Tech Integration
The magic ingredient people aren't talking about...
Technology and AI promises to solve all our business challenges.
Want to serve more clients with the same head count? Technology and AI. Want to reduce risk and human error in your processes? Technology and AI. Want to enhance the personalisation of your service to client preferences? Technology and AI.
You’ll know better than us how it can be practically used in your business and whether it can live up to the promises. Instead, we’ll focus on the investment portfolio.
Let’s consider a comparatively archaic form of technology and big data use that predates the ubiquitous Generative AI tools – quantitative investing. The strategy is still under-utilised in investment portfolios for the benefits it can bring.
Let’s start with a myth buster. Quant investing is often confused with simple smart beta investing or black box hedge funds.
To put it simply, a quantitative active equity fund can bring all the alpha potential of a fundamental (human decision making) active fund, with the diversification benefits of allocating to many more active positions and the fee benefits of blending active with passive.
We quipped that quantitative investing is an archaic relative to recent Generative AI development, but that was grossly unfair. The best managers out there running these strategies are at the cutting edge of technological innovation. They continually update their data, models and ability to identify signals that inform drivers in stock prices. Where fundamental managers have analysts reading research reports and management information, quant managers have teams of the smartest tech and data minds in the world, employed to power innovation and improvement.
For example, they will use satellite imagery to look at department store carparks to get a forward indication on earnings. Or patent filings and credit card transaction data. This would take humans weeks to wade through, but quant models can do it in minutes.
Investors (retail and institutional) are facing heightening pressures to reduce fees within their portfolio. This has led to a notable rise in passive funds. In Europe, Morningstar Direct data shows long-term index funds had inflows of EUR 307.6 billion in 2024, compared to just EUR 150.5 billion posted by actively managed funds. The market share of long-term index funds rose to 29.6% as of December 2024, up from 26.8% in December 2023.
In the table below, we illustrate how fees could be halved by using passive funds (Portfolio 2). With Portfolio 3 showing the impact if we framed the question differently, along the lines of “how do we reduce fees whilst retaining maximum alpha potential?”.
Portfolio 1 All Active
Portfolio 2Enough Passive to Half Fees
Portfolio 3 Add Quant to Keep Fees The Same
Active Equity Weighting
100%
45%
34%
Quant Equity Weighting
35%
Passive Equity Weighting
55%
31%
ER over inflation
5.7%
6.0%
Vol
16.7%
16.1%
Sharpe
0.26
0.27
0.29
Fees
0.83%
0.42%
*Figures shown are based on a Redington model portfolio and are intended for illustrative purposes only.
As shown, quantitative active equity funds can bring all the alpha potential of a fundamental (human decision making) active fund, with the diversification benefits of allocating to many more active positions and the fee benefits of blending active with passive.
For absolute clarity, we still believe skilled fundamental active managers can be identified and add value.
We simply offer an alternative to investors who are still seeking the value add and diversification of active management, but without the price tag.
