And perhaps a manager with a stronger bent to emerging markets. The biggest risk is ultimately losing our members’ money, earning negative returns overall. We don’t really measure risk, like tracking error or Sharp ratios or information ratios, I think because in the current market dislocation, those sorts of things have almost become out of date. Greg Bright: The typical quant manager tends to have a lower tracking error. Does that not matter right now?
Richard Dalidowicz: Most quant managers are quite sector neutral, most of their active stock bets are perhaps within one per cent of benchmark, or only one half a per cent, but some have delivered such bad returns that measuring tracking error is not perhaps a useful measure to look at. Matthew Ross: I think processes that are very heavily risk dependent will be very whippy in this environment, because the volatility and the correlation shifts are extreme.
Take the correlation between the resource and the banking sectors. For 10 years, those two sectors moved in lock step and then we hit a period, with a negative correlation between them. And that’s really caught a lot of portfolio managers short. As a general comment about active investment management, in favour of the quants, is they actually do have a focus on tracking error. Most of the other active managers in Australia don’t really take a view on correlations. They tend to look at single names because most active managers are largely stock pickers.
Peter Laity: You don’t want managers to be changing their processes and their styles, but you’d want them to continually question their processes. If something isn’t working, you’d hope that they’d say: “It’s not working at the moment, let’s talk to our clients and ask them if we can take some risk off the table”. Richard Dalidowicz: I think it’s important, as Ross said, to be flexible, to be able to change your process to the market environment. For example, many managers were long resources in particular and suddenly during the September and December quarters, they all blew up. So there’s nothing wrong in being flexible and changing the process.
James Gruver: It all comes back to skill. If people have skill then flexibility is more tolerated. It would be interesting if we could track the number of research enhancements over the last five years, by firm, and then compare that to performance. We might see that there’s actually an inverse correlation between performance and the number of ideas. There seems to be an insatiable appetite in the investment community for new ideas, especially in the quant space. We (BNY Mellon) represent both fundamental managers as well as quantitative managers and there is clearly a bigger appetite for enhancements with the quantitative managers.