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July 2016

Altrinsic Global Advisors

Many industries have benefited from huge efficiency gains through embracing technology and automating repetitive tasks. An investment process is a series of tasks that are applied in a consistent manner, but can these be automated?

Quantitative investment management approaches, including smart beta, have been at the forefront of investment innovations that look to exploit the value proposition of fundamental investment managers and threaten to ‘Uberise’ the investment management industry with lower-cost options. While these strategies have been growing in popularity their underpinnings are based on the assumption that underlying historical models can be used to consistently add value, thereby commoditising the approach used by bottom-up stock pickers.

So how do fundamental stock pickers succeed in the face of this type of substitute competition? Organisations that embrace the future, recognise the threat, and constantly self-challenge will avoid being caught up in the status quo. A strong culture, and people differentiation are important and key elements to optimising human thought and fundamental judgement. A culture that embraces collaboration while encouraging healthy competition, and inspiring self-betterment, lays the foundation for superior long-term performance relative to commoditised approaches.

While market conditions have been a factor in the onslaught of quantitative approaches, it appears that a long overdue transition emerged in mid-2015 and greater volatility has surfaced. Considering prevailing valuations, profitability levels, and interest rates, there are some powerful macro forces that further support the case for a transition in market behavior and drivers of performance, namely:

•       the tug of war between deflationary pressures caused by excessive debt and inflationary forces caused by unconventional monetary policy;

•       an erosion of confidence in policymakers as unconventional monetary policy has less incremental effect on economic conditions; and

•       the re-balance of China’s economy from one that is an investment-led to a consumption-driven economy and the country’s need to reduce mountains of unproductive debt.

The resulting transition is from an environment characterised by robust absolute returns with low volatility to one characterised by lower returns with much greater volatility. January 2016 marked the worst start to a new year in history.

Now that is a distant memory. Despite the rebound, investors are increasingly looking for validation in the form of fundamentals supporting valuations. The multiple expansion theme of the past several years has likely reached its peak. Altrinsic believes stock selection rather than market returns is likely to be the driving force in global equity returns for the foreseeable future.

Low-cost quantitative products deserve a role in a diversified portfolio, but the ‘alpha’ opportunity in more flexible, thought-based, mandates should far exceed marginal savings from quantitative low-fee investment strategies, many of which have not been battle-tested. Volatility brings opportunity for fundamental value approaches, but will challenge quantitative approaches and those looking purely for growth.

Humans can achieve investment excess. Machines can achieve investment success. However, we believe creative teams that bring differentiated perspectives, embrace technology, and apply a sensible investment process that focuses on the long term will deliver superior performance. As is the case in all competitive endeavors, the scarce and binding ingredient is a strong culture that drives a passion to win.

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