Barings: how to use a quant team

Baring Asset Management’s head of quant research and portfolio analytics describes how his team supports the wider investment process

Giuseppe Tedone, head of quantitative research and portfolio analytics at Baring Asset Management, describes how the firm uses the technical skills in his team to support the wider investment process.

The team, which reports to chief investment officer Marino Valensise, was established in 1986. It now has four staff in London, and one person in Hong Kong. Its purpose is to connect empirical evidence and theories, contributing to the fundamental investment process used at Baring Asset Management.

“Our job is to act like a scout helping a team cross a river. Many analysts are caught out by the ‘Flaw of Averages’, where they ‘drown’ in an unexpected bit of deep water because their analysis showed only the average depth of the river. Our job is to point out the narrow bit where the water runs faster, or the wide bit, where the crossing may take longer, but the water is shallower,” says Tedone.

“We offer pre-trade analysis which makes managers risk aware, not risk averse. We help eliminate systemic errors, and suggest different routes, which may be the quickest, safest or most economical. With macro sensitivity analysis, we try to determine where there is rough water, represented by volatile oil or gold, Treasuries or, say, Japanese stocks, and estimate what the portfolio would do if there were sharp changes in these factors.”

He says another task is to help keep manager portfolios within their remits, with bottom-up style analysis, which assesses valuation and growth factors. His team quantifies how much the manager is paying for the extra growth he is getting, and whether the portfolio remains within the guidelines of the overall investment process, which advocates Growth at a Reasonable Price (GARP)?

Tedone also offer managers special research that will help them take decisions – for example, the range of analyst error when predicting the growth of certain stocks. Most portfolios undergo scenario testing, where we look at the relative returns and tracking errors for three possible outcomes. The quant team first looks at the relative returns and tracking errors. Then for equity portfolios, there is an Implied Alpha Risk Budgeting process.

Finally, the portfolio goes through a proprietary optimiser to produce three possible scenarios. The inputs to these processes can be adjusted for the required “speed and risk of crossing the river”. We also look at how the active weight of sectors contributes to overall risk, because the underweights and overweights in a sector can skew the risk profile of the portfolio.

The value to the business of the quant team is not just clever modelling but a real business input. It is about using the risk budget in an efficient way and facilitating communication between clients and portfolio managers.

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