Churchill Franklin has been the public face of Acadian Asset Management LLC since he left his assistant treasurer's post at Thermo Electron Corp. to help launch the quantitative Boston-based money management firm in March 1986.
Strong outperformance between 2000 and 2007 made Acadian a standout asset gatherer, even for a period most quantitative firms will remember as very fat years. According to eVestmentAlliance, Acadian — best known for its global and emerging markets strategies — attracted more than $28 billion between 2005 and 2007, with practically no outflows. The past two years, however, have seen quants struggling, with some market watchers asking if the group will ever be able to recapture the fervent buzz it enjoyed pre-crisis. Against that backdrop, Acadian ended the decade on a down note, with net outflows of more than $2 billion for the quarter ended Dec. 31.
Mr. Franklin says this rough patch — Acadian's third, following periods of underperformance at the start and the close of the 1990s — isn't causing him to lose heart. Major clients, though understandably disappointed with recent performance, have all stuck by the firm, while recent months have provided hints that the fundamental factors tracked by Acadian's models are being rewarded again for the first time since the financial crisis struck, he said.
The wild quant party from 2000 to 2007 seems to have spawned a lot of hangovers recently. How has Acadian fared? Our performance has been soft for the past 18 months, with the exception of the last couple of months. Over 23 years, this is our third period of relatively painful underperformance. The good news is we've come out of (those previous rough patches) very strongly, with strong benchmark-relative performance, very happy clients, positive cash flow, all kinds of good things. It's not fun ... but we think we're incredibly well-positioned for the future.
Was there an expectation that quants should be immune to cyclical setbacks? Cyclicality is part of the asset management business. (If) you listen to Charlie Ellis telling the story for 30 years, the best time to hire a great asset manager is after two years of underperformance.
Net inflows of more than $10 billion for both 2005 and 2006 must be making your two years of underperformance a client service challenge. It's tricky to manage inflows and outflows ... (but) I do think it's very interesting that the institutional asset management business, from my observation of, now, 25 years of working in this business, is much more aware, much less emotional, much more analytical and much better prepared to seize the opportunity of a great manager that's underperforming than they've been in the prior two downturns. So we're actually seeing some clients give us more assets, taking the position that a contrarian bet is a good one.
Existing clients, or new ones as well? We're seeing a number of new clients coming in. We're getting great support from the consultant community. They're not happy with the performance by any stretch, but I've been impressed with their ability to see this as a dip rather than anything more Draconian.
But consultants are clearly going through a period of soul searching now on the merits of quant in general. When your performance suffers, you get more questions. That's logical, appropriate. But I do think the concept of quantitative is a much more complex topic than the simplistic thought that quant firms are underperforming. We're very different from some of our quant brethren, I believe — the whole behavioral finance play, our roots in global (since) 1987, 1988, long before most asset managers were even traveling overseas. We were early in emerging markets, early in frontier markets. We view ourselves as innovators and pioneers. We think the way to add value in this business is to continue to push the envelope on the innovation scale.
Acadian's managed and minimum volatility strategies seemed to have attracted some inflows during an otherwise difficult year last year. We were visiting a Fortune 100 U.S. corporate entity — a very well-known firm. Their board had said “we'd really like to lower the volatility of the pension fund, but keep the equity risk premium.” That's what managed volatility is. We've seen some asset flows, but we're seeing a huge amount of interest. It seems to hit a hot button in matching liabilities. I listened to an interesting debate — a U.S. public fund plan sponsor, talking about the challenge of underperforming periods, both in absolute and in benchmark-relative terms. Your career is at risk (if you underperform at a time when asset prices are dropping.) Your career is much less at risk if you're underperforming during up periods, when you're growing the pie. Trying to reduce the downturns and outperform in the down markets is exactly what the managed volatility and low-volatility strategies are doing.
eVestmentAlliance's latest numbers show a pickup in net outflows during the fourth quarter, following fairly balanced flows for the first three quarters of 2009. Some very large clients, for various reasons, have reduced their assets with us, (but) all of our major clients have stuck right with us. Many have three or four strategies with us. Sometimes they've taken money out to fund liabilities, (but) we're actually very bullish about the support we're getting. We've had about a month and a half to two months of strong performance, after a period of hugely emotionally driven markets. We're seeing fundamentals being rewarded (in recent months) and we think there's a reasonable likelihood that that will continue.
What are your conversations with fellow quants like these days? The street is talking about quantitative investing a lot. It's very clear to us we need to be Acadian — a very fundamentally driven firm. A CFA would completely understand why we think (the stocks the factors in our models point to) will go up. There's a big discussion in the quantitative world now about timing of factors, and whether that's an effective capability. When value's in favor, when growth's in favor: do you overweight different components of the portfolio at different times? That's tricky. We're doing a little work in that regard, as are others.
At this point, are you playing defense, offense or both? We never play defense. We think it's a fabulous time to hire additional people. ... We have clients in 20 countries, 11 sovereign wealth funds, offices in London and Singapore, a joint venture in Sydney — definitely a global profile. And if we look out five years, we'll have more research offices and client service capabilities around the world. (Building up Acadian's client service capabilities) is one of the things we've done over the past three years. We just did a client satisfaction survey, which showed clients concerned, disappointed with performance, but very happy with the client relationship.
