities and Conservative Credits.”
What research is done for existing strategies?
“We continue to look at our existing factors. How can we best harvest them? Can we take out any risks that don’t lead to higher returns? Can we define our variables better?”
“Another focus area is smart trading for the portfolio’s construction. What are the costs of a particular trade? What is the best way to execute a transaction? This will become more important as our assets under management grow. We want to offer capacity for new clients, while protecting our existing clients.”
“We will also look at adding new factors, but won’t be chasing the latest factor fads. Our decisions are based on extensive evidence over long periods of time and different markets.”
What is the focus of your fundamental research?
“We focus on the main research question: Why do factors exist? We know that certain factors work, because there has been a lot of empirical evidence. But there is little academic consensus on why factors work. Is it because of behavioral mistakes, or institutional reasons such as reward structures or how the asset management industry is organized? These explanations are highly important to investors. Knowing why certain factors work can give you insight into how best to harvest them.”
“Looking at explanations of why factors occur is not an easy path to take for a researcher. For example, Pim van Vliet, Eric Falkenstein and I looked at 12 possible explanations for the low-volatility effect. You can imagine how difficult it is to distinguish between the consequences of these explanations.”
“Still, I expect that we will make progress in this area in the coming years. My team is ready to meet new challenges and we have expanded our pool of junior researchers. Furthermore, we have increased corporation with universities, with two of our researchers writing their PhD theses here.”
“We are the place to be for quant investing. We see this in our ability to attract top talent, the feedback from our clients, and the fact that we compete successfully with the large quant houses in the US. There aren’t many European asset managers that can say that. I am proud of what we have achieved.”
* Named after the book ‘Blue Ocean Strategy’ by INSEAD professors W. Chan Kim and Mauborgne.
Head Quantitative Equities Research
“Factor investing, aimed at systematically capturing the value, momentum, low-volatility and other premiums, holds the future.”