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SIMON BROWN: I’m chatting with Rademeyer Vermaak, head of Systematic Solutions at STANLIB Asset Management. Rademeyer, I appreciate the time today.
With conflict in the Middle East and the market swings, it’s been a fairly wild couple of months since the Iranian attack on the last day of February. How does a systematic equity process respond to these shocks in terms of positioning risk – and even in terms of timing, to a degree?
RADEMEYER VERMAAK: Simon, it really all comes down to risk management. In our minds active equity management is really simple. There are only two things you need.
First, you need intellectually sound stock selection, and this comes from what you philosophically believe drives the market. If you get this correct, your portfolio should be right more often than wrong.
And then, second, you need risk management. This is how you control how much you lose when you are wrong.
The other reality is that the market is driven by different forces through time, sometimes by the macro environment such as the war in Iran, and sometimes it’s driven by speculation when central banks print money.
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But over the long term the market is really driven by fundamentals. So, when there are geopolitical shocks, the gold price falls, the oil price spikes and stocks are not driven by fundamentals, a well-designed, systematic equity portfolio should be protected by virtue of the risk management built into the portfolio to protect against these events. At least that is what we do at STANLIB in our enhanced multi-style funds.
SIMON BROWN: I get your point. It is that important – that ultimately it is the returns of the companies that will drive performance long term. But of course short term it’s crazy. By contrast, the sort of behavioural patterns we see from investors, I imagine, are probably the inverse – the knee-jerk responses and negative outcomes as a result.
RADEMEYER VERMAAK: Exactly. During these times of turbulence it is incredibly difficult to keep emotions from corroding a portfolio manager’s belief system. If you’re on the wrong side of a trade and you’re losing money fast, there are only two things you can do. You can either lock in your loss or you can trust your investment process.
The intestinal fortitude required to not get emotional is immense. This is exactly what a systematic investment process does so well.
It keeps emotions from corroding investment frameworks.
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SIMON BROWN: Yes. Emotions are the absolute enemy of any investor anywhere. During these unpredicted market moves, where do systematic models struggle? Do they struggle? Are there particular events or perhaps places – times when the systematic approach does find it harder?
RADEMEYER VERMAAK: Simon, every investment approach has periods when it struggles, and systematic approaches typically struggle when there are big inflection points in the market. For a period the market is driven either by speculative excess or by big macro themes, such as at the moment.
This is exactly why risk management is so important in controlling how much you lose during those inevitable periods when your investment philosophy struggles.
This is relevant for both systematic and non-systematic portfolio managers.
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SIMON BROWN: Actually a great point you make there is that if we step away from systematic and non-systematic and look at the core philosophies around maybe you as a momentum or a value or a growth investor – whatever your style might be – there are going to be times when you struggle. That really is when it’s hardest, when the performance isn’t there. It’s just going to happen at some point.
RADEMEYER VERMAAK: Exactly.
SIMON BROWN: How do we then look at the broader picture, because we can’t not touch on machine learning. I have to say I prefer the phrase ‘machine learning’ particularly in this environment, and the role that it plays in sort of equity in investing. Do the old-school fundamentals still matter? Do they still get incorporated into these modern models?
RADEMEYER VERMAAK: Simon, over the long term fundamentals are all that matters. Everything else being equal, there is just no way that low growth, low quality and expensive companies keep on outperforming companies with strong balance sheets, strong growth prospects, which one can buy at decent valuations.
Remember, the four most dangerous words in investments are: ‘This time is different.’ There is that wonderful anecdotal story about Warren Buffett driving around with a colleague through the streets of Omaha in the middle of the 2008 global financial crisis.
The colleague was frantic, given the turmoil of the financial markets, but Warren calmed him down by simply asking whether the colleague knew what the best-selling chocolate bar was in 1960. The colleague replied that he didn’t know, and Warren told him that it was a Snickers bar.
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And then Warren asked him whether he knew what the best-selling chocolate bar was back in 2008. Yes, it was still a Snickers bar. I think the key insight here is that we, as investors, should focus not so much on what is changing, but focus on what stays the same. The reality is that over the long term the market rewards companies with good fundamentals.
I think to close your question around AI, just by virtue of being technologically driven systematic investment processes do lend themselves more naturally to embracing machine learning and AI and the power behind it.
We at STANLIB follow a very cautious approach, and we would use AI, for example, to act as an assistant when we are coding, but it will never be in the driving seat.
At the at the end of the day, our enhanced multi-asset funds are managed by humans, but we use the power of technology to help us consistently make the best possible decisions despite our very human emotions.
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SIMON BROWN: Yes. I get your point around that. We’ve always had technology involving fax machines, emails, AI. It’s how we use it. They’re important, but they are just not the drivers.
We’ll leave it there. Rademeyer Vermaak, head of Systematic Solutions at STANLIB Asset Management, I appreciate the time.
#Managing #market #volatility #fundamentals #technology