Instos lower active risk to 'eke out more alpha': Acadian

Large superannuation funds are reallocating from their passive books, and in some cases away from discretionary managers, and moving it into lower-risk systematic strategies, according to Acadian Asset Management (AAM).

AAM Australia chief executive and head of Asia Pacific Gillian Savage told Financial Standard portfolios with lower active risk are gaining traction among institutional clients as they look to "eke out more alpha" and differentiate from the index.

Acadian is a quantitative manager with US$239.6 billion under management globally. It has been in Australia for 20 years, starting in 2005 as a joint venture with Colonial First State (CFS) before buying out CFS's stake in 2015. It now manages about $30 billion for Australian and New Zealand clients.

"They're allocating to these lower risk portfolios because we don't have to take a huge amount of risk to get a decent amount of alpha above the index," Savage said.

"Anecdotally, some of the flows have come from discretionary managers where their risk management is not as visible, and they're making a more broad-based, diversified, risk-controlled core allocation. So it's coming from both sides."

Savage added large, lower-risk mandates are the "sweet spot" for quant investing.

"When you look across the landscape in Australia, there is a lot of consolidation of the superannuation funds, and what these mega funds are often looking for is diversified, core-type allocations, which our strategies fit perfectly," she said.

She said institutional clients are taking more of their active risk in private markets and extension strategies.

Savage added Acadian works closely with the internal investment teams of the super funds. The fund manager recently appointed Matthew McLenaghan to expand institutional client relationships across Australia and New Zealand by working closely with Acadian's distribution, client service and investment teams.

"We complement some of the internal investment teams quite nicely because we've got the breadth and the technology that they perhaps don't have: the infrastructure, the data, the data scientists who are cleaning the data, the significant investment and expertise in AI, purely because we're a large global quant investor. Scale matters in systematic investing," she said.

"We've been using machine learning, natural language processing and those types of AI processes for two decades. We've built a sophisticated data platform over 40 years - it's our bread and butter."

Savage said transparency is also important for large institutional investors, as they need to know what bets they're taking and risk management is paramount.

Acadian's enhanced strategies, which have low tracking error and stay close to the index, are attracting strong institutional interest. Extension strategies such as 130/30 are also popular. These allow managers to short some stocks and use the proceeds to increase their long positions.

"Releasing that short constraint in parts of their asset allocation is actually a really attractive thing for some of these big super funds who are trying to exceed their performance target and get the best outcome for members. Our process lends itself to being able to generate alpha in both the long and short portfolios," Savage said.