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John Ameriks Vanguard

Quant Investor: The Man Behind Vanguard’s Machine

John Ameriks, head of Vanguard’s Quantitative Equity Group, on the future of rules-based investing, where advisors add value, and why being quantitative just for the sake of it is not enough.

Define “big data” however you like; there is no doubt data, statistics and the output of algorithms, fueled by ever-increasing computational power, will transform asset management.

To get an informed take, we turned to John Ameriks, head of Vanguard Quantitative Equity Group. One of its flagship funds, Vanguard Strategic Equity, has returned 17.96 percent annualized for the five years ended June 1, compared with 16.17 percent for the S&P 500 index, according to Morningstar.

Ameriks is enthusiastic about the rise of quantitative investing but is concerned about the strategies not being understood in context—or short-term investors looking for the can’t-miss, magical algorithm. As for financial advisors? They’ve focused too much on portfolio management—as the industry evolves, advisors need to focus on where they can make a real difference: asset allocation, client behavior, and, as always, minimizing costs.  

And he brings an odd background to his current gig: The economics PhD co-majored in Slavic languages and literature at Stanford University. He previously served as head of Vanguard Investment Counseling & Research. What are the strengths and weaknesses of quantitative investing?

John Ameriks: As for strengths, quantitative investing is data driven. It relies on an explicit process, and you can use powerful tools to test your ideas. It’s amenable to a lot of analysis and review. It leverages technology and is incredibly efficient. It allows us to create effective solutions at a minimum cost. You’re talking to a guy from Vanguard, after all.

As for weaknesses, I don’t think we always know what we’re talking about when we say quantitative. It can mean a variety of different things. Almost anything I hear about now is relying on data and analysis, including high-frequency algorithm activity that’s more trading than investing. I worry a little about quantitative for quantitative’s sake. Just because you are using numbers doesn’t mean it will be effective. There are quantitative approaches that rely on nonsensical indicators like Twitter feeds or on back-testing.

WM: How would you describe your own approach to quantitative investing?

JA: We take traditional fundamental ideas around economic drivers of risk and return within peer groups of securities and create a set of metrics that allow you to make comparisons among these peers to identify which ones will perform better.

Our version takes a lot of the same approaches that you’ll hear from non-quantitative managers. They want strong earnings growth, high-quality balance sheets and a wise use of capital. Those are ideas that we talk about also. We come up with a set of rules to specify what we mean by good management decisions. Then we apply those rules systematically rather than the firm-by-firm analysis that many fundamental managers perform. There’s a quantitative emphasis on process and data.

WM: So what are the rules that you mentioned?

JA: We apply ideas that have been salient in asset literature for a long time: characteristics that lead some firms to do better than others. We’re looking for earnings growth at a reasonable price.

We have a set of quantitative tools that try to get at four high-level ideas for growth: management decisions, the quality of a firm, a demonstration of consistent earnings growth and sentiment. Only one of those is not directly related to fundamentals: sentiment. For that we focus on observed patterns as well as changes in the opinions of analysts.

WM: Can you tell us about the “reasonable price” component?

JA: We have a set of valuation metrics that we use. The key issue is to make sure you don’t overpay. We’re fundamental investors, so it’s a matter of valuations as they apply to the fundamentals of the firm. We look at cash flow to price, and earnings to price. We use different metrics depending on the industry. We don’t place as much emphasis on distress. Deep value isn’t what we’re after.

WM: Do you think that the increased emphasis on quantitative investing throughout the money-management industry will lead to higher returns?

JA: I’m enthusiastic. It’s great to hear more people talking about it. But I don’t know about the growth of quantitative investing in and of itself. I struggle with what is the context.

Depending on the technology and strategies, if people are seeing value and growth the same way we do, maybe they will do better in the short term. But the long term depends on the quality of the model. I don’t expect an immediate impact from the growth of quantitative tools.

We will continue to work hard to make sure we add value compared with others. But there is a lot of competition, and that could hamper our ability to add value. I don’t worry much about the growth of quantitative investing because it helps ensure that market prices and the way firms value assets are based on hard numbers and a rigorous approach.

WM: What do you worry about?

JA: My worry is that investors will be disappointed by a strategy that worked in the past, souring them on quantitative investing.

WM: What do you think that financial advisors do well?

 JA: For many years, wealth managers got too much focus as portfolio managers. Asset allocation and cost are what drive investing. As wealth managers have evolved, they are placing a lot of value on behavioral coaching and costs that can be controlled, such as taxes and transaction costs.

It’s a matter of coaching people through the ups and downs of the marketplace. Wealth managers have always done that well, but it’s great to see them focusing even more on it. That’s where a great wealth manager can really help people. It’s a matter of focusing on the client.

WM: And where is there room for improvement?

JA: There’s a tendency to look at the latest and greatest things out there. Wealth managers can look at things and see what makes sense for clients. Maybe the role is to see what methods we [money managers] are missing.

Advisors can help product and service providers fill in gaps. The focus shouldn’t be on trying to find a strategy that always outperforms the market. You can’t do that. Successful strategies often attract more attention than they should.


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