Singapore-based Quant Asset Management
was co-founded by Frank Holle and Chatchai
Ngampakdeepanich.
QAM manages the QAM Global Equities Fund
and the QAM Asian Equities Fund. Both
funds were launched in April 2004. The
QAM Asian Equities Fund has returned 34%
since inception with an annualised return
of 37% and annualised volatility of 23%.
The QAM Global Equities Fund has returned
29% since inception with an annualised
return of 32% and annualised volatility
of 16%.
QAM currently has US$17 million in assets.
- Quant Asset Management is relatively
new; how did it get off the ground?
We set up Quant Asset Management in
Singapore in November 2003.
I met my current partner, Chatchai
Ngampakdeepanich in early 2002 whilst
he was working at Thomson Financial.
I had approached Thomson because I was
interested in their quant data and Chatchai
came to see me in KL to show me their
product. After a couple of meetings
he showed me some work he was doing
in his spare time. For many years he
had been researching which factors and
factor combinations have an impact on
share prices. He had also developed
a methodology whereby these relevant
factors would regularly get different
weightings depending on what actually
happens in the market.
His university background is in computer
engineering and finance, which is a
pretty useful combination and soon it
was clear to me that I was dealing with
a very talented person. He started sending
me portfolios of 50 stocks on a monthly
basis that were the outcome of his dynamic
models and I was stunned. These portfolios
were going up consistently and sometimes
even more than 15% in a month. We had
many more meetings to get to know each
other better and by the end of 2003,
we back-tested the strategy in a global
universe and in an Asian universe. The
results, cleaned for survivor bias,
were outstanding despite the adverse
market circumstances in the past 11
years. That is the reason we decided
to set up Quant Asset Management.
To fully concentrate on QAM, Chatchai
left Thomson Financial and I parted
with my stake and activities in my Asian
fund.
- Could you tell us more about the
key decision makers in the fund?
Chatchai is 37 years old, has four children
ranging from 7 to 13 years old and has
worked with Thomson Financial for over
eight years. In these eight years Thomson
acquired Datastream, I/B/E/S and First
Call and became truly the world's biggest
financial database. Chatchai knows the
database inside out and spends a lot of
time improving on it.
I would say he is a true academic hobbyist
and he is never happier than when behind
the computer. Previously at Thomson,
he would spend evenings and his weekends
back-testing a huge amount of factors
and factor combinations trying to find
a way to beat the markets. He has read
all the quant research that is out there
but was never really impressed by what
he saw. Often, even the most advanced
quant shops would use multi-factor models
in a very static way. He found the key
to outperformance to be in dynamism
as opposed to the so-often practised
dogmatic approach like growth or value
and bull or bear market dynamic in the
sense that models must have their own
artificial intelligence, able to listen
to what the market tells them within
a factor framework that makes both theoretical
and practical sense.
When I first approached him with the
proposal to set up a company together,
he didn't like the idea too much. He
was very happy at Thomson and had never
thought of the monetary advantages of
running a hedge fund. Only three months
after I had first approached him did
he come back to me with more enthusiasm
to set up QAM.
As for me, I started my career at the
same university (Utrecht, Holland) as
where I obtained my master's in business
law. I soon got bored with the university
environment and got myself involved
in the financial markets. I spent three
years at ABN AMRO and later as a director
at Merrill Lynch in London for seven
years. At Merrill Lynch I not only learned
a lot about how analysts do their work,
I also learned how brokers make money.
That is useful because there is a fine
line between paying too much and getting
not enough in return, and paying too
little and not getting the service needed.
I used to deal for big institutions
and was involved in program trading.
The way we execute our order flow is
always through program trades, so my
experience here is relevant. I left
Merrill Lynch because I felt that being
on the sell-side wasn't satisfactory.
I wanted to execute my own ideas. In
2001 I co-founded an Asian equities
long/short fund and that is where I
got my experience as a hedge fund manager.
- Can you explain a little more
about your focus on automation?
Our idea has always been that our company
should be on the forefront of IT and
we have developed systems and automated
many processes within our company that
many other companies still do manually.
To illustrate this, we can update our
investors on our NAVs automatically
per email at every desired time interval.
It is interesting to see that Singapore
has recently overtaken the US as the
world's best user of information and
communications technology, according
to a recently issued report called "Global
Information Technology" by the
World Economic Forum in Geneva.
Our office in Singapore is paperless.
Automation is the reason why we don't
need that many people to operate a global
fund investing in more than 60 countries
worldwide. The computers do the work.
The only human input in our company
— obviously besides the skilful
programming and execution — is
really constantly checking the systems.
We currently also spend a lot of time
on the processes of faultless execution,
avoiding/minimising market impact and
trading costs analysis.
- And the investment methodology?
First of all, the entire investment
process is quantitative and is driven
by the computer. Obviously our model
is proprietary but in order to get investors
interested in what we do and to make
sure they understand our strategy we
give away probably 60% of it. That is
more than a conventional fund manager
will ever give you, because he is simply
not able to, due to an inherent lack
of consistency in the human brain.
The idea that we run a black box model
and are therefore not transparent and
hard to follow is wrong. Just have a
look at our newsletter and you will
notice the level of transparency and
consistency in our methodology.
Running the models takes many, many
hours and involves millions of calculations,
impossible for a human being or even
a football stadium full of intelligent
investment professionals to make. You
have to realise that every month at
the same date we run the models and
the models will decide which factors
need to be used and how they should
be weighted. The models are let loose
on a dynamic universe of 6,000 stocks
for our Global Fund and 1,600 stocks
for our Asian Fund. The factors used
range from earnings forecasts changes,
earnings revisions, earnings dispersion
to price to book, price to cash earnings,
etc. These are always divided into two
main groups which we believe to be the
drivers of share prices: earnings expectations
and relative valuations.
We use the aggregate data from 50,000
analysts worldwide and if you think
about it, earnings expectations always
reflect every change in the relevant
economic data be it at a company level
or at a macro level. Interest rate changes,
commodity price volatility, GDP growth
expectations or what have you, it always
comes back into analyst forecasts. Analysts
are the first to take up these changes
into their forecast because that is
what they get paid for to do. Our models
never look at the actual buy, sell or
hold recommendations because that does
not add any value.
Our portfolios always contain a big
number of stocks from a minimum of 30
to as much as 120. It is a big numbers
game with very low individual company
risk. It is never a risky bet on the
fortune or misfortune of a small number
of companies.
- What is the main theme throughout
the investment process?
Growth at a reasonable price and dynamism,
ie, listening to the market, the place
where the smartest people and institutions
put their money to work. The stocks
the models select always go through
a valuation and earning growth/momentum
filter. Sometimes weighted more towards
valuation, sometimes weighted more towards
momentum but never exclusively tilted
to one side.
- In what market conditions does
the model work best and worst?
It is difficult to say because the
models use many factors and strategies,
and are dynamic. The strategy generally
works well in bull or bear markets.
Because part of what we do has an element
of trendfollowing in certain factors,
you could say that sudden trend changes
can have a negative impact but due to
the frequent rebalancing of the model,
the model is able to quickly find the
right track again.
- How scalable is your strategy
in terms of AUM?
Quite. All the processes are automated.
The models select a huge number of stocks
far more than a conventional fund manager
would. The investment process is automated
and entirely consistent and systematic.
The issue we spend a lot of time on
is liquidity. A position in a stock
is never more than a certain percentage
of the stocks' daily trading volume.
That is what limits our capacity but
we anticipate that we will be able to
manage a total of US$800 million. We
will only grow our funds after having
shown step by step, year by year, that
we can maintain our performance targets
of an average of 40% per year.
- What are the countries covered
in the Asian and Global Fund?
It would be too extensive to sum them
all up but basically any company worldwide
is in our universe without restrictions
as long as it is covered by at least
4-6 analysts and as long as it trades
a minimum liquidity. The stock selection
ranges and varies from emerging markets
to developed markets and from small
to big caps.
- How do you see yourself different
from other fund management companies?
Maybe I would like to emphasise here
that we really think we have a unique
product, computer driven, programmed
to generate alpha in either a bull or
bear market environment. The analogy
is in chess I guess. If you look at
the history of it not long ago, it was
consensus that a computer could never
beat a human chess master. Look what
happened. Now we all think that it is
actually remarkable that human chess
players even stand a chance against
the computers we have today.
It is hard for human fund managers
to consistently beat the market. It
is easier on the inefficient side on
the market than on the efficient side.
In a universe where each stock is covered
by let's say at least six analysts,
the universe where we operate in, it
is my conviction that you have to be
systematic and computer driven otherwise
you will not make it over a prolonged
period of time.
Working with a value approach on the
inefficient side of the markets where
analyst coverage is low has proven to
work as long as it is done by a talented
fund manager. Concentrating on a universe
of companies that are not well known
to the investment community makes sense,
and analysing them in-depth by a skilled
human manager is the only other strategy
besides our own systematic, computer
driven strategy that I would contemplate
investing in.
- You mentioned you will be able
to manage US$800 million. Are there
plans to launch more funds in addition
to the existing Asian and Global funds?
Yes, later this year or the beginning
of next year we will launch the QAM
Japanese Equities Fund and the QAM European
Equities Fund based on the same methodology.
These funds will have expected volatility
and return profiles that are lower than
our two current funds due to a different
hedging methodology.
- What are your future travel plans
to meet with prospective investors?
So far we haven't been marketing
aggressively but I just came back from
a trip to Europe. We'd really prefer
to let our performance speak for itself
and earn our place in the various rankings.
In order to get QAM on people's radar
screens, we have listed ourselves with
hedge fund databases like Eurekahedge's
and we speak at some conferences. I
was on such a conference in New York
in the first week of April.
Furthermore we are planning trips
to Amsterdam, Zurich, Geneva and London
at the end of the summer this year
to update investors on our progress.
Since investors often have to visit
a manager's office as part of their
due diligence process, we prefer them
to come Singapore and see us for the
initial meeting where we actually
explain our methodology.
