What’s best, quantitative or fundamental? And, which are the main factors investors should consider in their portfolios? Here are some the topics we discussed with our guest Marc-Gregor Czaja,1 from Allianz Investment Management.
Global Head of Equities and Derivatives at Allianz Investment Management, in Munich
“Honestly, at Allianz we are pretty agnostic regarding the question of fundamental versus quantitative. We do both, which implies that we don’t think one is necessarily better than the other. It depends. What’s more, I think that, to a large extent, fundamental and quantitative investors tap the same sources of return.”
“I think the most important element has to do with how far away you want to position yourself from the benchmark. If you have little appetite for relative risk, then quantitative strategies are probably more suitable. But if you are interested in very active strategies that really break away from any benchmark and require a flexible investment process, then you will probably feel more comfortable with a fundamental manager.”
“Yes. But I think there’s another aspect: portfolio construction. The closer to the benchmark you want to be, the more important your portfolio construction is. That involves quantitative techniques, which is something the typical quantitative manager is better at. I often say that, to a certain extent, quants are better portfolio constructors.”
“Exactly. They are probably better at understanding short-term drivers of diversification. But there’s a catch. When market fundamentals break down completely, when there’s a regime shift, when the past does not tell you anything about the future, then a skilled and seasoned fundamental manager may have an edge; although that’s obviously a rare skill.”
“I tend to look at this from a slightly higher level: factors are very important return drivers whether you adopt a quantitative or a fundamental approach. Again, both types of strategies tap the same sources of return, at least to some extent.”
“Yes. For instance, there was a recent paper explaining Warren Buffet’s performance based on the value and quality factors.2 And Warren Buffet is not the first person you would think of as being a quant investor. This implies that you should be aware of your factor exposures, whether you do explicit factor investing or not. You should know which sources of return you are exposed to and how well diversified these exposures are. I think of factors as a tool to improve diversification.”
“My views on this are pretty consensual. Investors should consider value, momentum, small caps, and to a less extent, quality and low risk. But what investors should really figure out – particularly because my list is so consensual – are the reasons behind the performance of a particular factor and how well all this fits with their investment needs and beliefs.”
I don’t think factor performance can be timed in the short term
“No, I mean medium to long-term justifications as to why these factors should be priced in. I don’t think factor performance can be timed in the short term.”
“There are indeed factors we prefer to others. Generally speaking, our business is very long term with very long-dated liabilities, at least as regards life-insurance. This means we tend to have time on our side and therefore sell liquidity, if you will. So, any factor that involves selling liquidity, like small-cap investing, is interesting for us. Value is also something that works for us, simply because at the end of the day, it pays to buy cheap. You simply need time for a catchup to take place.”
“Having said that, we are not a long-only, but a liability-driven investor. We need some downside protection, we need to control drawdowns, and value and small-cap investing can be cyclical. So, we also like factors that outperform or protect from drawdowns when markets tank, as diversifying factors. I am talking here about quality and, to a lower extent, low risk.”
“Finally, something that typically does not work for us is momentum. Momentum strategies usually involve relatively high turnover and we are quite wary of turnover for a variety of reasons. Transaction costs is one, stability of accounting returns is another.”
“Exactly. Generally speaking, I like this kind of strategy a lot. I myself worked quite a bit on momentum investing, in earlier days. I even published a couple of papers on this topic.3 So, I don’t mean momentum is not interesting or does not work. But for an investor like Allianz, this is not the best type of strategy.”
“This is precisely what I meant when I said investors should figure out the reasons behind the long-term performance of a particular factor and how well they fit with their investment needs and beliefs. Some people thought that factor investing was an easy way to make money and now realize it isn’t. Of course, it was never meant to be. Many factors are, at the end of the day, risk premiums. And risk premiums do not necessarily materialize steadily over time. They are often cyclical.”
“This is especially true for the value factor. Value has been through a rough patch for most of the post-financial crisis period, and 2018 was particularly challenging. But that’s not something new. Value did not perform for most of the 1990s. There were short periods of relief, like in 1994 as the Fed tightened its monetary policy. But overall, investors did not make much money with the value factor during the decade.”
“There were also long periods when investors did make money with value. And there is overwhelming empirical evidence to show that value has performed over long periods of time. So, I am not overly worried. This is just something investors need to understand.”
“First and foremost, factor investors should be patient and brave. Some people claim they can time factors, but the evidence I am aware of is not particularly strong. That being said, we do look at valuations. Valuations are not a good market-timing tool, but over the medium to long term, they are probably the best predictor. Right now, value is very cheap, while more defensive styles such as low risk and quality are relatively expensive. So, you should certainly take this into account for your factor allocation. But I would not call that timing. It’s more strategic positioning, if you will.”
“No. I am not talking about binary decisions such as active vs. passive. It is about tilting the portfolio allocation but not based on short-term views. You first need to understand which factors you want to be exposed to. Then, when we invest fresh money or when we have a large re-allocation, the valuation of factors is one input for the investment decision. But we are not chasing factor performance.”
This article was initially Published in our Quant Quarterly magazine.
1 Marc-Gregor Czaja is Global Head of Equities and Derivatives at Allianz Investment Management, in Munich. He holds a PhD in Finance and a master’s in Business Administration from the Catholic University of Eichstätt-Ingolstadt and the Chartered Financial Analyst designation. His research has been published in several journals, including The Quarterly Review of Economics and Finance and European Financial Management.
2 Frazzini, A., Kabiller, D and Pedersen, L. H., ‘Buffett’s Alpha’, Financial Analyst’s Journal 74 (4), 35-55.
3 Czaja, M.-G., Kaufmann, P. and Scholz, H., ‘Enhancing the Profitability of Earnings Momentum Strategies: The Role of Price Momentum, Information Diffusion and Earnings Uncertainty’, Journal of Investment Strategies 2 (4), 3-57, and Bohl M., Czaja, M.-G. and Kaufmann, P., ‘Momentum Profits, Market Cycles, and Rebounds: Evidence from Germany’, Quarterly Review of Economics and Finance 61, 139-159.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.