Profs vs Quants: Who’s the Better Investor?

Those who can, do, and those who cannot, teach, as the saying goes. But investing may be an exception, according to Morningstar’s Vice President of Research John Rekenthaler.

Despite evidence of academics’ poor track records—Long-Term Capital Management’s Myron Scholes and Robert Merton, for example— Rekenthaler’s latest column argued finance and economics professors are not as bad as people think.

“No doubt Irving Fisher flubbed the Great Depression, but John Maynard Keynes navigated it (and the subsequent rebound) very well, thanks much,” he wrote.

Furthermore, Rekenthaler said academic-led fund companies such as Eugene Fama’s Dimensional Fund Advisors and Cliff Asness’ AQR “have not suffered for their PhDs.”

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“No doubt Irving Fisher flubbed the Great Depression, but John Maynard Keynes navigated it (and the subsequent rebound) very well, thanks much.”However, in addition to IQ, market knowledge, and theories, the columnist added professors would do well to have “adaptability, practicality, and flexibility” for instances when economics theories fail.

Quantitative managers with math, computer science, and engineering backgrounds likewise have some gaps.

According to Rekenthaler, quants are plagued with overconfidence. “There’s no money to be made by outthinking the masses,” he wrote. “Being very good gets a quantitative investor precisely nowhere.”

In addition, numerically gifted investors could stray too far from theories, sometimes leaving them in “no position to understand why their models had worked in the past and how that might change in the future,” he argued.

If an investment formula fails, quants could re-run the numbers and modify their models—“a form of blind reckoning”—which does to connect cause with effect.

Finally, quants struggle in game theory, the columnist said, failing to see “second-level concern of interactive effects.”

“The ability to consider others’ actions in forming one’s own strategy is critical to succeeding in multiplayer games—and I suspect, in investing as well,” he said.

State Street revealed Thursday it had incorrectly charged clients by at least $200 million over an 18-year period.

The incorrect charges were billed to asset servicing clients primarily in the US, according to the firm’s expense review.

In a statement, State Street said it would fully compensate affected clients at the conclusion of the billing review, including interest, as well as make any necessary changes to its billing practices.

“We deeply regret this matter and are in the process of notifying affected clients,” a spokesperson said. “This is an issue that we identified and one that we are committed to resolving.”

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The expense categories under review represent a total of $400 million, with annual amounts invoiced ranging from $9 million in the early years to $36 million in 2014. Total asset fee revenue in fiscal year 2014 was $5.1 billion.

The actual amount that clients will be reimbursed will not be known until the review is completed, and could differ “materially” from the $200 million cited in this preliminary assessment, the firm said.

State Street’s asset servicing business is already under scrutiny by the US Securities and Exchange Commission (SEC) for methods it used to solicit public pension mandates during a period ending in 2011. An SEC filing in June said the investigation focused on State Street’s use of consultants and lobbyists, as well as at least one instance of political contributions by a consultant during and after a public bidding process.

A State Street spokesperson said in June that the firm has since eliminated the hiring of consultants and lobbyists for its asset servicing dealings.

“Since 2011, we have also enhanced our compliance training and oversight for employees,” she said.