Speaking in Sydney, Avoca Investment Management’s managing director, John Campbell, said the heightened “cross sectional volatility” among Australian stocks is down to the dominance of quantitative (‘quant’) investment strategies.
“When I first started out in investment markets, most of the big investors in Australia – such as AMP and National Mutual – were fundamental investors,” Mr Campbell said.
“They looked at stocks and tried to work out what the growth potential was. Then, they applied an appropriate multiple and decided whether they would buy it or sell it.”
Today, that style of investment is “completely out of the window”, he said – with fundamental managers like Avoca “few and far between”.
As a result of the dominant quant approach to investing, some of the “meteorically priced” defensive growth stocks on the ASX200 were de-rated during the recent reporting season, Mr Campbell said.
“You can survive on momentum for so long, but eventually every asset in the world has to come back to its fundamental value,” he said.
Secondly, momentum-based investment strategies have created cross-sectional volatility in the Australian stock market, Mr Campbell said.
“With momentum being a very dominant style, as long as a stock keeps delivering, quants keeps buying. But the minute a stock stops delivering – and it might only be for one reporting period – the quant signal is sell, exit, get out,” he said.
“Because quant is a very dominant money management style, that also leads to very heightened volatility across stocks,” he added.
That volatility, however, creates opportunities for the likes of Avoca, Mr Campbell said.
“Quality names being thrown out at bargain basement prices is great news for us, as is ‘okay’ names that are being bid up to insane prices,” he said.
Nevertheless, while quant is the dominant investment style today, this cannot last forever.
“If the whole world goes quant momentum, it doesn’t work. I think it ultimately has to lead to a resurgence of old-fashioned fundamental investors, of which we are one,” Mr Campbell said.
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