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Three reasons to like European equities

The head of quant shop Quoniam, now majority owned by Union Investment, argues his case for European equities and for quantitative strategies.

Andreas Saucer is CEO and CIO at a new quant shop based in Frankfurt called Quoniam Asset Management.

What is the story behind the name 'Quoniam'?

Saucer: The history of the company goes back to 1999 when we were founded as a joint venture of German-based asset manager Union Investment and Boston-based investment boutique PanAgora Asset Management. We were named Union-PanAgora Asset Management until January this year. In January, Union took over the stake of PanAgora in our company and so we had to look for a new name. So we spent some time finding something that no one has ever used before. And finally, we ended up with 'Quoniam', which is a Latin word. It means "since, therefore, because".

It stands for our structured investment process. We are a quantitative investor. We use our own models to develop forecasts for equities, stocks, bonds, currencies, interest rates, so we have very structured investment process. And 'Quoniam', stands for this way of investing -- it is a very causal relationship between data and portfolio precision.

What's the ownership structure?

The management of Quoniam owns roughly 25% of the business. Union owns 75%. It's not the American way of doing it -- no one was granted share options. We have bought into the company with our private money. It's a clear signal to our clients that we believe in what we are doing.

How much is your company managing now?

We managed close to €9 billion. Our clientele is 80% German institutions. We also have clients in Austria, Switzerland, Scandinavia, in the Middle East, and we have very proud that we also have a client in Hong Kong.

What is the investment philosophy?

We focus on quantitative asset management. We think of our task like engineers: we take 20 years of data, and we look back to see what kind of information would have been helpful for us to forecast the future. We apply it and we end up with a model that tells us: ok, over the past 20 years it would have been right on average, for example, to use that kind of information to forecast equity returns. And then we apply that model going forward. We are pure quantitative investors.

Quants in general have a bad track record over the past 18 months.

There will be a generation of portfolio managers, analysts, investors that will never forget what had happened because it was so unforeseeable. Things we never thought could ever happen happened in 2008. In capital markets, as in life, there will always be things that are unforeseeable.

Even in these unusual, uncertain environment, we believe there are fundamental things that still are true -- maybe not every month; maybe not every week, but fundamentally, it should be, must be better to invest in cheap stocks with good earnings and not vice versa. In 2008, we out-performed in our equity strategies and in our fixed-income strategies.

Our models are not technical in a sense that they just look at patterns and try to replicate patterns. We are fundamental investors. We believe that capital markets are driven by fundamental information: macroeconomics, balance sheet items, earnings estimates and so on.

Do you see new regulation affecting your business?

When it comes to asset management, institutional investors want to know: are you regulated in your company; what kind of repos do you have to do with your regulator; how are you audited and so on. I'm not sure whether there will be so much additional regulation or procedures in this aspect when it comes to asset managers. Banking is a different thing.

What asset class should do well this year?

European equity markets today are priced in a way that expect maybe 30 to 40% decrease in corporate earnings in 2009/ 2010. So, even if we have a big recession, even if we have a big global downturn in economic activities, and even if we get worse news from German or European corporations, our assumption is that this news is priced in already.

This is my first assumption. The second assumption is that worldwide government interventions have to help the global economy. It would be surprising if none of these actions -- spending money, creating more debt, helping companies -- if none of these had an effect.

The third assumption is that the world is still a global market. Europe's corporations have really profited from globalisation over the past 10 to 20 years. When I travel in Asia or America, there are so many people that want to buy a German car.

What do those three assumptions add up to?

I would be surprised not to see equities coming back over the next three to five years.

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