Goldman Sachs Chief Investment Officer Offers Perspectives On the Role of Quantitative Methods in Investment Strategies
12 OCT 2015 CAMPUS & COMMUNITY
More than 400 students, faculty, staff and guests gathered at Stevens Institute of Technology’s DeBaun Auditorium on October 7, 2015 to hear Sharmin Mossavar-Rahmani, chief investment officer of the Private Wealth Management Group (PWM) at Goldman Sachs, deliver a stimulating presentation on "The Art and Science of Quantitative Tools in Investment Management" for the President’s Distinguished Lecture Series.
Introduced warmly by Stevens President Nariman Farvardin as a thought leader and expert in the global financial world, as well as a generous philanthropist, Mossavar-Rahmani is responsible for overall strategic asset allocation and tactical investment strategy within PWM at Goldman Sachs, the multinational investment banking firm she joined as a partner in 1993.
Since the advent of modern computing, quantitative investment tools have become ever more central to the structuring and investing of wealth. Data-driven, quantitative investment tools use complex mathematical and statistical models to study financial markets with the primary goal of detecting investment opportunities and forming investment portfolios to achieve superior returns.
Over the last decade or so, the financial industry has made much greater use of quantitative tools and technology in investment management and trading. The ability of quantitative methods to exploit market inefficiencies and predict abnormal market events can be extremely helpful, but they also have their limitations, Mossavar-Rahmani said. Her message throughout the lecture: We cannot rely exclusively on art or on science in the application of quantitative tools; it is the blend of the two that results in a more optimal investment process.
One of the most compelling advantages of using quantitative investment tools is that they tend to counter or remove any emotional response that a person may experience when buying or selling. This is significant, said Mossavar-Rahmani, given that humans, no matter how disciplined, often trade with behavioral biases that cause them to act on emotion and deviate from logic and reason.
She described how investors often ignore empirical facts, basing decisions on limited knowledge accumulated from websites, financial media and friends and family. Instead of making the most efficient decision, they'll make the most "satisfactory" decision, she explained.
Making sound investment decisions instead requires filtering out the “noise,” separating the real data from the hype, she added.
Insight during a financial crisis
To illustrate this point, she recalled the popularity of emerging markets more than a decade ago, particularly the BRIC countries (Brazil, Russia, India and China). But Mossavar-Rahmani and her colleagues could not share in the general enthusiasm for emerging market equities, she recalled.
Given the structural fault lines within these countries, including flawed inflationary and monetary policies, she advised clients against betting too much on emerging markets and that they were safer sticking with the developed world.
That cautious approach seems to have been justified as the sentiment around emerging markets has completely changed.
“We’re starting to see outflows from emerging markets and people are beginning to think that the period of high valuation was an exception,” she noted. “We’ve obviously seen tremendous downsides in Russia, not just because of the sanctions, but also the incredible drop in the price of oil; we’ve also seen the issues in Brazil, from bad policy to corruption, and its overdependence on commodities.”
She also spoke about the challenge of "leaning against the wind" during the lowest point of the financial crisis (2008-09), when Mossavar-Rahmani and her colleagues went against a general consensus that argued for reducing exposure to U.S. equities. For investors with a long investment horizon, Mossavar-Rahmani explained that the broad historical performance of U.S. equities, using valuation metrics such as the Shiller CAPE, supported a U.S.-focused strategy.
“When everyone was talking about the end of the American century, and that this century belonged to China, we very much stood against that theme, and said that actually the U.S. is preeminent. It is preeminent on multiple factors – human capital, financial markets, GDP per capita, labor productivity, etc.”
When quantitative methods have limits
Although the underlying theme of Mossavar-Rahmani‘s lecture was the art and science of using quantitative tools in investment management, she also underscored their acute limitations, particularly when the quality and collection of data are severely suspect. Case in point: China’s growth rate.
Despite exhaustive research from China experts, no one knows what the real number is and what it means for commodities pricing, profitability for U.S. companies exporting goods to China, or consumption, she said.
“The reality is that no matter how much research we have done, how many people we have talked to, how much data we try to get, we cannot zero in on a number where we have a lot of confidence,” she said. “So here is an example where there is actually nothing to do – there is no art, there is no science. You just try to collate the data, come up with a number and acknowledge there is a huge confidence interval around this number.”
Mossavar-Rahmani is the sixth speaker in the President’s Distinguished Lecture Series.
“We have been very successful in inviting truly distinguished speakers on topics of significant interest,” said President Nariman Farvardin, who launched the series in 2012 to give the Stevens community unprecedented access to influential scientists, technologists and policymakers who engage in academic and policy discussions focused on important topics in science and technology.
Previous President’s Distinguished Lecture Series speakers are Dr. Harold Varmus, Nobel laureate and former director of the National Cancer Institute; Dr. Craig Barrett, retired CEO and chairman of Intel; Dr. John Deutch, institute professor at MIT and former CIA director; Dr. John Holdren, director of the White House Office of Science and Technology Policy; and Dr. Norman Augustine, former chairman and CEO of Lockheed Martin.
“The focus of this lecture series is to invite experienced dignitaries in areas of major societal interests – healthcare, national security, energy, education — and in particular learn about the interplay between these areas of significance and national interest at the confluence of science and technology,” said Farvardin.
Join us in the spring for the next President’s Distinguished Lecture on March 16, 2016, featuring former CIA Director Michael Hayden.
For more information about the President’s Distinguished Lecture Series, please visit stevens.edu/lecture.