The Quants Run Wall Street Now | WSJ

From Gregory Zuckerman and Bradley Hope:

For decades, investors imagined a time when data-driven traders would dominate financial markets. That day has arrived.

…. quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013, according to the Tabb Group, a research and consulting firm in New York.

Quants now dominate the short-term trading market but active managers (homo sapiens) are still very dominant in the much larger long-term investment market. And this is unlikely to change any time soon.

Source: The Quants Run Wall Street Now – WSJ

Fidelity Reviewed Which Accounts Did Best And What They Found Was Hilarious | Business Insider

From Miles Udland:

[James O’Shaughnessy of O’Shaughnessy Asset Management] relays one anecdote from an employee who recently joined his firm that really makes your head spin.

O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity….They were the accounts [of] people who forgot they had an account at Fidelity.”

There are numerous studies that explain why this happens. And they almost always come down to the fact that our minds work against us. Due to our behavioural biases, we often find ourselves buying high and selling low.

I have always called this “the Siemens effect” from an example I came across, in a completely different field, about 30 years ago. German electronics giant Siemens built a telecommunications exchange in a sealed container, where no human could have access and all maintenance was conducted from an outside control panel. The exchange experienced only a small fraction of the equipment failures experienced in a normal telecommunications exchange, leading to the conclusion that human intervention by maintenance staff caused most of the faults.

Likewise in investment, if you build the equivalent of a sealed system. Where there is no direct human intervention, you are likely to experience better performance than if there is constant tinkering to “improve” the system.

The caveat is, during an electrical storm it may be advisable to shut the telecommunications exchange down from the control panel. Likewise, with stocks, when macroeconomic and volatility filters warn of elevated risk, the system should move to cash or assets (e.g. government bonds) with low or negative correlation to stocks.

Read more at Fidelity Reviewed Which Accounts Did Best And What They Found Was Hilarious | Business Insider.

To sell or not to sell?

Recent acquisition Northern Star Resources [NST] in the ASX 200 portfolio is a great example of the conundrum faced by long-term investors when a new stock leaps out of the starting blocks. Profit-taking is evident from the tall shadows/wicks early in the week and in the decline of 21-day Twiggs Money Flow. Medium-term selling pressure suggests the stock is likely to retrace and give back some of the gains of the last two weeks. The temptation must be great to sell the stock and lock in profits of close to 30 percent.

NST

It is important, however, to stick to the plan. We are investing for a longer time frame in anticipation of much larger gains. There is no guarantee that any individual stock, including NST, will deliver. But I can guarantee you that they will not deliver long-term gains if you sell within the first few weeks.

Investors in S&P 500 stock Micron Technology [MU] faced a similar conundrum in July 2013. The stock had put in a good run from $9.00 before encountering profit-taking as it approached $15.00. 21-Day Twiggs Money Flow retreated below zero and the stock fell back to $12.50. Many investors would have taken this as a sign to get out.

MU July 2013

With hindsight, the decision to stay the course looks easy: support held at $12.50 and MU is now trading at $33.00. But I am sure that there were many investors who forgot their original plan and took profits at $12.50.

MU 2013/2014

….They just aren’t bragging about it.

How does R&I compare to other investment channels?

DIY investors have several alternative channels for investing in equities. The most hands-off is to invest in managed funds, or a managed discretionary account (MDA), where all investment decisions and actions are made for you. On the other extreme is to purchase investment software that offers a proven investment strategy, where you are responsible for your own investment decisions and execution. In the middle-ground is Research & Investment, where no decision-making is required — other than to invest in a subscription — but you are required to execute your own trades in the market.

Here we compare the relative costs and effort required for each investment channel using a standard investment of $100,000:

Investment Alternative: R&I MDA Software
Upfront cost: $0 $0 $2,000 to $3,000
Ongoing monthly cost: $95 $100 to $200 $50 to $100
Performance fees (above index benchmark): None Up to 22% None
Time & Effort required: 2 to 3 hours/month 0 to 1 hours/month 2 to 3 hours/day
Complexity: Low Very Low High
Mobility & Freedom of movement: High Very High Low
Detachment & Freedom from emotional pressure and external influences: Medium High Low
Investment Timeframe 5 to 10 years
Recommended Leverage: None
Typical Number of Stocks: 10 to 20 Varies Varies
Tax Implications: Suitable for lower tax vehicles such as super funds.
Subscriber Limit: 500 to 1000 Varies Unlimited
Performance: Medium to High Low to High Low to High

Upfront costs are for purchase of investment software.

Monthly costs include R&I subscriptions, management and platform fees for MDAs (from 1.2% to 2.4% of net assets), and data costs for investment software.

Performance fees are calculated on outperformance above a suitable benchmark like the ASX 200 Accumulation Index.

Time required for R&I is to review the update and implement the portfolio changes, normally once a month. A managed account merely requires you to review performance. Investment software normally requires daily scans of the market, review of charts and placing trades with your broker.

Complexity with R&I is limited to reading the updates and placing trades with your broker. A managed account merely requires you to review performance. But investment software requires complex installation and mastery of the operating rules.

Mobility is a problem if you are on holiday or work away from home and need to access your system. R&I requires you to login once a month to receive updates and then place any trades with an online broker. A managed account requires no monthly intervention. Investment software normally requires daily access to the database on your computer to perform scans and daily access to an online broker.

Detachment is achieved if you have a managed account: someone else makes the decisions for you. R&I is a rules-based strategy and requires you to ignore external influences and adhere to the system, implementing all trades. Because of the level of involvement required with investment software, detachment is difficult and investors often stray from the prescribed rules.

Investment time frame is the same for all three vehicles.

Recommended leverage is zero because of volatility of returns.

Typical number of stocks is 10 to 20. R&I is a high conviction strategy, selecting a smaller number of stocks in order to achieve outperformance. Some funds and software follow a similar path, while some erode performance through over-diversification (di-worsification as Warren Buffett calls it).

Tax implications are the same: active strategies do not maximise capital gains tax concessions and require a low tax vehicle such as a SMSF.

Subscriber limits are enforced by R&I to protect performance: too many investors using the same system would affect entry/exit prices and erode returns. Some managed funds are closed or capped, but most are not.

Performance of all three investment alternatives is variable, but by pursuing a high conviction strategy and following a strict, rules-based approach, R&I investors are more likely to outperform the relevant index benchmarks.

We hope you find this comparison useful. To find out more:

  • Visit our home page or FAQ;
  • Open a support ticket; or
  • Call 1300-850-951 (Australia) or +1-866-662-7542 (USA & Canada) on weekdays.

Quant Funds Are Hot Again | Morningstar

By Greg Carlson

Funds that use quantitative stock-picking models are on a roll. A list of 52 U.S.-sold quant funds compiled by Morningstar beat more than 80% of their respective peers over the trailing three years through June 13, and the group outperformed its respective peers in 2011, 2012, 2013, and thus far in 2014.

Read more at Quant Funds Are Hot Again.