While identifying true alpha is important, Dr Alistair Rew, head of alpha strategies with AMP Capital, reminds the industry not to underestimate the value of client engagement and tailored solutions, along with the heightened role of data and technology in helping to deliver it.
From a cost perspective, Rew sees the “commoditisation of alpha” as a great outcome, which potentially frees up the fee budget to track down more active management opportunities. However, he says it’s equally important that greater computing power, speed and storage capacity is successfully combined with human talent – the skill-sets of investment teams – when it comes to getting return and managing risk.
“With technology having levelled the playing field, over shorter-term investment horizons funds will need to find alternative ways to generate alpha which is becoming more demanding,” Rew says. “Focusing on longer-term investment horizons is one approach and should mean greater concentration on higher conviction portfolios with fewer constraints and greater transparency.”
As well as being part of the value-add that leads to better client engagement, he says data and technology, if deployed intelligently, could be the source of competitive advantage. “The trick for funds is to reintegrate four key building blocks – stock selection, risk management and portfolio management, together with technology and data – to develop unconstrained and benchmark unaware strategies that help to deliver on a much wider range of client needs,” Rew says.
“Better analysis of richer data sets will enable funds to reach more tailored client outcomes, whether it’s around greater process transparency, absolute capital growth, reduced volatility and downside protection, social investing or whatever is important to the client.”
It’s still early days, but over time Rew expects more advanced data and technology to change the traditional mix of skill sets collectively found in an investment team and portfolio management structure. He suspects the move towards more diverse and advanced skill sets will mirror a corresponding demand for psychological skills in the team.
“As well as helping to get the most out of the talent, the role of psychologists in investment teams with more diverse skill sets and personality types is to better manage individual behavioural biases and reduce key-person risk,” he says.
Aiming to enhance its efforts in the benchmark unaware and unconstrained space, AMP Capital set up an in-house resource called Cortex two years ago. Drawing from different skill sets across the broad investment team, Cortex, Rew says, is helping to enhance portfolio and risk management through leveraging an integrated team focused on technology, data, visualisation and portfolio and risk management tools and analysis.
Rew says much of this thinking is reflected in the new Global Equity Fund, launched by AMP Capital earlier this year, which targets double-digit annualised absolute returns across a market cycle. With lower volatility than equity markets, the fund focuses on absolute risk and return, not benchmarks, and invests in a concentrated portfolio of up to 35 companies with strong current or anticipated cash generation.
Seeking to deliver absolute outcomes, Rew says the benchmark unaware Global Equity Fund marks a highly differentiated investment opportunity for clients, following years of work by the team to re-position its broader equity fund range over time.
“We’ve taken a high-conviction approach, investing in a small number of exceptional companies with outstanding prospects, that have dependable and persistent cash-backed returns on capital,” he says. “As we’re not bound to a benchmark, sector or country, these are names that we think are the best stocks globally and will deliver the performance to meet our clients’ goals.”
AMP Capital head of alpha strategies Alistair Rew will participate in a panel, titled Alpha is not absolute: The commoditisation of alpha, at the upcoming Investment Magazine Absolute Returns Conference. For more information about the conference, to be held in Sydney on September 14, 2017, please visit the event website or contact Emma Brodie via [email protected] or +61 2 9227 5708.