Active ETFs have become a key part of the overall investing landscape in recent years. Their launches have contributed massively to the pace of overall ETF launches. Meanwhile, active ETF inflows have been a positive, adding some serious assets relative to their overall AUM totals. T. Rowe Price has been a big player therein. VettaFi recently sat down with the firm’s head of quantitative equity, Farris Shuggi, to talk about quant investing in that space.
Key Takeaways:
- Quant investing and fundamental research together can help produce strong strategies, according to T. Rowe Price’s Shuggi.
- A fund like TCAL, charging just 34 basis points, can leverage both toolsets to help its approach.
- The fund’s covered call ETF strategy may make it one to watch right now as investors look for more income.
Shuggi not only leads quant equity at T. Rowe Price Investment Management (TRPIM) but also serves as a portfolio manager within the popular Capital Appreciation suite of strategies, and is a vice president at the company, which he joined 17 years ago. Additionally, he is a member of the T. Rowe Price Associates (TRPA)/TRPIM Model Risk Management Subcommittee.
Asked what the biggest trend investors should be watching right now is, Shuggi pointed to AI. Specifically, he spoke to the challenge many investors are facing, trying to maintain exposure to that key space while also balancing that exposure in a portfolio.
“It’s clear that this is going to be a secular trend for the next five, 10, 15 years, and a lot of wealth is going to be created,” he said. “A lot of wealth has already been created, but there’s clear risks around it in terms of the total amount of capex spending and the valuations that some of these names are getting.”
“One of the big things I’ve spent a lot of time thinking about is: How do we maintain exposure here but still have a balanced portfolio such that if we had a market pullback, we would outperform in a meaningful way?” he added.
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Shuggi’s work aims to combine the firm’s strengths in fundamental research with quantitative investing. By combining quant investing with that strength of T. Rowe’s, he said, the firm can look to outperform.
“So, with quant equity at T. Rowe Price, and TRPIM in general, a big part of what we do is we start as foundational, our multifactor stock selection models,” he said. “We bring a lot of fundamental insight and perspective that makes its way into the models, having those partnerships with the fundamental analysts and the fundamental PMs.”
“Then, combining that with the fundamental analysts and their ratings is how we really start to up the hit rates in our advantage,” he added. “So there’s a lot of research that shows if you take quant investing, call it the outside view and fundamental, the inside view and blend it, you do better than either discipline and isolation.”
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The T. Rowe Price Capital Appreciation Premium Income ETF (TCAL) represents one key option where those elements combine. TCAL charges a 34 basis point fee to actively invest in U.S. stocks, with a covered call strategy offering income. According to Shuggi, both quant and fundamental factors inform how the investors assess risk.
“So we have a proprietary risk measure where we kind of whittle down the universe, let’s say, to the bottom quartile of risk,” he said. “We’ll then sit down with our fundamental colleagues on the team. They’ll have specific company views … and based on names where we have a more positive view, we may write calls on those names further out of the money and other names we’ll write closer in the money.”
Looking ahead, then, TCAL represents one of the ways T. Rowe Price has combined quant investing and fundamental research. For those looking to add income and equity upside, it could be one to watch.
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