Investor explains the theory behind his algorithms-based approach to wealth management
Being a quant is not cool. But for believers, it’s a way of investment life.
After the financial crisis of 2010, Francois Lucas put his engineering background to work and went about establishing The SPY Surfer, a niche platform that now features six quantitative ETF portfolios.
Lucas dug deep into white papers and other research to formulate his algorithms. As of Wednesday, his best performing portfolio, the Global and Sectors CAD, was up 12.7% on the benchmark, while the rest were all equalling or exceeding it.
The Canada-based Frenchman admits that going solo with a passionate quant strategy requires a certain outlook. What he does, he said, is not sexy but “extremely boring”, dry and designed to take all the narrative and emotion out of investing.
He said: “[Quants] accept the fact that we don’t know and that’s a big thing – being a quant you accept that and you develop your strategy accordingly.
“It’s like running a casino. If you are the manager of a casino, you want to make sure you have different types of games on which you have a slight edge and you know over the long term you are going to win. So you want lots of players playing all these different types of games, knowing that in the long term you are going to be more right then wrong.”
Lucas’s route to praying at the quant altar is, unsurprisingly, a logical one. With $1 million in your pocket, he asked rhetorically, would you pay someone to manage holdings in a mutual fund or would you opt for access to global asset classes and “very low cost, highly liquid” ETFs?
He explained: “When you take that path you have another two options. One, I’m going to be a value investor, which is 95% of the investors in the world represented by Warren Buffet? Everybody wants to be Warren Buffet, but unless you are as smart as him you will never be able to beat him or to endure the drawdowns he went through over 60-plus years.”
The other option, he said, is to embrace the quant method, with lorry loads of data at your fingertips.
“You can implement strategies that you can back test in time so long as you have data,” he added. “Data is power when you become a quant and you could be a value quant investor – you could take everything that Warren Buffet is using to screen future investment and you could code that and make it totally quantitative.”
Some advisors, including Richardson GMP portfolio manager Ken MacNeal at the recent WP Awards, have poured cold water on "backward-looking" robo-style approaches, believing that investors have to use their abilities to anticipate future market conditions instead.
Lucas, however, said that back tests are vital in understanding market analogies and is a strident follower of American economist and Nobel Prize winner Eugene Fama, the “father of market hypothesis”.
Working out how momentum works, and the herd effect, said Lucas, means you can’t just say no to the data; you have to study the history of the market in order to understand how it functions.
He said: “After the crash, people wanted the narrative. We love movies and the story, and quantitative strategies are extremely boring. When it comes to managing money, emotion is extremely high and all people want to know is, what is the prediction?”
He added: “But [quant] is very nice and it’s very dry in the sense that we rarely make any predictions. We react more, so we look at what the algorithm is saying and we look to allocate accordingly.”