APG’s Quant Equities team uses so-called alternative data for its investments, looking beyond the traditional distinction between growth and value stocks. Gijsbert de Lange, Head of Quant Equities at APG since January 1, 2020, explains his strategy and explains where his team differs from (primarily) U.S. quant equity investors.
De Lange can be brief about the difference between a regular, or discretionary, investor and a quant investor. “The former knows a lot about a relatively limited number of companies, while the latter knows a little bit about a lot of companies, but just enough to achieve outperformance.” APG has been using quant investing since 2003. When results declined in the second half of the 2010s, the pension asset manager asked De Lange to write a business plan to make quant investing profitable again.
What is the core of the new strategy?
“In the second half of the 2010s, we saw that growth stocks were doing very well, only the value-oriented model used at APG was not suitable for that. At that time I said we shouldn’t gamble on either growth or value. We need a model that during both periods of growth and recession is able to make money for our pension fund clients.”
And how do you do that?
“By looking not only at companies’ ‘traditional’ accounting or pricing data, but especially at alternative data. That includes different types of texts, such as annual reports, reports for regulators or ordinary news items. If you analyze these texts with advanced software, often running on servers in the cloud, you can extract information that is not directly accessible to discretionary investors. At APG, we employ people who understand modern techniques like machine learning and natural language processing and can develop the technology to make that possible. We can therefore do that trick for thousands of companies at once. If you do that well enough and are on the winning side often enough, it works. That gives us an edge over other investors.”
How does the APG’s Quant Equities team’s approach differ from other quant investors?
“We try to add value in terms of responsible investing. For example, we select the ‘green’ patents, i.e. those that are related to the transition to a green economy, from a database that lists all the patents applied for. And it turns out that companies adept at green innovations outperform the market. And not only in times when ESG investments are doing well, but also in times when ESG is not doing well. That is because they are high-quality, innovative companies that are on the right side of the market as the economy moves in the sustainable direction as well. By investing in those, we achieve our outperformance, and we make our fund clients happy, because they are interested in ESG themes. It is also important to us, because our team includes people who are interested in ESG investing, which is why they have come to us, since here we look not only at shareholder profit maximization, but at all stakeholders of a company.”
What is an important development in quant investing?
“Machine learning on all kinds of alternative data is becoming increasingly important, and then specifically natural language processing. To give an example, companies often mention in their publications, such as annual reports, who their main competitors are. Based on that, we created a ranking somewhat similar to the search results you get at Google. At Google, the top results, apart from the sponsored search results, are Web pages that are linked to most frequently from other Web pages, giving greater weight to the links from often-linked-to pages. That is because of the page ranking algorithm behind it. We use a similar algorithm to rate companies. If a company is mentioned by many other companies as a competitor, and particularly by competitive firms, our algorithm places that company higher in the ranking. This throws up companies regularly that would immediately be judged as competitive. This kind of algorithm does require a lot of computing power, which is why we run it in the cloud.”
You’ve been around in the world of quant investing for a while now. What do portfolio managers (PM) do differently now than they used to?
“In the past, they were a kind of mechanistic implementors of what the mathematical model prescribed. Now each PM is responsible for their own portfolio, and they are explicitly tasked with identifying situations where the mathematical model falls short, and coming up with solutions for them. So we no longer think ‘this model will do everything’, and we are now much more aware of the model’s limitations. The underlying economy and market are constantly changing, and that means the model has to be adjusted all the time. Our researchers do that, but the first people to signal whether the model still works are the PMs. That is why I always use an adaptation of the French saying éducation permanente. What we need is innovation permanente.”
What is a major challenge for your team right now?
“Hiring enough qualified staff sometimes takes a lot of time. It is a step by step process. We find junior researchers easily; we get them from the APG AM Quant Trainee Program, for example. Recruiting intermediate-level researchers also generally goes well. But recruiting senior researchers with experience in new technologies has been difficult; there are fewer of them. We can easily find senior quant researchers with experience in the old, traditional methods, but that is not what we are looking for. The good thing, though, is that the members of my team are gaining more and more experience, so even though it was a challenge to find senior researchers, we are now solving it internally thanks to personal growth.”
Looking at your team, what else are you proud of?
“That we are showing good performance, but I also like the fact that we have ten different nationalities and relatively a lot of women on our team. That is quite unique for the quantative finance industry. I deliberately tried to create a team with diversity, because I want a team where a variety of ideas and opinions are put forward. That is why we have people from different backgrounds. We also have a tremendously good team spirit. Even other managers and outside trainers notice that. I’m really proud of that.”