The macroeconomic shockwaves accompanying this have brought investment markets into a period of great uncertainty, says Rob Prugue, head of Lazard Asset Management in the Asia-Pacific. The long reign of price momentum as the dominant factor driving equity returns is over, he says, and investors now face a directionless market. In the past, when secular returns were strong, price momentum was conducive to further gains, but now markets are trendless and subject to the impacts of big macroeconomic changes. But has this shift been reflected in equity strategies, or even equity benchmarks? “As we move into this period of uncertainty, of a directionless market, some people are challenging the validity of market capitalisation-weighted indexes as a benchmark, particularly since they have a bias towards price momentum,” Prugue says.

“If the financial crisis catapulted us into this regime of uncertainty, then strategies which implement price momentum are likely to be more vulnerable going forward.” In this new world, one thing is clear – “the next 20 years won’t look like the last 20 years” – so it is time for equity managers and investors to adapt. Quants under fire Investors’ reactions to this change has been mixed. Some got on the front foot early on in the crisis and bought equities – even small-caps, the riskier and lessliquid type – but most spent time with asset consultants reviewing their investment beliefs and objectives, effectively waiting out the storm. As equity portfolios incurred steep losses, the merit of active management was naturally called into question. Some big funds, such as QSuper and UniSuper, increased their passive allocations coming out of the crisis. “You’d be crazy to say the crisis didn’t test your belief in active management,” acknowledges Hugh Dougherty, head of manager research at Towers Watson.

Out of all active strategies, quantitative equities drew the most fire. Since the financial crisis, JANA Investment Advisers has, in the main, scaled back its allocation to quantitative equities managers. Marshman says the investment philosophy behind quant strategies has not been fatally wounded, but weaknesses in the application of these ideas have been exposed. “We continue to believe that the basic premise for quantitative management is sound, which is buying value, quality and following shorter-term trends and turning points in both earnings and price.” This bias towards value, quality and momentum has been rewarded consistently over the past 80 years, he says. “However, in the crisis they were not, mainly due to large flights of money into and out of different asset classes and sectors as a result of the unusual actions taking place in markets, in policy actions and across economies.” Not knowing for how long this uncertainty and “choppiness of markets” will persist, Marshman sees JANA’s move to pull money from quant strategies as prudent.