You are one of the few quantitative investors in our Future Generation investment portfolios. Do you mind explaining what quantitative investing is?
Quantitative or systematic investing is an approach that uses advanced models to make and implement investment decisions. At Vinva we use vast amounts of data and develop models and algorithms that allow us to forecast relative stock price returns (i.e. stock ranking models). These return forecasts are then combined with our risk and transaction cost models to build efficient portfolios for our clients.
Like all good investment managers, our biggest asset is our people. We are an intellectual capital firm and it is the insights and ideas from our people that are key to our models. From our perspective, the advantage of systematic investing is that it creates discipline and removes emotion from the investment process.
Why do you think your style of investment strategy works?
The success of our investment strategies ultimately depends on the quality of our team and the investment insights generated. It is our people who develop the models and the insights that allow us to adapt to dynamic market conditions to continually innovate and stay ahead.
On average, emotion detracts from investment performance. Having a disciplined and data-driven approach to investment decision-making removes emotion and knee-jerk reactions from decision-making. This leads to consistent outperformance over time throughout market cycles.
A big advantage of our style is that we can process huge amounts of real-time data, identifying patterns, trends, and mispricing that may not be necessarily apparent to other investors. This data-driven approach leads to more informed, timely investment decisions and portfolios that take a large number of active bets rather than a concentrated number of large active bets.
You’ve been a Future Generation Australia pro bono fund manager for years, but you recently began managing money on behalf of Future Generation Global too. As a quantitative fund manager, what do you bring to each portfolio for shareholders?
The Future Generation Australia and Future Generation Global portfolios have exposure to some very well credentialed fund managers and the Vinva team is incredibly proud to be a pro bono fund manager for Future Generation in both the Australian and global equity portfolios. Our portfolios are actively managed whereby we take small, yet deliberate positions in a large number of stocks. This is complementary to the other styles of managers in the Future Generation Australia and Future Generation Global investment portfolios and therefore enhances the portfolio’s risk-return profile.
How do you think artificial intelligence (AI) will impact your style of investing?
The Vinva team has been at the forefront of artificial and machine learning and language processing techniques since 2006, extracting valuable information from numerous sources of written text to measure changes in sentiment amongst other things. We have developed a leading-edge, proprietary investment platform that processes large quantities of information quickly and allows us to implement decisions into our portfolios very quickly.
The emergence of AI has seen an increasing focus on how investors can use these tools to enhance performance outcomes for clients. Financial markets are very noisy and a large amount of data is unstructured. We have been using AI for many years now. The key is knowing how to use it and on which types of data. Implemented in the right way, AI can be used effectively to enhance and supplement existing models to enhance investor outcomes.
On the global equity side, the strategy in which FGG invests has exposure to emerging markets. How does this benefit FGG investors?
That’s right, FGG invests in the Vinva International Equity Fund which is benchmarked to the MSCI World All Countries benchmark so we have the ability to invest in up to twenty-four emerging markets along with the 22 developed market countries in our investable universe.
Emerging markets offer a number of benefits to investors such as diversification due to lower correlation with developed markets. All things equal, these markets are typically less efficient and there is more mispricing, hence creating opportunities that our systematic strategies are well-positioned to exploit.
On the other side, although emerging markets offer some unique advantages to a portfolio there are elevated risks associated with them (be it political, regulatory, or liquidity risks) which need to be accounted for appropriately during the portfolio construction process.
How have your global equities strategies performed over the past year?
The outperformance in our global equities strategies has been very strong over the past few years and we have delivered information ratios (a risk-adjusted measure performance) well in excess of 1. In the year to 31 August 2023, the FGG’s investment in Vinva’s international equity funds has delivered an outperformance (alpha) of more than 5% above the benchmark.
How do you incorporate ESG into your investing strategy?
As a fiduciary acting on behalf of our clients, we have a responsibility to examine a range of financial and non-financial factors that may impact the operational efficiency and financial performance of companies in which we invest. Since sustainability issues may have a sizeable financial impact on companies, we systematically incorporate risks and opportunities associated with ESG factors in our process.
We have been pro-actively conducting investment research on ESG, and have been a leader in incorporating ESG factors in systematic portfolios, since 2007. Essentially, the guiding principle for incorporating ESG signals into our investment process focuses on how these factors may enhance or detract from shareholder value over both short-term and long-term horizons. Our ESG signals capture over 400 measures for a range of ESG factors.
Many members of your team came out of Barclays Global Investors (BGI) and have worked together since the 1990s. It’s rare to have that level of longevity and stability. What does that say about your culture – and how critical is culture to a funds management business?
You’re right, the Vinva investment team is one of the most stable and experienced teams in the market. The majority of our team has worked together for over two decades (including our time at BGI), providing clients with continuity and certainty. We do feel that this longevity and stability is a testament to our strong culture and mutual respect that has been fostered over decades. The shared ownership of the firm and the investment team being directly responsible for the performance leads to a strong alignment of interest and shared common goals with our clients.
I understand Vinva is 100 per cent owned by the team. How important is it for you to be aligned with your clients in that way?
We have seen evidence in both Australia and globally, that when investment professionals have large ownership stakes in the firm, their interests are closely aligned with those of their clients and this results in better outcomes.
From my perspective, it is imperative that our employees, and in particular the investment team, have personal ownership in the firm. Employee-owned firms tend to have a longer-term perspective in decision-making. This leads to a sustainable, successful business over the long run rather than chasing short-term gains.
At Vinva, the ownership model is one which is spread across all areas of the business. In addition to helping attract and retain the best talent, it is also an important contributor to the culture of the organisation. We have a strong entrepreneurial spirit and are motivated to innovate and find new ways to add value to our clients’ portfolios.
What are the two key lessons you’ve learned from your time in the market?
There are plenty of things I have learned over the years and I am still learning. Two things that come to mind are:
Firstly, to know what you don’t know. Stock markets are dynamic and the information flow globally is huge. The signal-to-noise ratio is low, i.e. a lot of the day-to-day volatility in stock price moves is driven by noise rather than information. Therefore, in addition to “knowing what you know”, it is arguably more important to “know what you don’t know”. Markets can be quite humbling so it is important to understand that there is a lot going on that we cannot explain accurately. Hence, when constructing portfolios, we need to control risks and avoid inadvertent exposures.
Secondly, successful active management requires great people first and foremost, as well as leading investment insights and world-class research. These are necessary ingredients, but not sufficient on their own. It also requires a strong investment philosophy and a culture of discipline and patience. Even more so in this modern day of technology, with easy access to data and trading platforms, there is a greater propensity for relative mispricing to develop and stay for prolonged periods.
We are incredibly grateful that you are one of our pro bono fund managers. Why do you do it?
I speak for the whole Vinva team in saying that we are very proud to be managing money on behalf of Future Generation Australia and Future Generation Global shareholders.
As a firm, we feel we are very much aligned with Future Generation’s objective of making a positive impact for tomorrow’s generations. The focus on children at risk and youth mental health are issues very close to our hearts and where we can contribute to the great work of Future Generation, we are very happy to. Coming back to the importance of culture within our firm, supporting initiatives such as Future Generation is ingrained in the ethos of our business and our people who demonstrate the awareness and importance of giving back to society.
