From Barron's:
Top Quant Buys Emerging Markets
Justin Abercrombie's computer-intensive strategy has posted top-notch returns for Schroders. He likes emerging markets, but is short Tesla.
Justin Abercrombie is known as "our mad scientist" in the halls of Schroders, the big London-based asset manager that oversees $447 billion in stock and bond funds around the world.
Abercrombie is the head of the firm's quantitative equity group, which he created when he joined Schroders in 1996. His group runs $42.5 billion in stocks, using a strategy he developed with a sophisticated computer program that employs several different investment models capable of running 90 different metrics to distinguish among 15,000 stocks. In July 2008, he took the reins of the $555 million Schroders Global Value Extension hedge fund, which he revamped with his quant strategy. Remarkably, the moderately sized, strong-performing value fund is long 1,015 stocks and short 244 others.
Even with that computer firepower, Abercrombie and his team of 30 analysts in London, Sydney, and New York rely on their own judgment at times in guiding their fund. If they detect a number of stocks falling or rising together, they try to figure out if there's a connection. Then they turn on the power -- about 30 value-oriented and roughly 60 quality-oriented screens -- to help them build an investment theme around those stocks. They've recently been buying emerging-market shares because they could identify high-quality stocks that investors were selling for what the researchers believed were the wrong reasons. Similarly, if a bunch of seemingly low-quality or overvalued stocks are rising, Schroders Global Value can short them. One short sale earlier this year was the hugely popular electric-car maker Tesla (TSLA), whose shares sell at a forward multiple of 135 times earnings.
All of the analytics give Abercrombie "an industrialized version of fundamental investing," says the Briton, 44. "That doesn't mean we meet loads and loads of companies. We make sure the processstays on track, and we don't drive into a ditch with excess concentration in financials or another type of stock," says Abercrombie, who spent part of his childhood in Zimbabwe. His father was an engineer.
The fund limits its risks by not allowing a single stock to represent an entire theme. (It shorted Twitter as well as Tesla.) As a result, individual positions are tiny: A stock pick will start off as 0.2% to 0.4% of Global Value's assets; from there it might grow to 0.7% or 0.8%. And yet, since many of these small stakes may be tied to the same theme, they allow Global Value to perform more like a concentrated equity fund than an index fund.
This system of nano-like parts has worked well to date. From its inception on July 31, 2008, to April 30 this year, Schroders Global Value is up 10.64% annualized net of fees, while the MSCI AC World Index is up only 5.48%. The fund's human override helped it through the financial crisis. The analysts tweaked their models to keep all but the strongest banks out of the portfolio even though the stocks were cheap. Global Value dropped sharply in the crisis but beat the market and then surged 54.5% in 2009, topping the MSCI's 34.6% rise. Most quant funds didn't do nearly as well.
Abercrombie, who got his masters in econometrics from London Metropolitan University and worked at foreign-currency specialist Pareto Partners before joining Schroders, offers another unusual feature. Global Value doesn't charge performance fees. For American investors in the ultrahigh-net-worth version of the strategy, the management fee is 95 basis points (0.95 percentage point). These investors tend to keep large sums at the fund.
SO WHERE ARE ABERCROMBIE, his analysts, and their computers finding opportunity? They like emerging markets, which he says move through economic cycles too fast for most investors to time them. By his calculation, emerging markets trade at a discount of about 35% to developed markets, having fallen from a recent premium of about 10%....MUCH MORE
