Quantifying Equities is Not a Bettor’s Game
When it was first created in 1998, OakBrook Investments, a quantitative equity manager focused on leveraging the index, had no idea that just a decade later the firm and its counterparts would face the most volatile time in the history of the modern capital markets era.
However, the institutional manager maintained a mindset that helped to keep it a notch above other “quants” during the period.
Janna Sampson, co-CIO of the Lisle, Ill.-based firm, said last week its use of “behavioral economics… makes [it] a little different from the average manager because [OakBrook is] looking at how the market reacts to information, rather than what the actual information is.”
“The U.S. large-cap market is an efficient market for dissemination of information,” Sampson noted. “Everybody gets the same information at the same time but how people react to that information is not efficient, and different market participants can react to the exact same information differently.”
Post-financial collapse, the former VP and senior portfolio manager at ANB Investment Management & Trust Company highlighted that “quantitative managers have been sort of out favor because of the volatility they faced during the difficult market of ’07-08.
“Many quantitative managers kind of blew up or significantly underperformed because their risk models didn’t work well,” she said.
Rather than using the market norm of a structure that implements a “correlation model,” Sampson, Peter Jankovskis, co-CIO, Giri Cherukuri, head trader and portfolio manager, and Neil Wright, a firm founder who headed investments prior to his September 2007 retirement, concluded that optimizing risk wasn’t the best look for its sector of the market, especially during the downturn.
She noted that its “actual stock selection model did struggle a little bit in the fall of ‘08, but didn’t dramatically underperform.” The firm was 17 basis points under the index on a relative basis, which was “much better than [its] competitors,” Sampson highlighted.
“We use a set of absolute risk controls [that] control for risk at the stock, sector, and the style level,” Sampson revealed last Wednesday. “We just make sure we don’t take huge bets; we take very small bets in all of those areas and we strictly limit and control them on an absolute basis.”
Because of this “finite over, underweight position,” the firm has been able to stay in conversation with its core client base of public and corporate pension funds that include funds at St. Louis County, Mo., B.P. Corp. and the United Food and Commercial Workers’ Pension Fund in Atlanta.
Sampson stated that its S&P 500 index model can be used for an institutional investor’s large-cap position with the “goal” of “attempting to be close to the index, but outperforming it.”
However, in the current market, utilization of an indexing strategy in the middle and large capitalization sector, or a product somewhat close to it, hasn’t been the most optimal of choices for the industry’s major players. As seen across the nation, large pension funds have begun unloading assets internationally, while domestic strategies have been getting snubbed.
Recent evidence of Sampson’s claims can be seen across the country. Specifically, at the Retirement System of the Town of Greenwich, its Retirement Board agreed last month “that the first step [for its new asset allocation plan] was to move funds from fixed-income into the international equity area.” Additionally, in June, the nearly $30 billion Tennessee Consolidated Retirement System CIO Michael Brakebill told IMMP that its initiative to commit about 5% of its portfolio to Canadian equities had been completed. And next week, the roughly $2.3 billion San Mateo County Employees’ Retirement Association (SamCERA) will discuss approving two separate investment manager searches in the international small-cap equity and emerging markets equity market.
“Right now, we are seeing a lot of people looking outside of the U.S., we don’t do any international investing or global mandates, and there seems to be tremendous amount of interest in [that space],” Sampson commented.
While equities have languished, passive mid-cap and large-cap value products have seen substantial more interest, Sampson said, while noting that there presently are “a lot of managers that have had a hard time outperforming in the mid-cap space… over the long run.”
She explained this was because of the uncertainty of what S&P “will add to the index next.” The addition forces many active managers to stay behind the index because they only hold a select bunch of stocks; passive or index managers like OakBrook stay above the cut in this case.
Erudite emerging
With this safe, but strategic position in the market, OakBrook has also found itself in the center of the emerging manager conversations. Previously, states across the country, such as its home state of Illinois, have been at the forefront of helping minority, or women owned businesses.
Initial inclination required a set cap of assets under management for firms; however now with its more than $2.5 billion in assets, Sampson noted that because it is “majority women owned”, OakBrook has a continued presence with the distinction.
“We definitely get into some searches” as a result of numerous public retirement systems’ emerging manager programs. Previously, in March, the firm saw itself in the running for a $15 million large-cap value search at the Metropolitan Water Reclamation District Fund of Chicago (MWRDF) that was first issued in November. At the time of its issuance, the fund listed that the requirements to be involved in the conversation are that firms should have at least $10 million, but less $10 billion under management. Additionally, the firms should be “minority owned,” “female owned,” or a “business owned by a person with a disability,” this according to the state’s statute.
While the 13-year-old firm’s co-lead investment officer admitted that it has been a “little bit tougher right now” due to the lowering of domestic equity weight toward an international standing by plan sponsors, Sampson said OakBrook is taking a wait and see approach.
“Over time, those kinds of cycles tend to run their course. People will eventually have hired all the emerging managers and global managers they need after a year or two, then they will go back to focusing on their U.S. managers,” she added.
In looking towards its future over the next three-to five-years, Sampson predicts that OakBrook, the firm that offers “investments in all different cap sizes in the U.S.,” anticipates a buildup of assets to “get up to $5 billion,” but “exactly what path that will take depends somewhat on the market.”
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