Acadian has clapped back at Vanguard’s view that AI tools are easily commoditised in active management, arguing that managing active risk is key to competing in a more concentrated market.
The firm’s senior vice president and portfolio manager, Matt Picone, says AI is aiding active management, but the benefits and tools are far from uniform or easy to replicate, giving different managers distinct advantages.
It follows Vanguard’s recent pushback against the view that AI and quant tools are enhancing actively managed strategies, arguing that any edge is eroded once the entire industry has access to the same capabilities.
It also comes amid the ongoing active versus passive debate, with SPIVA’s latest Australia Scorecard showing nearly three-quarters of Australian equity funds underperformed their benchmark last year.
In his critique of active management, Vanguard’s head of investment management and global equity Asia-Pacific, Duncan Burns pointed to rising market concentration as a common counterargument to passive investing.
While acknowledging risks such as inflated valuations, Burns said that market-cap indexing flushes out underperformers while amplifying winners, with the key point being that investors remain exposed to the largest companies, which now drive a majority of returns.
But Picone has pushed back, saying that market concentration is not new and can create opportunities to exploit inefficiencies and profit from valuation normalisation, only it needs to be balanced with active risk.
He pointed out that concentration has long been a feature of the Australian market, with the top 10 constituents accounting for more than 50 per cent of index weight at times over the past 20 years, and sitting at 47.1 per cent at the end of February this year.
For active managers in global markets now reaching similar concentration levels, the lesson is that concentrated portfolios – especially those excluding major outperformers like Commonwealth Bank – can lead to significant return dispersion.
Against that backdrop, Picone explained that the systematic manager has spent 40 years developing a single quant strategy used across its funds, screening company characteristics across value, quality, growth and technical factors to identify inefficiencies and signals for analysts.
“As a systematic manager, rather than focusing on a particular stock and saying we like CBA or we like BHP or we like Taiwan Semiconductor, we’re looking at those signals or those characteristics that we know work… and then we spread that across a lot of different securities so that we’re diversifying that exposure to those characteristics,” Picone said.
While AI and access to alternative text-based data have recently improved the model’s efficiency and precision, he said the approach is still not easily replicated, even with widespread access to chatbots and other tools.
“AI tools are definitely providing advantages and being able to do things faster and easier than what’s done before, but it’s moving at such a pace that it’s not easy to [keep up],” Picone told this publication.
“It’s not like you can just open up ChatGPT and do exactly the same things that we’re doing. It takes a lot of technological infrastructure, data and expertise…AI is providing opportunity, but it also requires a lot of investment and understanding to do it properly, because it’s certainly not perfect at this point.”
Taken together, he said the result is a benchmark-aware strategy designed to generate alpha while staying relatively close to the index. By capturing over 600 million data points daily to build signals across 40,000 securities aided by AI, the funds are highly diversified, often holding hundreds or thousands of exposures.
Of Acadian’s two main strategies, the enhanced approach targets around 1 per cent per annum of outperformance, and a core strategy aiming for 2 to 3 per cent per year. This also reflects lower investor tolerance to large variations in active fund performance, particularly in Australia following the introduction of the Your Future Your Super (YFYS) annual performance test.
Ultimately, Picone said taking active risk is a “trade-off” that aims to deliver the best of both worlds and respond best to the current environment.
“You don’t want to be passive, because there are opportunities and you don’t leave opportunities on the table. You want to chase them, but you want to do it in a risk controlled, sensible way.”
Evidence of that approach can also be seen in performance outcomes. Last year, Acadian’s Australian Long Short Fund ranked second in Mercer’s fund survey, beating the S&P/ASX 300 Accumulation Index by 5.8 percentage points and delivering a 17.6 per cent annual return.
Meanwhile in August, Acadian’s AI model flagged concerns around Guzman y Gomez’s cash flows relative to its operational and reinvestment needs. This prompted fund manager Zhe Chen to take a short position that paid off when the stock fell nearly 20 per cent on the day of its earnings release.
