Transcript:
Karen Watkin: Welcome to AB Alpha Females, the multi-asset investment podcast. I'm Karen Watkin and I'm a fund manager in the Multi-Asset Solutions team here at AB. As a multi-asset investor, I love the daily challenge of looking across the capital markets to deliver the best outcomes for our clients. I work closely with colleagues across all areas of the investment universe to tap into their research and expertise along the way. Why Alpha Females? These are the women I have the pleasure to work with, who have developed these unique areas of expertise and made their mark in the investment industry. In this series, I'll be hearing their expert insights on some of the key questions facing multi-asset investors today, such as where and how to find the best performing fund managers, how AI can be used to generate better investment returns, and how a responsible investment approach can deliver better outcomes for our clients and the planet. We'll also discuss their career journeys, the challenges they faced, and the lessons they've learned along the way. So stay with me as we uncover the stories of these impressive and inspiring women and at the same time, gain a deeper understanding of the Multi-Asset investment landscape.
Today I'm joined by Alla Harmsworth, Co-Head of our Institutional Investment Solutions group, and she'll be taking us through how and where to find the fund managers that can reliably outperform the market. The asset management industry faces continuing pressure, with investors moving more and more of their money from active funds to cheap passive funds. Passive funds simply track a benchmark, so finding those fund managers that can persistently outperform the market has become increasingly important. The hunt for alpha or active returns may seem elusive, but Alla has developed an innovative way to measure fund manager performance and identify those consistent outperformers. It's a really valuable new tool to help investors scour the fund manager universe and find those bright spots of managers skill.
Alla, welcome to the podcast. Thank you so much for joining me today.
Alla Harmsworth: Thank you very much for having me.
Karen Watkin: Now, the path to your current position is certainly an interesting one. You mentioned that you were born in Russia and came over to the UK aged 17 on a scholarship, which then took you to Oxford University to study politics, philosophy, and economics, and from there you've had a long and distinguished career in quantitative investment research. I want to come back to that personal and professional path that you've taken. But let's start with your research into where and how to find Alpha. I think you might be my perfect guest actually for our podcast on Alpha females given most of your research has been looking into alpha.
Alla Harmsworth: Oh that's wonderful. Thank you so much. Yes, so you gave a great introduction to Alphalytics already. It is basically a set of tools we have built, and really a whole framework and process for analyzing and selecting active strategies or active funds. Most of our clients in AB allocate some of their capital to active strategies as part of their overall investment programs, of course. So, what we want to do is help them find those funds that are most likely to outperform. Obviously, our multi-asset portfolio managers who put together many different types of return streams also invest, in active managers. And again, we want them to help invest in those who will beat their benchmarks and help their clients achieve their best investment outcomes. So Alphalytics is, as you said, all about identifying the best managers, but also about putting them together in a way that achieves even more than the sum of the parts. That is possible because of diversification and managing factor risk, which, as we know, is very important in investing. And that's another key tenet of the premise of Alphalytics.
Karen Watkin: So let me just stop you there for a moment, because I think it's interesting actually, to take a step back and often in the industry we talk about alpha as that just outperformance versus the broad market. But you've actually taken a deeper look at that, haven't you, in terms of how should investors really measure manager performance and success?
Alla Harmsworth: Yes. That's a really key question that Alphalytics tries to answer. And this is really the way that Alphalytics came about several years ago, we were doing a lot of research on managing performance, on the trends in the industry, and we found that investors were and still are very focused on picking managers who have been outperforming recently, those who have recently done well at beating their benchmarks. But of course, we have long believed, based on our research, that past performance does not last into the future. It's, if anything, it's mean reverting. So more often than not, active managers, the recently successful active managers disappoint. So, we developed what we believe is a much better measure called idiosyncratic alpha. And that's the measure of alpha that takes the excess return, but also adjusts it for different factor exposures such as value, growth and momentum. And the alpha that's left over after taking those factor exposures out is a much better gauge of manager's underlying skill. And our research shows very compellingly that if you pick managers based on that idiosyncratic alpha measure, we really, really raise our odds of finding future winners, those who persistently outperform. And their alpha is, again, more persistent in that even through the cycle, no matter what the weather is, if you like, they're going to outperform smoothly compared with the rest of the active industry or compared with their peers.
Karen Watkin: So, when you've looked at the analysis you've done across these kind of thousands of fund managers, are there certain areas of the market or particular kind of attributes of managers that you find tend to give you that persistent outperformance?
Alla Harmsworth: That's a great question. Obviously a key one. There are some patterns that emerge when we look at very large data sets, of the alpha, which Alphalytics allows us to do. So, among the fundamental managers, for example, we find that being relatively concentrated makes you more likely to be among the top alpha generators. And that sort of makes intuitive sense, because if you're a fundamental manager, then your bandwidth and your capacity to come up with really value-added idiosyncratic insights just sort of get somewhat diluted. So, there is an optimal sort of size of the portfolio, which is not too diversified. Another thing we have found is that the best alpha generators tend to not churn their portfolios too fast. They tend to have a fairly low turnover. Again, that makes sense, the skilled managers have fundamental insights into stocks that are compelling long-term investments. The other thing we find is the most successful managers tend to be the ones who do not take massive risks. They're less likely to have extreme exposure, such as value momentum, but again, keep their risks fairly diversified or manage them well so that they can really focus on harvesting that alpha.
Karen Watkin: And, you know, you've been doing this area of research for quite a while now. Was there anything surprising that came out in the research when you were looking at, where and how to find these outperformers?
Alla Harmsworth: Our research findings themselves surprised us. Even we were amazed at just how strong the difference is between what happens if you focus on excess return and idiosyncratic alpha. If we put together those managers who have done well recently we find, unfortunately, very strong mean reversion happening over the next 3 to 5 years. But if you create portfolios so that idiosyncratic alpha is maximized, then there's a strong positive relationship between your track record and how you're going to do in the future. The higher the idiosyncratic alpha, the, stronger your future performance and the relationship was just surprisingly monotonic and linear. The other striking thing, and very satisfying just how smooth the performance of the top idiosyncratic alpha generators is. We know that the active industry as a whole is famously cyclical. You know, it really depends on what's happening with the macro, where the market is, where the cycle is going. But if you identify, say, the top quartile of the alpha generators, their return profile is remarkably smooth, and they do well whatever happens around them.
Karen Watkin: It's such a valuable tool to help identify, like you say, that true idiosyncratic alpha. Because then as multi-asset investors, we can really focus on making sure we have the right beta or market exposures that we want in the portfolio, not just from a kind of broad asset class perspective, but like you say, also the factors that we want and the styles and sectors that we might want in the portfolio. So then when we're adding alpha on top of that, you know, it's really that value-add as you say. And so, it's a really great way of being able to decompose that return and find the persistent alpha. You mentioned the kind of whole framework, so obviously the Alphalytics tool does that kind of in-depth quantitative analysis. But what else is important when you're looking at kind of fund manager performance perhaps from a more qualitative perspective that needs to be considered?
Alla Harmsworth: That's a really crucial point that I wanted to bring up myself, because Alphalytics is just one input. We really believe in the importance of having good models. We need to be rooted in data and objective criteria. So, we do have also, along with Alphalytics, a very in-depth, thorough qualitative process whereby we speak to the fund managers who really understand exactly how they articulate their process, which we are then able to cross-check using the data but it's important to us to understand whether they are really doing what they say they're doing. Anything to do with the team dynamic, whether there's been a manager change, and that sort of stuff is very, very important. In general, I think the interesting thing I found being a quantitative researcher for a long time was that while data and history are very important, you also do need to have experience, intuition, qualitative insights. In the case of manager selection, it's really to get to know and understand the team dynamic.
Karen Watkin: And have you found any patterns in terms of some of those team dynamics? I know there's some research which has shown, for example, that, mixed gender teams’ kind of tend to deliver better risk adjusted performance. Have you kind of found that in any of your research?
Alla Harmsworth: I have. Yes, yes. And that finding is obviously very dear to my heart. We do find that more diverse, generally a team approach tends to better on average. Again, it's very difficult to generalize because we've also found that long tenure managers do tend to be amongst top alpha generators. But a team approach, is also something that is a benefit from the point of view of generating sustainable alpha, because of course, when the manager changes, then you have a smooth transition and, you know, the investment process does not suffer. Diverse teams also do tend to do better. That's something that we're doing more research on. But it's definitely a finding in saying that a mixture of men and women is, an asset to a fund management team.
Karen Watkin: Yeah. And it's somewhat of a rarity, right? I think in the industry today, we've got about 12% of fund managers are female. So, we definitely need to do more to, you know, to have more of those mixed teams to your point. I think it's really interesting hearing how you bring that qualitative of kind of framework and, and insight to the process. And I would love to hear a bit about how your path has evolved through time from being a quantitative analyst to now, you know, taking that broad view across where to find those outperforming fund managers?
Alla Harmsworth: Yes. It's just, as I said, it's probably one of the greatest learnings from my career, which has always been in research, I've always had very analytical roles, as well as some quantitative, but also of looking at the broader trends in the market and more fundamental trends, as well as building quantitative models. So, both are fascinating.
Both need combining and then analysis at the same time. History is great, but it doesn't necessarily going to repeat. It's not necessarily going to repeat itself in the future. At the same time, it does give us the discipline and rigor, and an understanding of the relationships between the key variables and how they drive each other. So, I guess just through experience, I've learned that we need to have the humility to know that history is not going to repeat itself, but also have conviction and sort of take a view and stand by it. Analysis and strong empirical evidence is very important. But, you know, there's all sorts of things and factors and qualitative and fundamental variables that also matter massively. So it's really, I guess, one of the key challenges, particularly for somebody who is quite quantitatively minded, is to combine those two in a way that is consistent. So knowing how to weigh those various variables to give you an output, it's a continuing challenge. And, you know, it's fascinating and very instructive for me, working out with fundamental fund managers within AB, to sort of make these two inputs work harmoniously together, in order to generate the best outcome.
Karen Watkin: So Alla I think it's really interesting how you talk about bringing those qualitative insights to bear when you're doing that kind of deep quantitative research. And it makes me reflect on what we mentioned at the beginning about your background. So coming over here from Russia and then studying PPE at Oxford, do you think that's informed kind of how you approach that quantitative research through the course of your career?
Alla Harmsworth: Definitely. I mean, it was it was an amazing course at the time it was I'd say it was reasonably quantitative, but, it was also quantitative and we spent a lot of time analyzing that, you know, the fundamental drivers of the various variables and, you know, how the economy works and the philosophy part of it was just amazing. It's sort of teaching me how to think and argue logically, and just really seeing the relationships between things, whatever they are. So it certainly gave me an understanding of how the world works and how it might differ from what any given model can tell you. Economists are quite famous for coming up with models, which don't necessarily give you an answer to those famous on the one hand or on the other hand, so the course also taught me that ultimately you need to take a view. And through my career, that's been one of the biggest learnings, is that you can have a very strong empirical model, but no one model will work perfectly in the future. And more often than not, we're going to forecast things wrong. So while an empirical model, and we can make them as good as possible, is a very important starting point, something that allows us to be structured in our thinking and understand the relationship between different variables and how they all fit together. Understanding the more qualitative fundamental drivers of the world, of securities, of asset classes, is just as key. And also just being aware that things change in a way that we can't necessarily capture and model. So we need to be humble, understand that history evolves and things change, and take a view. Ultimately take a view, develop a conviction, and stick by it.
Karen Watkin: I think that's right. And, you know, having that humility is so important. And while it sounds like an amazing course that you did, I can imagine as well there's also a lot of life experience that taught you things along the way in terms of, you know, coming over from Russia on your own at an early age, and I'm sure kind of built a lot of that resiliency and kind of inner strength, which I would say is also, a key component of having a successful career in financial services and investment management.
Alla Harmsworth: It was an amazing experience. I came over with not that much English, so I wasn't speaking quite as much as I do now. It was challenging. Resilience is what it really did teach me, and also it was just an incredible eye opener being able to study economics and philosophy and English literature. But I think that's right. I think, funnily enough, when I went on to Oxford, everything seemed incredibly easy because I sort of learned a bit of English by then in the prior year, and then, having being fortunate enough to have this long career in finance, that really helped me to apply all my learnings and also, yes, use that resilience, which you really, really need in finance. I think we all know this,
Karen Watkin: The markets can be very humbling.
Alla Harmsworth: Work is very unforgiving. We can have challenges on a daily basis that we just need to keep a sort of a level head about and again, I think the best we can do is be as rooted in analysis and rigor as we can, but also think about things carefully and thoughtfully. And, remain humble and open to the fact that things change.
Karen Watkin: Fantastic. So before I let you go, I would love to know those three key investment insights that your research and experience in manager selection has taught you about how to improve investor outcomes through active management?
Alla Harmsworth: Absolutely. That's, well it's easy in a way, but also there's probably more than three. The key ones, this one won't surprise you - It's the need to focus on the metrics that really matter and for us, it's idiosyncratic alpha. It is something that we've done so much work on, and we really believe and see very compelling evidence that if we use this as a metric to at least pre-select, prescreen our managers of active strategies, we really, really give ourselves a much better chance to identify those that are going to deliver Alpha in the future in a persistent way. That persistence is worth a lot and is very, very important so focus on Idiosyncratically Alpha. And we're here to help make it as easy as possible by, you know, having carefully built it so that they're easy to use and give as many people as possible access to that very important measure. I think the other striking takeaway is that while there are types of managers who seem to be more likely to generate alpha, there's no one size fits all at all. So some people seem to think that quantitative managers are very different fundamental managers in terms of the alpha they generate. The key point is that while the investment processes are very, very different, the alpha generation potential is just the same between all sorts of different mandates. So while we can look at patterns, it's really important to understand the investment process in question, to understand what drives it in order to be even better and more accurate in identifying those winners so, there's no one type of fund that generates alpha. And while patterns can help us, a more in-depth qualitative approach is also very important and that's something that I also mentioned earlier on. Data is very powerful, but we also need to take time to understand the manager, to understand what drives them, to understand how the team works and so on and so forth. Finally, portfolio construction, and I can't bang on about this enough. The way that you put funds together is just as important as the way that we identify, or pick them in the first place, because we can have wonderful, really highly skilled managers, but if they're highly correlated with each other, for example, because they try to do the same thing, then that may not necessarily be optimal at the portfolio level. So what we want to find is managers who are diversifying in terms of those underlying alphas streams and those whose exposures are complementary to each other so that overall, we end up with a portfolio that is diversified, that does not take any extreme tilts and that makes it relatively insulated from was going on, out there in terms of the macro and market environment. And sometimes we find that people don't necessarily spend enough time thinking about it.
Karen Watkin: Thank you so much for your time today, Alla. You gave me lots of food for thought and look forward to continuing our work together.
Alla Harmsworth: It's been a real pleasure. Thank you so much.
Karen Watkin: So, one of the key things I think I've taken away from that conversation with Alla is how she captured this idea of working in the investment management industry, which is, while you always want to root your thoughts and positions in deep research, the markets are a very humbling place to be. And as much as we try to forecast and build risk management, there is always this scope for being wrong. And so recognizing the fallibility and the limitations of any kind of forecasting are really important and actually make you even better as an investor once you recognize that. I think Alla is such a great example of a of an alpha female. She epitomizes that resiliency, that strength of character and ability to, you know, to drive her career forward from, you know, her early beginnings in Russia to a long and distinguished career in the investment management industry.
That brings to a close this edition of Alpha Females, the Multi-Asset Investment Podcast from AllianceBernstein with me, Karen Watkin. I really hope you've enjoyed this episode. Don't forget to tell your colleagues and friends about it and subscribe wherever you get your podcasts. It only remains for me to thank Alla Harmsworth for today's interview. This episode was produced by Richard Miron from Earshot Strategies.
