Pension fund managers may be forced to rethink key investment decisions because international accounting standards have thrown the strategies used by quantitative funds into turmoil.
The introduction of IFRS will cause huge swings in reported figures and throw the mathematical patterns used by quantitative funds – one of the most popular methods for determining investment strategies – out of sync.
A total of 64% of the UK’s £600bn worth of occupational pension funds is invested in equities, and a substantial proportion of that is sitting in quantitative funds.
‘From an investment point of view, IFRS is going to have an affect on the quant models,’ an NAPF spokesman said. ‘Each investment house is going to have to review the impacts of the new accounting policies and some may see fit to fundamentally change their models.’
Peter Elwin, head of accounting and valuation at Cazenove, said there will be ‘distortions’ if investment decisions are based on a 10 to 15 year accounting period.
‘Quant investors are likely to find it particularly difficult to adjust some of their screens to cope with this,’ he said.
Richard Mathieson, UK equity manager at fund manager Barclays Global Investors, which has an estimated £18bn in quantitative funds, said it had set up a working group to look into the issue. ‘We have been concerned for some time about the impact of IFRS,’ Mathieson said.
He said that BGI was investigating the use of new investment signals, such as cashflow and sales, as these figures would not be affected by the new standards.
A spokeswoman for the Investment Management Association said the transition to IFRS was likely to force quantitative funds to revamp their methodologies. ‘It is early days, but as we see it, quants will have to devise a new method for assessing market patterns or go back and recalculate past figures,’ she said.
Quantitative funds base their investment decisions on intricate statistical analysis of company results over a specified time period and have become increasingly popular with large-fund managers.
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