Inside Macquarie's unique approach to consistent alpha

The Rules of Investing

Behavioural economics explains why we make such stupid decisions with our money. Unfortunately, the study has found that behavioural biases are very hard to control and, even if you are aware of them, no one is immune from poor decision-making when it comes to both life and our finances.

This is where quantitative or systematic investing comes in - a realm of investing typically reserved for institutional investors like super funds and the ultra-wealthy.

Quantitative investing removes emotion and behavioural biases from investing. Instead, it relies on some of the smartest people in the world to put together hundreds to thousands of signals and data points for a large language model to make decisions. Humans are involved but just for oversight, in case the model does not truly understand a situation. For example, it may not understand that airlines were not a fantastic short-term opportunity amid a significant sell-off during the COVID-19 crash.

This is a far cry from fundamental investing, which relies on a fund manager or investor analysing macroeconomic and stock-specific factors, meeting with management teams, trying out products and services and reviewing a business's balance sheet before making an investment decision of their own.

The gains from quantitative strategies are typically small, but they're consistent over time. You are not going to have years of 10-20% plus outperformance over an index, but equally, you shouldn't experience huge drawdowns either. And over the long term, this small amount of alpha adds up.

Interestingly, Macquarie Asset Management was one of the few firms that saw its funds achieve 100 batting averages - for both the large-cap and small-cap categories - over a 10-year period. This means that these funds, which are all quantitative strategies*, have outperformed the benchmark 100% of the time in every three-year rolling period over the past decade.

So, to learn more about quantitative investing, quantitative ETFs and the major trends shaping ETF markets, Livewire's Ally Selby was joined by Blair Hannon, ETF Strategist at Macquarie Asset Management.

We discuss some common misconceptions surrounding quantitative investing, the signals that have worked over the last few years, and the magic of compounding over the long term.

Plus, Hannon also shares why he strongly believes that passive investing is not creating a bubble in markets - despite what some of the world's most famous investors (like The Big Short's Michael Burry) would have you think.

Note: This interview was recorded on Tuesday 24 September 2024.

Timecodes

• 0:00 - Intro
• 1:54 - Difference between fundamental and quantitative investing
• 5:28 - Removing the emotion from investing
• 6:55 - Signals that are used to avoid behavioural biases
• 8:56 - Do we need human touch on quant funds
• 10:31 - Common misconceptions of quant investing
• 14:44 - The signal that has been working over the last year
• 18:20 - Turnover of stocks in the portfolio
• 20:10 - The signal that has worked over the long term
• 21:32 - Why 1% alpha is attractive over the long term
• 24:38 - Macquarie's batting average scores over 10 and 5 years
• 27:37 - Why ETF popularity will continue to soar
• 29:57 - Why active fund managers need to innovate on ETFs
• 32:50 - Innovation in the US - and what we can expect in Australia
• 35:08 - Why ETFs aren't the death of managed funds
• 37:10 - Why passive investment isn't creating a bubble in markets
• 39:07 - Something that worries Blair about the direction of ETF markets
• 41:21 - One ETF to hold for the next 5 years if markets were to close

Disclaimer:

Product Disclosure Statements and Target Market Determinations for Macquarie ETFs can be found at etf.macquarie.com and should be read before making a decision to invest.

*The Macquarie Australian Shares Fund, Macquarie Australian Equities Fund and the Macquarie Australian Small Companies Fund’s investment strategies changed effective 18 December 2017. Until 17 December 2017, the strategies were managed with a fundamental approach. From 18 December 2017, the strategies were restructured such that they are managed with a quantitative, systematic investment approach.