'Active' By Another Name

July 01, 2018

She said her firms’ two funds rely on quantitative models to “do the heavy lifting,” but she said that she and Ted Theodore, chief investment officer at TrimTabs, make discretionary decisions about final investments. Funds that are labeled active and are rebalanced back to a particular factor or have more rules still aren’t really active if there’s no human fund-manager discretion.

“I’ve been picking stocks as a portfolio manager for over 25 years. We listen to conference calls, we dig into our companies, we make active decisions about what stocks go in and out of the portfolio, and when,” Johnston said. “That’s very different from portfolios driven purely by a quantitative model. Just because a quantitative fund has more activity, more factors or more rules to appear active, doesn’t make it an actively managed product.”

In traditional actively managed mutual funds, where a portfolio manager uses a top-down approach making macroeconomic calls, that’s not much different from what ETF strategists do now, FactSet’s Kashner says. For the bottom-up portfolio manager who performs company analysis to try to understand the management and the value proposition of the company, among other research, she says that many of those elements are captured in so-called smart beta investing.

“Certainly when you go to the value factor, some people talk about quality, boiling that down to earnings stability or debt ratios,” Kashner noted. “That’s all part of the classic bottom-up, kick-the-tires research.”

Quantitative Approaches Usually Multifactor
So can smart-beta deliver something other quantitative strategies or models can’t provide? Rosenbluth says that, typically, quantitative-derived mutual funds are more what’s akin to the multifactor ETFs, using as an example the John Hancock suite of multifactor ETFs that were developed by Dimensional Fund Advisors, a quantitative equity strategy firm. It’s less common in mutual funds to have quantitative strategies tied more toward the single-factor approaches seen in ETFs, like momentum.

While there are many value-oriented mutual funds, they’re also looking at other characteristics, like where the fundamentals show signs of quality but the stock has fallen off. Compare that to a fund like the iShares Edge MSCI U.S.A. Value Factor ETF (VLUE), which simply uses  a value screen.

“You get a lot more exposures with your qualitative active management [in mutual funds] than just the factor,” Rosenbluth said. “That often is more than you may’ve bargained for in that space.”

Balchunas says from what he’s seen about quantitative active managers’ pitches to institutional clients, their methods are all systematic, so it’s hard to imagine that can’t be packaged. In the past, institutions have traditionally relied on private managers.

“Institutions have traditionally preferred the private pool as opposed to the public one down the street, which is the ETF,” he said metaphorically.

Although that could change—and some pension funds have questioned why they should pay a quantitative active manager rather than use an ETF—there’s always going to be room for something exclusive, Balchunas says. “There’s probably always some room for somebody who’s got something really special going on there," he added. "They're doing well. It's private, and institutional feesl like, 'if I buy you, I can get a leg up on other institutions.'"


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