Beruflich Dokumente
Kultur Dokumente
Executive Summary
Quantitative equity investing has been an evolutionary process from its inception,
and one whose practitioners hold certain tenetsdisciplined adherence to
a research-driven process, objectively engineered alpha, and awareness of
systematic risks. Five years after the financial crisis, quantitative strategies are
gaining investor interest precisely because the systematic application of these
principles has resulted in attractive risk-adjusted returns. Contrast this view with
conditions that prevailed during the crisis, which left many investors disappointed
Vinod Chandrashekaran, Ph.D. in the performance of quantitative approaches.
Senior Vice President
Director of Quantitative Research
and Portfolio Management
As investment professionals, we understand that investment strategies naturally
tend to come in and out of favor. Because of changing investor perception of
these strategies, we believe this is an appropriate juncture to revisit the history
of quantitative equity investing and provide greater context around these
approaches. We explain why quantitative equity investing is well positioned to
provide attractive long-term performance.
Introduction
Quantitative investment management may loosely be described as the application of
rigorous mathematical and statistical principles, informed by economic theory, to the
study of financial markets with the primary goal of forming investment portfolios to
achieve superior returns. This approach to investing has a long history and distinguished
academic pedigree. So while quantitative investment strategies have gone in and out
Early Pioneers
Despite its more recent prominence and popularity, the field of quantitative investing
is over a century old. Louis Bachelier, a French mathematician at the turn of the
20th century, is widely acknowledged as a pioneer in the application of advanced
mathematical concepts to the study of financial markets. His Ph.D. thesis at the
Sorbonne, titled The Theory of Speculation, was published in 1900 and illustrated
the use of statistical techniques to study the fluctuation of stock prices. Bacheliers
work was initially viewed with skepticism and the full value of his contribution was
not understood or acknowledged until decades later. Therefore, it should come as no
surprise that quantitative investing remained an academic discipline with no apparent
real-world significance.
Value Investing
In sharp contrast, another pioneering piece of work received critical acclaim and,
decades later, had a major influence on the development of practical quantitative
investment strategies. Following steep market declines in the 1930s, two professors
at Columbia University, Benjamin Graham and David Dodd, published a book titled
Security Analysis that exhorted investors to consider a disciplined framework to analyze
securities. They promoted an approach that examined a companys business via the
lens of its financial statements to arrive at a measure of the companys intrinsic value.
Comparing the market price of a security to its intrinsic value could be used to identify
under- and over-valued securities. This approach, dubbed value investing, gained
popularity among fundamental analysts. Several decades later, with the widespread
availability of financial data and growth in computing, this philosophy would also find
favor with quantitative investors.
Standard deviation
Source: MSCI Barra, American Century Investments. Data from 3/31/1973 to 12/31/2014.
Source: MSCI Barra, American Century Investments. Data from 2/28/1991 to 12/31/2014.
Total # of Strategies
in financial markets, leading
to severe drawdowns in the $200 80
returns of such strategies and
massive outflows. $150 60
Total # of Strategies
We find that for the large-core $50
40
and large-growth strategies, $40
assets under management 30
peaked in mid-2007, and were $30
20
subject to sharp drawdowns $20
thereafter. The peak in small-
$10 10
cap core assets occurred
slightly earlier, but the general $0 0
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
pattern holds. Only in the last
several years have assets
under management begun to
increase again. At the same US Large-Cap Growth Quantitative AUM # of Quantitative Strategies
time, the number of quant
practitioners declined notably Quarterly Total AUM/Number of StrategiesSmall-Cap Core
in all strategy groupings. eVestment US Small-Cap Core Equity Universe
$35 60
$30
50
Total AUM in Billions
Total # of Strategies
$25
40
$20
30
$15
20
$10
$5 10
$0 0
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Source: American Century Investments and eVestment. Data from 12/1993 to 12/2014.
Return (%)
active management amid low
volatility and rising cross-sectional 50 -50
correlations.
This analysis of returns compares
75 -75
the relative ranking of quantitative
and traditional managers over
time in the large-cap growth,
100 -100
large-cap core, and small-cap Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
core segments. Specifically, we eA US LCC Median Traditional Manager eA US LCC Median Quantitative Manager
provide the rolling 36-month
return rankings for the median
Rolling Three-Year Returns Relative to eA US Large-Cap Growth Universe
eA U.S. LCC, LCG, and SCC
eA US LCG Median Traditional Manager vs. eA US LCG Median Quantitative Manager
fundamental manager and the
median eA U.S. LCC, LCG, and 0 0
SCC quantitative manager for
the last five years relative to their
respective universes. 25 -25
Return (%)
25 -25
Return (%)
50 -50
75 -75
100 -100
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
eA US SCC Median Traditional Manager eA US SCC Median Quantitative Manager
Source: American Century Investments and eVestment. Data from 1/31/2010 to 12/31/2014.
I would like to thank Jeremy Deering, Yulin Long, Ph.D., David Streeter, and Syed Zamil,
for their input and assistance in creating this paper.
References
Bachelier, Louis. 1900. Thorie de la spculation. Annales scientifiques de lcole
Normale Suprieure. 17:3, pp. 21-86.
Banz, Rolf W. 1981. The Relationship Between Return and Market Value of Common
Stocks. Journal of Financial Economics. 9:1, pp. 3-18
Basu, Sanjay. 1977. Investment Performance of Common Stocks in Relation to Their
Price-Earnings Ratios: A Test of the Efficient Market Hypothesis. Journal of Finance.
12:3, pp. 129-56.
Black, Fischer, Michael C. Jensen and Myron Scholes. 1972. The Capital Asset Pricing
Model: Some Empirical Tests, in Studies in the Theory of Capital Markets. Michael C.
Jensen, ed. New York: Praeger, pp. 79-121.
Fama, Eugene F. and Kenneth R. French. 1992. The Cross-Section of Expected Stock
Returns. Journal of Finance. 47:2, pp. 427-465.
Fama, Eugene F. and James D. MacBeth. 1973. Risk, Return, and Equilibrium: Empirical
Tests. Journal of Political Economy. 81:3, pp. 607-636.
Graham, Benjamin and David Dodd. 1934. Security analysis: Principles and technique.
1E. New York and London: McGraw-Hill Book Company, Inc.
Grinold, Richard C. 1989. The Fundamental Law of Active Management. The Journal of
Portfolio Management. 15:3, pp. 30-37.
Grinold, Richard C. 1994. Alpha is Volatility Times IC Times Score. The Journal of
Portfolio Management. 20:4, pp. 9-16.
Jegadeesh, Narasimhan and Sheridan Titman. 1993. Returns to Buying Winners and
Selling Losers: Implications for Stock Market Efficiency. Journal of Finance. 48:1, pp.
65-91. Markowitz, Harry. 1952. Portfolio Selection. Journal of Finance. 7:1, pp. 77-99.
Material presented has been derived from industry sources considered to be reliable, but
their accuracy and completeness cannot be guaranteed.
Opinions expressed are those of the author and are no guarantee of the future
performance of any American Century Investments portfolio. Nothing in this document
should be construed as offering investment advice. Please note that this is for
informational purposes only and does not take into account whether an investment is
suitable or appropriate for a specific investor.