Pictet Asset Management's systematic strategies Quest AI and Quest Sustainable offer investors differing and complementary attributes.
Systematic approaches to investing can both mirror and improve upon traditional passive and active management strategies. Take Pictet Asset Management’s two families of quantitative strategies: Quest AI and Quest Sustainable.
Quest AI closely tracks a reference index at low fees. However, by using automated analysis to tweak stock selection – eliminating companies with the worst outlooks and favouring those with the potential to win – Quest AI delivers a percentage point or two of return in excess of a purely passive strategy tied to the same index.
Quest Sustainable is more like an actively managed strategy benchmarked to an index. It has a value and defensive bias, driving a larger tracking error versus the index than Quest AI's. On the other hand, because it is a systematic strategy, its approach is considerably lower-cost than traditional actively managed alternatives, with the same aim of outperforming its index while also offering downside protection.
Core beliefs
There is a strong case for using Quest AI as a core holding in a diversified portfolio. Increasingly, investors build their portfolios around passive index-tracking strategies. These give them low-cost market-matching performance. But by making some adjustments away from the index composition, investors can boost their returns while also keeping tracking error to a minimum – and, at the same time, avoid factor or regional biases.
This is what our Quest AI strategy seeks to achieve. Using a proprietary machine learning model that identifies relationships between carefully curated data sets, the strategy identifies the stocks in a relevant index that are most likely to either under- or outperform. The strategy’s investment managers then apply those outputs to stock selection, underweighting the former and overweighting the latter, while ensuring that style or geographic biases don’t creep in.
Quest AI aims for near perfect correlation with the market – it has a beta of 1 (it moves in the same direction and magnitude as the market) – with a tight maximum tracking error of 2%.
The result is a core equity holding that closely tracks a chosen market index with an additional percentage point or two of return per year on average. That percentage point or two might not seem like much in a single year, but over a longer period, it compounds dramatically. Given that core equity holdings are meant to be held for the long term – satellite actively managed strategies are better positioned for shorter-term tactical decision making – this compounding effect makes a significant difference to a portfolio’s performance over time.
Downside protection
By contrast, our Quest Sustainable strategy is much less closely tied to a reference index. As its name suggests, sustainability is a consideration in stock selection and there is a bias towards defensive and value stocks with the express intention of avoiding companies that are at high risk of destroying shareholder value. So it has a maximum tracking error of 4%, doesn’t have any overarching geographic restrictions and has a beta of 0.85-0.90. That’s while also aiming to generate one to two percentage points of additional return above the index.
Its defensive tilt means that one of the key aims of Quest Sustainable is outperform the market during difficult periods – it has a lower drawdown and is thus seen as insurance against bad times.
That’s important for those who invest over long time horizons. Investors too often make the mistake of selling stocks at or near market lows and then buying back in well after rallies have run their course, because they can’t tolerate the volatility. Reducing drawdowns mitigates the volatility and thus helps investors avoid selling at the bottom.
The Quest Sustainable strategy’s greater flexibility also allows it to focus more heavily on sustainable stocks. As a result, it is classified as Article 8 Article 8 refers to the Sustainable Finance Disclosure Regulation regime, the EU's system of classifying funds based on their environmental and social characteristics., best in class, The strategy seeks to invest in securities of issuers with low sustainability risks while avoiding those with high sustainability risks, reducing the investment universe by at least 20%. The MSCI World index is used to measure the universe reduction; however, no reference index has been designated for the purpose of attaining the environmental or social characteristics promoted by the fund. whereas Quest AI is Article 8, positive tilt.
Quest Sustainable has an advantage over traditional actively managed strategies in that it is also based on a systematic, algorithm-driven approach. This helps to cut running costs and is thus a lower fee alternative to active strategies.
Better together
Although Quest AI and Quest Sustainable are separate strategies fulfilling differing client needs, they can also work together.
Combining the two strategies means that during good times, investors have the potential to benefit from rising markets plus a percentage point or two extra, while during market corrections they are spared the full drawdowns.
Together, these two strategies can replace a portfolio made up of a large index-tracking component and a smaller actively managed component. Quest AI takes the place of the core passive exposure, with Quest Sustainable acting as the smaller complementary strategy. A combination of lower fees, smaller drawdowns and superior returns, has a powerful compounding effect over time compared to traditional approaches of a passive index-tracking core and actively managed satellite, making it an attractive proposition for prudent investors.
- Article 8 refers to the Sustainable Finance Disclosure Regulation regime, the EU's system of classifying funds based on their environmental and social characteristics.
- The strategy seeks to invest in securities of issuers with low sustainability risks while avoiding those with high sustainability risks, reducing the investment universe by at least 20%. The MSCI World index is used to measure the universe reduction; however, no reference index has been designated for the purpose of attaining the environmental or social characteristics promoted by the fund.
