The Genesis of a Big Idea
Client-driven innovation has always been the lifeblood of QMA. It is a legacy that was firmly cemented 20 years ago with pioneering research into the impact of behavioral anomalies on factor returns that helped launch the firm’s active equity business and lay the foundations of modern quantitative finance.
The innovative finding came in an era when large institutional investors were first grappling with the increasing pressure associated with mounting pension liabilities. QMA, founded in the mid-1970s as the asset allocation arm of Prudential’s institutional annuity business, was a leading expert at using the underlying return potential of various asset classes as building blocks to optimize balanced portfolios. QMA’s leadership realized there could be a way to do something similar within equities to meet their pension clients’ needs for higher returns. QMA senior managing directors Jim Scott and Maggie Stumpp, and researcher Peter Xu, developed a framework for combining the underlying return premia associated with value, growth and quality factors and adaptively weighting them to take advantage of investors’ biases regarding faster- vs. slower-growing companies. For some of the world’s largest institutional investors, now able to outperform an equity benchmark with only incrementally higher tracking error and risk, this was a major game changer.
Twenty years later, QMA’s US Core Equity strategy remains a standard bearer of active equity for core exposure. Still, as markets are not static, the strategy itself has been constantly evolving, as have the other QMA domestic and global equity strategies it helped spawn. These, in turn, have further propelled the quantitative advancement of our multi-asset class offerings.
Our continued evolution and commitment to deep research not only has helped the firm prosper for clients in high times, but also stand strong through more volatile periods. During the “quant meltdown” of 2007, when a wave of quant managers rapidly unwound their highly correlated positions and triggered an abrupt selloff, QMA’s more differentiated exposures allowed it to weather the tumult and ultimately gain more assets and clients. In the 2008-09 financial crisis, a combination of conviction and adroit adjustments proved a similarly effective formula.
The Next Chapter
Today, quant has become one of the hottest buzzwords in investing as low-cost delivery vehicles and advancements in big data and artificial intelligence draw an ever-widening circle of managers and clients. Across the institutional and retail spectrum, investors have faster, cheaper and better access to underlying return drivers. The popularity of these approaches has created its own momentum but also created its own risks of factor crowding, increased potential for data mining and faster arbitrage.
Facing these exciting opportunities and new challenges, QMA remains a solid long-signal quant with roots deeply embedded in the core values of research and client-driven innovation that have motivated and distinguished us for 40 years. Whether it’s new risk-premia-based multi-asset solutions, or the machine reading techniques we are using to enhance our earnings revision factor, the tools change but the essential process and innovation target remain the same: finding more successful ways to meet our clients’ ever-evolving need for long-term sustainable sources of alpha.