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Profiting from out-of-the-box thinking

A collaborative management and investment approach, as well as being willing to say “I don’t know everything” are important elements to success according to Janet Campagna, chief executive of the former Deutsche-owned quant shop, and women-majority owned firm, QS Investors.

It is one thing to say you’re open-minded, but another to actually live by that mantra. Janet Campagna, chief executive of QS Investors, encourages an out-of-the-box approach to people and ideas management which is reflected in the firm’s investment approach. While generalisations are fraught with danger, the irony of explaining this open-mindedness by the fact the firm is majority-women owned is not lost.

“Management structures that don’t all look alike are good for the industry,” she says. “It means we are looking at markets in a different way and our culture reflects that difference. We think the team is larger than the sum of the parts.”

The firm practises a philosophy which is “open minded, innovative and meticulous”, promoting the hierarchy of ideas, not people, and employing a dynamic investment process which incorporates both qualitative and quantitative investing.

Perhaps, one of the most pertinent reflections of the firm’s open-mindedness is the incorporation of fundamental factors into the mostly quantitative way of thinking.

“It is quite radical for a quant person to realise a fundamental manager may add something,” Campagna says. “We’ve systemised it. Quant models tend to have static weights but in currency for example, carry trade is a significant part of any quant model but the ability to incorporate regime shifting is difficult. Now we have signals of when to condition carry on and off. The fundamental teams helped us moderate that carry trade, and it’s saved our clients a lot of money.”

QS Investors adopts a collaborative, integrated approach, acknowledging the importance of different skill sets in risk management, the research agenda, openness to new ideas, and responsiveness to clients. And women, she believes, are more likely to set up a more collaborative approach.

“I don’t have an office, it is all open, collaborative, we share information. I’ve been in the industry for more than 20 years and avoided hubris. I think that is a reflection of being a woman,” she says. “Being willing to say ‘I don’t know everything’ is very important.”

The firm was formed in 1999 under the Deutsche umbrella, as the quant strategy group, but was spun out as an independent firm in August 2010.

“In our analysis this business makes sense on a stand-alone, independent basis, we  have specialised needs in terms of technology, sales, and backoffice and couldn’t take advantage of the economies of scale of the bank. They were very supportive,” she says.

In the time at Deutsche the group had developed four key areas, which are still the cornerstone of the business – strategic asset allocation, diversification based investing, active quantitative equity, and tactical asset allocation.

The firm, which is now 100 per cent employee-owned and majority-owned by women, has different ways of thinking about diversification, Campagna says.

One example of this is a dynamic weighting in stock selection strategies, in recognition that any particular quant factor does not always work, it varies over time.

“We looked at when do factors work? In terms of economic market factors, you’re always in a market cycle of fear and greed, over- or under-reaction. And if you look at factors and say when you expect them to work it tells us when they should work, for example valuation works when people feel comfortable, when they are calmer; and glamour factors work when people are optimistic,” she says.

With this in mind QS has created a secondary process that incorporates the position in the cycle and weights the processes or factors accordingly, across all bottom-up strategies.

Now, Campagna says “we are definitely not in the strong fear part of the cycle. That is weakening, it’s more rational, I’d say we’ve moved from the 98th percentile of fear to the 80th.. We are still susceptible to event risk, volatility spikes, de-risking and over-reaction. We have more weight on sentiment factors.”

Another example of the unique way of thinking about diversification is the firm already incorporates factor-based diversification in the strategic asset allocation and risk management portion of specific strategies.

“It is very important to be thinking about factor exposures, sometimes we need to remind people that risk/return are related, that you can’t eliminate all the risk.”

QS Investors has 46 employees (about 35 per cent are women, including chief investment officer Rosemary Macedo) and manages about $14 billion.

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