Is the importance of quantitative analysis growing in wake of coronavirus?
BY Yaelle Gang | July 17, 2020
Throughout the coronavirus pandemic, in-person visits by institutional investors have been drastically reduced, temporarily short circuiting qualitative due diligence and leading to slightly more reliance on quantitative analysis, says Jeff Schwartz, president of Markov Processes International Inc.
Quantitative analysis can help identify red flags and indicate when a deeper dive is required, for example. “That’s what we’re seeing more of through the pandemic, is people ramping up their quantitative work to better identify potential problems like style drift or implied leverage ramping up.”
Quantitative analysis can also help investors identify certain trends. For example, at the beginning of the pandemic, it became apparent from a quantitative standpoint that many equity managers in the U.S. large cap space were moving heavily into cash, Schwartz says. “That’s the kind of thing that you might not see in the holdings for weeks or months, but when you’re doing a quantitative analysis you can identify that very quickly from the movements in the return stream.”
A defined benefit pension plan sponsor, for instance, would want to know if its managers were drifting into cash. “Moving into cash for an active manager is not necessarily a good or bad thing, but it depends on your perspective.”
As an example, he says a plan sponsor may have hired a large cap equity manager expecting it would stay consistent with its mandate regardless of what’s going on in the world. And if a manager moves into cash it could put the pension portfolio overweight cash or impact its overall asset allocation. “Those are the types [of] trends that you can see by doing quantitative analysis and the kind of thing that we’ve seen during the pandemic.”
In addition to identifying red flags, quantitative tools can allow for greater efficiency. “I don’t think that’s any secret that over the past year or two, a lot of organizations have been trying to do more, or do the same, but with fewer people,” says Schwartz. “Tools like ours, that have an ability to automate the analysis of thousands of products, or even a handful, can allow groups that have been slimmed down, or cut, to still do their jobs in a really efficient way and COVID has only sped that up.”
Throughout the coronavirus, fund and portfolio risk analysis is also increasing, he adds, noting investors want to look specifically at additional shocks that may occur. And while most DB plans have been performing risk analysis for years, most of it is expensive, time-consuming and heavy on position-based tools that look at every security in a pension’s portfolio.
On the other hand, Markov Processes International uses a return-based risk analysis that shocks the factor exposures rather than the actual positions, Schwartz says. “This returns-based approach is way quicker, it’s way cheaper and can be done by even small to mid-sized pensions, not just the big boys who have the time, the staff [and] the money to do position-based.”