Jens Kummer is very well positioned to compare mechanistic and discretionary investing.
When using ETFs in ‘normal times’ to achieve its goals, SEB AM will not distinguish between ‘full replication’ trackers and ‘synthetic’ alternatives, “but if times change and counterparty risk increases, we become more selective”. Kummer is sensitive to tail risks. But he says “counterparty risks are not as high as they were in 2008”.
He points to another significant benefit of passive funds over active ones – cost.
In the short-term this may not be so important. “But for long-term investors it makes sense to enter markets only with ETFs because they are cheaper.
“Unfortunately, product costs of active managers are so high. Even if a manager might add value, the costs of their product are so high the ETF will beat it in the very long term. Expense is the main problem with the active industry.”
Partly for this reason, and for their “disappointing” returns overall, Kummer’s team also is marginally using hedge funds.
He would welcome more high-quality managers in biotech equities. “In biotech 10 years ago there were so many funds and you used to find good active fund managers, but most were stopped out of the market and now it is very difficult to find active managers with good track records still in play. You can quite often see inefficient markets and not enough managers taking advantage of them.”
Kummer’s team currently regards some high yield equities, showing annualised return expectations of up to 12%, as attractive.
But to buy equities today, he says, investors “really have to be long-term investors”.
Most are not right now. Instead they take a 12-month horizon. Because the risk of shares falling over that period is too high, Kummer’s team is only taking underweight positions, and postponing more.
“We look each week at the forecast for the coming days, and when it is a little bit cloudy, we ‘take an umbrella’. This year Europe will muddle through, but [as an investor] it will be better to take an umbrella, and be on protective mode.
“But the opportunities will not stay there for the next year. We look to provide positive returns over 12 to 18 months, and as long as we have this time horizon, you also must have an instrument or model that gives you some indication of when is the right time for positive returns, and when the risk is too high not to achieve a positive return.”
And where does Kummer stand in the discretionary / mechanistic fund management debate? He stands on both sides.
“For both approaches, it depends on the maturity of the process. Each process can add value, you just have to understand the processes, and how they behave at different times. You cannot have quant without people, and you cannot have passive products unless there is also active management.
“Nowadays it is quite easy to generate back-tests or simulations, and people can make calculations to show great results. But if you invested your money into these kinds of back-tests you would be lost. Quant models based on economic fundamentals have to show they have developed further in the last years.
“On the human side, you have to have a very mature team, low turnover, lots of experience and stable decision-making processes. Both approaches are worth considering.”