Janet Campagna is the CEO of QS Investors, a 100% employee-owned, majority woman-owned investment management company based in New York and founded in 2010. Prior to founding QS Investors, Janet was a managing director at Deutsche Asset Management serving as the global head of quantitative strategies and a member of the global operating committee. She was a principal at Barclays Global Investors from 1994–99 and from 1989–94 an associate at First Quadrant and director of asset allocation research. She is a board member of the Mott Haven Academy in the South Bronx, a charter school for at-risk students in the foster care and child welfare system, and a member of the MFE Steering Committee for the Haas Business School, UC Berkeley. Janet has a BS from Northeastern University, an MS from California Institute of Technology, and a PhD from the University of California, Irvine, in 1990.
In general, the reputation of quant managers took a hammering as a result of the crash. The media pretty much blamed quants as one of the causes of the crash and certainly highlighted the losses of high-profile investment bank quant funds through the downturn. Do you feel that was unfair to mathematical investing?
Although there is no doubt that a number of quantitative funds turned in results through the crash that would not have pleased investors, there is a mistaken impression in the media—and to a lesser extent perhaps among some investors—that all quant funds are the same, and that therefore it makes sense to talk about “quants” in general terms. This paints all quants with the same brush. In reality, there are many different ways of using mathematical techniques to generate alpha, and different funds take very different approaches. Recent academic research shows that the correlation among different quant fund managers is actually substantially less than the correlation between traditional, long-only active investment managers, particularly during market crises. That, by itself, should suggest that generalizations about quants are not going to be particularly helpful, accurate, or even interesting.
What is certainly true, however, is that there is a very strong demand from the investor community for transparency. Not everyone has the background to understand the mathematics, but they expect a sensible layperson’s guide to what it is that we are doing, and we are very happy to provide this. In our case, at QS Investors, we are particularly keen to do so since we believe we are taking an approach that enables our models to be very responsive to changing market conditions and to changing investor attitudes in the market over time. Our results show that incorporating these dynamics generates an enhanced performance over time.
What we have in common with many quant managers is that our approach is a relative returns one, which means that our funds will try to beat the appropriate benchmark for the universe of stocks that we are targeting by a specific amount. There are quant funds that offer an absolute return strategy—one that focuses on capital preservation under all market conditions—but that is not the role of a relative return fund.
We offer various levels of outperformance and construct portfolios that are designed to produce a risk–reward outcome that is commensurate with the target benchmark for that specific portfolio with its risk and return objectives. This gives both our institutional clients and wealth management clients the opportunity to select one or more of our funds to match what they are trying to achieve with whatever portion of their overall funds they assign to us.
This is actually a very important point to get across. We are not in the business of second-guessing the client’s portfolio allocation strategy. They will have already decided how they want to allocate their portfolio across a range of asset classes, and we will get a chunk of the monies that they have decided to invest in equities. Our job is to attempt to fulfill our performance goals while staying within the risk parameters that we have set up for that particular client’s portfolio. If they have decided to invest in, say, our global equity fund for a 3–4% outperformance target, we will have done our job if we beat the global index by 3–4%. If the whole market is down 10%, we will still aim to be around 4% better than that, so our portfolio will be down only 6%. But we won’t suddenly try to outperform the market by 14% to give an absolute return of 4%.
“Doing well” means, in our terms, achieving the goals we set out to achieve. A number of our funds achieved exactly this through the downturn of 2008 and turned in performances that beat their benchmark indexes by 3% to 4%. Investors appreciate and put a high premium on consistency of performance over time.