A $1.5 Trillion “Quantamental” Market Opportunity

While the debate rages if retail investors have eased on their boycott of the stock market, making it increasingly difficult for institutional investors to dump their holdings of risk assets to Joe and Jane Sixpack even as active investors continue to suffer unprecedented redemptions amid a historic shift from active to low-cost, factor-driven passive management, in today’s Sunday Start note from Morgan Stanley Andrew Sheets, the cross-asset strategist points out that the next $1.5 trillion market opportunity may be a fusion of retail and institutional preferences, namely a low-cost quant approach to investing, coupled with a legacy, fundamental strategy.
As Sheets writes, “$1.5 trillion of AuM currently managed under quantitative guidelines could continue its double-digit growth over the next five years. Part of this growth is a ‘pull’ from investors broadening their search for risk premium and uncorrelated returns at lower fees than traditional alternatives. Part of this is a ‘push’, as asset managers see systematic strategies that lend themselves well to automation and scale, offering value over pure ‘beta’ in a traditional active management framework. Relatively small further reallocation by asset owners towards these strategies could still drive significant growth.”
And while that may come as soothing words to asset managers scrambling to shift from fundamental to a fusion, or “quantamental” investing approach, Morgan Stanley then sets a cautious tone asking whether “this growth is occurring at the wrong time” pointing out that “there are serious concerns over whether the flow we’ve already seen into these strategies explains a recent deterioration in performance, and is leading to a dangerous ‘crowding’ of too much money chasing the same factors.”
This goes to the whole “ETFs are socialist products which are destroying both portfolio selection and capitalism, and making markets illiquid, fragmented and at risk of seizure” argument that has been discussed here over the past few years.

This post was published at Zero Hedge on Oct 1, 2017.