Quant funds have grown to $37.1-billion in assets under management in Canada, according to data from Morningstar Canada.da-kuk/iStockPhoto / Getty Images
With ongoing advancements in artificial intelligence (AI), machine learning and algorithms, quantitative funds are gaining in popularity as investors see an opportunity in a systematic, mathematical approach.
Quant funds – also known as smart-beta, strategic beta or factor funds – have grown to $37.1-billion in assets under management (AUM) in Canada as of Aug. 31, from $7.4-billion a decade ago, according to data from Morningstar Canada.
There are currently 222 funds that qualify as quant or smart-beta in Canada. The height of launches for quant funds came in 2016 and 2017, with just a handful released in each of the past few years as either exchange-traded funds (ETFs) or mutual funds. Currently, 16 funds have achieved a Morningstar Canada five-star rating, and the average management expense ratio is 0.6 per cent.
“The smart beta or systematic strategies are a broad definition of what a quant fund is,” explains Ian Tam, director of investment research at Morningstar Canada. “In essence, it’s results-based investing, whether that’s something that the manager does, or if it’s a push to an index that’s factor-based – that’s what we would call a quant fund.”
These funds are not meant to be a short-term investment, Mr. Tam says, and it can take time before the investment strategy gains traction. Of the funds that survived the past five years, about half outperformed more traditional funds, according to Morningstar Canada. Of the 35 quant funds that have been around for 10 years, 57 per cent outperformed.
Many of these funds have a specific focus such as low volatility, value, growth, momentum, dividends or multi-factor, which combines several of these aspects. Low-volatility funds as a category didn’t perform as well as those focused on a fundamentally weighted index, on dividends or using a multi-factor approach, Mr. Tam says.
Arup Datta, senior vice-president of Mackenzie Investments’ global quantitative equity team, which is based in the quant hub of Boston, says the technology used in quant investing has advanced during his 30 years in the field.
His team builds stock selection models, examining common metrics including price to cash flow, return on equity and return on invested capital, and screening upwards of 20,000 stocks twice daily. But he says they’re also using AI, machine learning and text-parsing technology to peruse company press releases, earnings call transcripts and broker research reports to help choose the right stocks at the right time and at the right weighting.
Mr. Datta and his team, who have been together for the past seven years, manage 12 funds available in Canada with about $12-billion in AUM. Mackenzie Emerging Markets Fund and Mackenzie Global Equity Fund have a broad, multi-factor quantitative mandate. The emerging market fund has more than $850-million in AUM and an average annual return of 9.5 per cent over the past five years, as of Sept. 30. The global equity fund has more than $425-million in assets and a five-year return of 13.5 per cent.
“Our style is we embrace value, growth [and] quality all at the same time,” Mr. Datta says.
The technology quant managers use to choose stocks is becoming more sophisticated, Mr. Datta says. Mackenzie added a machine learning-based model to predict a company’s fundamentals that his team has been using for the past year. “It has been successful for us so far,” he says.
Mackenzie has added more quant ETFs to its lineup this year, including low-volatility funds covering Canada and the U.S., as well as an emerging markets fund that excludes China. Mr. Datta says other quant strategies on the horizon include long-short strategies and those aiming to choose public equities based on the industries and types of companies private equity investors or funds are focused on.
CI Global Asset Management’s version of quant funds is its smart-beta suite of ETFs, says Geraldo Ferreira, senior vice-president, head of investment products and manager oversight.
The firm’s multi-factor suite of ETFs is “getting a lot of traction,” Mr. Ferreira says, and has about $1.9-billion in AUM. Launched in September, CI Global Quality Dividend Growth Index ETF CGQD-B-T, which is also offered as a mutual fund, gives investors exposure to a global portfolio of high-quality, dividend-paying companies that have a strong earnings growth potential.
Mr. Ferreira says factor-based funds could expand into the small-cap space, as managers could screen for the high-quality, momentum-oriented stocks that are more likely to grow. “I haven’t seen a lot of small-cap, factor-based products out there,” he says.
Bill DeRoche, head of quantitative investing at AGF Investments in Boston, says quant funds have become more diverse since new rules that broadened access to liquid alternative investments took effect in 2019, giving asset managers more options.
While the field is growing, quant funds are still small in comparison to the overall fund market. “For a lot of people, when you start talking math, their eyes glaze over,” Mr. DeRoche says, so asset managers need to educate investors about their offerings.
AGF’s quant lineup includes dividend and sector funds, ETFs focused on infrastructure and ESG factors, and a U.S. market-neutral ETF, which Mr. DeRoche says acts like insurance in down markets.
To improve its forecasting, AGF created a macro regime model to identify whether gross domestic product is expanding or contracting, or if inflation is accelerating or decelerating.
“We’re trying to match sequences that have happened historically to what we’re seeing today,” Mr. DeRoche says, to then predict what type of investment will do better in this environment over the next three months.
New quant funds in the U.S. use options strategies to eliminate the downside, he explains, while others are using leverage or offering a “defined outcome” for investors. Other strategies are more complex and use a combination of long and short holdings. Mr. DeRoche expects those types of funds to come to Canada soon.
Editor’s note: A previous version of this article included an incorrect figure for the assets under management in CI Global Asset Management’s multi-factor suite of ETFs. Those ETFs have about $1.9-billion in AUM.