Jazz and maths: Intech's volatility strategy

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Striking a chord: a combination of jazz-style improvisation and mathematical acumen has served Intech well

Born in Sydney, Australia, Banner started studying piano at the age of three. He played in a band called the Klez Dispensers and appeared at the Montreal International Jazz Festival in 2007.

He earned a PhD from Princeton University in 2002 and went on to publish a book called The Calculus Lifesaver, reviewed as “an indispensable volume for any student seeking to master calculus”.

This mixture of logic and improvisation serves Banner well in his current role of chief executive and chief investment officer of Intech. He has held both positions since 2012.

Intech is a so-called systematic investor, whose products have beaten cap-weighted indices by an average of 72 basis points in the five years to June; 39bps over 10 years, 118bps over 15 and 247bps over 20. Intech has made money for clients most of the time, even after fees which range between 30bps and 50bps.

Banner’s team likes to analyse the success of its strategies since 1987 by studying rolling three-year periods for performance. This analysis comprises 566 sampling points, of which 79% have outperformed, with the rest only falling short by a narrow margin.

The right balance

To achieve the right balance, it draws on formulae first developed 30 years ago by mathematician Robert Fernholz, who demonstrated that volatility could be a source of return.

In 1987, Fernholz started Intech, now 97% owned by Janus Capital. He remains a consultant to the company to this day.

Banner says: “We’re not looking at a share price travelling in a line. We are looking at a portfolio whose return grows as money flows from one thing to another. You invest near the bottom of a share price range then rebalance out of it, as it rises through the range and becomes more fully valued. You do it over and over again. The same money keeps working for you.”

Intech outperforms by taking weightings in stocks that are relatively volatile compared with the rest of the market. It makes sure the stocks are relatively de-correlated with each other. But it is neither concerned about their sectors, nor their market value. It is the rises and falls of stocks that count.

Intech’s portfolios tend to be large to maximise the number of trading opportunities. Its global strategy would take positions in 800 stocks.

Over time, Intech’s computer program determines whether weightings in the portfolio should rise or fall. Even when share prices are unchanged over a longer period of time, Intech argues it can make money out of their rises and falls along the way. The performance can be viewed as the cumulative impact of a series of trading profits

Intech accumulates its biggest weighting in companies when their share prices are near the bottom of their trading range.

It will generally expect to retain a position in a company even when its shares shoot beyond their normal trading range. But the position can become vanishingly small.

Intech’s relative performance against the cap-weighted index can suffer during periods of euphoria when stocks retain their value for far longer than you might expect.

Tech mega-caps

Of late, for example, cap-weighted indices have been tilted in favour of highly priced technology mega-caps at the top of an inflating trading range, where Intech has a low exposure.

Its large-cap global growth strategy has produced an excess return of 310bps, compared to its index, since launch in January 1993. But the strategy has underperformed by 147bps over five years, as a result of the high weighting of the index in booming mega-caps.

This has led to Intech losing money to passive, or smart beta, managers. Its US funds have also suffered redemptions as US investors have sought to diversify overseas.

In the past 12 months, however, the performance trend has reversed, with a gain from the strategy of 40bps. Non-US investors have come in to back the firm.

The majority of other Intech strategies have done better over most time periods. Those that take a defensive view of volatility have dramatically outperformed, with Intech’s global managed volatility fund outperforming by 12.8 percentage points in the last year alone.

It has also developed a product that incorporates environmental, social and governance factors.

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