Algorithm & Blues
Shocked by a volatile market, investment firm Intech will now find out if its pure-math approach can add up again.
Internally, Garvy stresses the importance of keeping talented investment managers satisfied and stimulated and the firm's employee turnover low. Recent results show promise. All told, 42% of Intech strategies beat their benchmarks over a one-year period as of the June 30 quarter after fees. None did so in the prior quarter. And 83% beat the market for the three-year period, compared to just 42% in the first quarter. Janus CEO Dick Weil told analysts in July that Intech's risk controls worked well, allowing it "to come back reasonably quickly with outperformance, and that's key to their success. ... We also recognize that one quarter does not make a trend. They continue to face some very challenging industry circumstances."
Co-CEO Jennifer Young will succeed Robert Garvy when he steps down next year.
As for flows, the bleeding continues but it has moderated. After net outflows totaling $9.2 billion in the prior three quarters, net outflows slowed to $1.5 billion in the June 30 quarter.
Recapturing lost business is another matter. The sophisticated people who run huge retirement funds think just like Ma and Pa Investor. After a decade of no gain in stocks, they want more money in fixed-income investments. Particularly ill news for Intech: Casey Quirk, in its annual survey of consultants for institutional investors representing $7 trillion in assets, found demand for U.S. equities way down and found no preference for quantitative firms after poor performance. Institutional investors represent 81% of Intech's business, with the remainder mutual funds.
"Institutional demand for quantitative equity strategies has been pretty subdued" as some investors question math-driven investing strategies, says Sandler O'Neill's Kim. He says investors are going in two directions on the risk curve — either seeking more risk through alternative investments or little risk with fixed-income. He expects Intech's outflows to continue this year as institutions restructure their strategies.
Co-Chief Investment Officer Adrian Banner will become the sole CIO when Robert Fernholz retires in 2011.
As Intech again outperforms, Garvy expects business to build. Based on assets under management, it remains the largest player in its specialty — active-managed U.S. institutional equity quant, according to eVestment Alliance. It ranks seventh among U.S. actively managed institutional equity managers. It executes 1 million trades a year from West Palm Beach.
"Twenty-three years we've been beating the stock market. This is something managers are not supposed to do with market-like risk," Garvy says. "We've had some very significant success, but I think we also have some tremendous opportunities going forward."