Summary

00:38 – Introduction: Paul O'Connor introduces Morry Waked, Vinva and the evolution of systematic equities investing.

04:33 – Systematic Investing: How human insight, technology and disciplined decision-making come together in Vinva’s systematic investment approach.

10:54 – Separating Signal from Noise: How investment ideas are tested and refined, and why diversification and continuous innovation are important to the process.

15:13 – AI, Data & Investment Edge: How AI, machine learning and data support investment decisions, and why differentiated insights and critical thinking remain important.

25:41 – Investing Across Market Cycles: How Vinva’s diversified, style-neutral approach seeks to generate active returns through different market conditions.

28:06 – Concentration Risk & the Magnificent Seven: The rise of mega-cap concentration in global equities and where Vinva sees opportunities beyond the market’s largest stocks.

Paul O'Connor:
Good morning, listeners. I'm Paul O'Connor, and I hope the new financial year has started well for you all. On today's Netwealth Portfolio Construction podcast series, we have Morry Waked from Vinva Investment Management, and we will discuss systematic equities investing.
Morry, thank you for joining us on today's podcast.

Morry Waked:
Thank you, Paul. A pleasure to be here.

Paul O'Connor:
Morry is the founder of Vinva, having started Vinva Investment Management in 2010 and is the managing director and head of investments. Vinva is an independent global investment management firm founded in Australia. They manage active equity strategies long-only and long short across global markets and are a highly regarded investment manager. The genesis of the firm dates back 30 years with Morry and several members of the investment team sharing a significant level of co-tenure having previously worked together at Barclays Global Investors or BGI that's now part of BlackRock prior to establishing Vinva. The business employs over 30 professionals and manages over 61 billion in assets under management. Prior to founding Vinva, Morry spent 12 years with BGI, which was the largest investment manager in the world at the time. Morry was global head and chief investment officer for BGI's global active equity business with responsibility for the portfolio management and research functions overseeing 300 billion in actively managed global equities.
There are four global equity Vinva funds on the Netwealth Super and IDPS investment menus being the Global Equity Fund, Global Alpha Extension Fund, Global Alpha Fund ASX listed, and Global Alpha Fund Hedged.
Global equities continue to provide strong returns to investors, but there's increasing focus and debate on the Mag 7 and AI that are really driving the overall market returns and really I guess from a concentrated number of stocks. Vinva's generated strong performance over this period, which is a testament to their insight-driven active systematic process. Vinva being a pioneer in Australia in active systematic investing, which unlike traditional active investing, systematic strategies rely more on data and aim to remove emotion from the investment process. But I'll let Morry elaborate further on this investment style.
So maybe starting, Morry, Vinva's a name a lot of the audience will know, but can you give us a quick sense of who Vinva is and the firm's place as I guess one of the pioneers of systematic investing in the Australian market?

Morry Waked:
Yeah, absolutely. Thanks, Paul. Look, as you mentioned before, the genesis of our firm dates back 30 years. So a core group of us have worked together for that period of time. And really we are a private firm. We're majority employee-owned, a firm that's really focused on investment performance for our clients. We have one asset class that we look at, and that's equities around the world. And we have a single investment philosophy. An active manager with a systematic style, and we'll certainly go through during this podcast what we mean by systematic. We've been referred to as one of the pioneers in this style of investing. If I go back to when I first started my career in the 1990s and working at a firm called BGI that you alluded to earlier, systematic investing was relatively small, at least in this country, and it was a bit foreign.
So as one of the pioneers, we were sort of bringing this style of investing to the Australian market in Australian equities and global equity products. We're on the clock forward nearly 30 years now and certainly a lot more well known, a lot more established in the institutional space certainly, and now more recently in the retail and wholesale space.

Paul O'Connor:
So for listeners newer to the term, what does systematic actually mean in practice and what do you think is unique about your style?

Morry Waked:
Yeah, systematic is certainly getting a lot more air time these days. It can mean different things to different people. A lot of people are referred to systematic as quantitative algorithm driven type strategies. And there is some merit in saying that when we talk about systematic, we really refer to it as insight driven active investing with strong discipline. The systematic part of our investment process really brings a sense of repeatability, discipline, and effectively removing emotion out of the investment process. Ultimately, everything that we do begins with our people and ends with our people.
Our investment performers, like any good active manager out there, is only as good as the investment professionals that design the investment strategy, so that doesn't change. Where we start to part ways with more traditional approaches to active management is that once we have our ideas and our philosophy and our approach to how we want to extract our performance in the market for our clients, we embed that in our technology and we remain relatively unemotional and disciplined in terms of our day-to-day implementation.
Our big believers that on average, emotion detracts from performance as humans. And I'm sure you can all attest to this and the listeners as well, that sometimes emotions can get the better of us. And that also goes for when we're making active decisions on the investment side. So having that emotion-free, disciplined investment approach ensures that we stick to what we know, stick to our approach, not get caught up in the day-to-day noise that can sometimes lead to suboptimal decision making.

Paul O'Connor:
Systematical quant strategies are often considered opaque, but you describe Vinva as a glass box and not a black box. What does that distinction really mean and why does it matter for investors considering investing in Vinva?

Morry Waked:
Sometimes when people focus on the algorithms and a lot of the data and technology that are used by active managers with a systematic style like ourselves, they can sometimes think that at least what we do might be more of a black box driven. It's all run by algorithms and technology and there's the very little human sort of insight and judgment that goes into the process. Well, that's completely the opposite of what we do.
As I said before, everything starts with the people. So when we're coming up with our investment ideas, we are investment professionals first and we are more scientists and technical people second. So when it comes to designing investment strategies, there's a range of different things that we think the market misprices. We incorporate that into our investment process. But what it means is when we design the investment process, the ideas that we're looking to exploit are very well known internally by us. We put them together in a certain way and we're very systematic and emotional at exploiting those ideas on a day-to-day basis.

What that also means is when we do have a position in the portfolio, we can disaggregate and understand what are the drivers of our position in that portfolio. Why we like a stock and hence why we're overweight or why we might dislike a stock and hence why we're underweight. And that's what we mean by a glass box. Any client that wants to pick any stock in our portfolio, we can give them the transparency and explain and articulate and also show visually why we like the stock, whether it's fundamentally cheap or expensive, whether it's driven by some short-term flow or behavioral biases that we're seeing in the market, whether it's part of a global network of companies or particular industries that might be doing well or otherwise, we can certainly give that sort of transparency. And that's what we mean by glass box.

Paul O'Connor:
Yeah, I guess that's where you can differ, or I guess from my observations, differ from I guess some of the bigger US quant managers where a lot of the portfolio managers wouldn't even know what stocks are being held in the portfolio or what that thesis is. So I guess that really does differentiate you and I guess gives me an understanding of why you use the term a glass box and not a black box there, Morry.

Morry Waked:
Yeah. That's right, Paul. I mean, I think there's some misconceptions about systematic investing in that as you alluded to, the portfolio managers don't do much or they don't know the stocks in their portfolios. It's all driven by algorithms. The algorithms, the data and the technology are really just a support to the investment professionals. I keep going back to the fact that everything starts with the people. I mean, technology and data just leverages the people. It gives us scale, and that allows us to do what we do on a daily basis systematically on a global basis. That's what technology and data does. It doesn't replace people.

Paul O'Connor:
Moving to the people side of it, you clearly process an enormous volume of information, yet, as you've said, people are the architects of the process and technology provides the scale, which I guess makes sense given systematic models can have limitations or blind spots. What are the key decisions that actually stay firmly with the people rather than in the models, Morry?

Morry Waked:
First and foremost, and I think you certainly used this phrase earlier on in the introduction, we are an insight-driven systematic manager. And to your question about what sits with the people, the insight, the investment ideas, the investment thesis behind everything that we do, that sits with our people. When we come up with certain ideas that we can exploit in the marketplace, when it comes to understanding the flow of information around global markets, market, market structure, those ideas come from people. Majority of them come from our people internally, but we also read a lot of literature and see what's written out there in the investment world by the market participants. And we come up with those ideas. And we first and foremost, before we even go away and try and model those ideas, we articulate what the investment rationale is for why a particular piece of information or why a particular idea is mispriced by the market and how we think we can exploit that.

Once we've articulated that, our investment professionals have articulated that, we then go away and model it and stress test it in different market regimes, different industries across different countries around the world, and then that will determine whether that particular idea gets embedded in our investment process or not.

Paul O'Connor:
A lot of the edge in your world comes down to separating signals from noise. How do you and the team decide what's a genuine repeatable signal versus something that just looks like one?

Morry Waked:
Yeah, if you think of stock price movements on a day-to-day basis, the majority of what you see move stock prices every day is arguably noise. We had this metric that we refer to, we call it the signal-to-noise ratio, signal being information and noise obviously being noise. That ratio signal-to-noise is actually pretty low when it comes to equity markets. A lot of the movements that we see in stock prices is driven by noise. So again, getting back to the people, when we're designing our investment strategies, we have to come up with certain assumptions whether particular ideas are likely to work in the short term, whether they're likely to work in the medium term, or whether they're likely to work in the long term. And that allows us to, that premise of what is the investment sensibility behind every idea, that's really a big part of understanding what we think is genuine, repeatable information or signals that we can exploit and what may be noise.

And again, there's certain things and robust testing framework that we have that allows us to test our ideas and be able to differentiate what is true information and what is noise, and that certainly forms a big part of our framework. One of the things we also make sure of is that we don't get caught up in a lot of the hype. There's a lot of new ideas, there's a lot of flow of information, market talk that sort of drives stock prices every day. And as I said, a lot of it's noise. Our job is to have certain tools and certain philosophy that allows us to sort of break up what's true signal and what's noise.

The other thing is when you're constructing your portfolios, we run portfolios that are highly diversified. So a typical global equity portfolio that we have would have more than 400 positions in that portfolio. A large part of that is because we want to control certain aspects of risk. We don't want to introduce large country industry biases in our portfolio. We want to focus on what we call pure stock selection. But also having a diversified portfolio allows you over time to diversify away a lot of the noise and idiosyncratic risk that can hurt investor performance.

Paul O'Connor:
I guess your actual systematic investment process must be an ongoing piece of work that would never stop, a bit like a Picasso continually working on it and refining it. Would that be a fair comment, Morry?

Morry Waked:
Not sure if it's a Picasso, but yes, it's a fair comment that look, ultimately at the end of the day, as an investment firm, we're an intellectual capital firm. Our investment performance is only as good as the investment people that we have and the people that we have across the organization, but also is only as good as the innovation. To continue to generate our performance and do it over a long period of time and do it consistently requires ongoing and continuous innovation. So really when you think of the improvements that we've made to the investment process over time, a lot of them are small incremental enhancements that accumulate to substantial differences and improvements to performance over time. Our markets are very competitive. There's certain types of information and data that are becoming more accessible, certain things that used to be mispriced maybe 10 years ago are more efficiently priced now.

So coming up with new ideas, new and better ways to exploit mispricing is really a part of our DNA. And not only does that require good investment professionals with good insight, but it also requires people that have certain character traits, not resting on your laurels, not getting too comfortable, but that sort of day-to-day grind of getting better and making sure we are the best that we can be such that we can compete well in this industry.

Paul O'Connor:
There's a view doing the rounds and Morningstar made the point recently that the real competitive moat in AI-driven investing is proprietary data and infrastructure and not the models themselves, which I guess to me may explain why the major US hyperscalers I think are investing over US 725 billion in AI CapEx this year. Does that match how you see it at Vinva?

Morry Waked:
Yeah, I mean that huge number of CapEx that you mentioned over 700 billion, those AI models are very demanding when it comes to data and energy and so forth. I'm not a big fan of the phrase AI-driven investing, at least not from a Vinva perspective. We use a lot of AI tools and machine learning techniques, but they are just that. They are techniques and they are tools that allow us to do what we do, but maybe accelerate some parts of the investment process, allow us to make better sense of unstructured information. But ultimately, at the end of the day, at least in our case, they're not here to replace people.

Of course, every good active manager needs a moat, and of course, proprietary data is part of that and infrastructure and technology to be able to process thousands of pieces of information every day, it's part of that moat. But those things are necessary but not sufficient on their own.

If you think about the world today, a lot of the AI tools and models are readily available. There's so much more data that's readily available. So you can think of some AI tools and data becoming a lot more commoditized in this day and age. So really the real moat I believe is what I refer to as a learning loop. How much of the processing and information that gets done is actually done within the organization, within that learning loop, and how much of that learning loop is proprietary? That's where I believe the real moat is going forward in active management.

In fact, for any industry, ensuring that if you are using AI tools, if you are using data that may be used by other market participants because a lot of data is more readily available, it's really what are you learning from that data? What pockets of information in that data are you focusing on that may be overlooked by other investors and what are you learning and how do you ensure that learning is shared within the organization and stays within the organization? And that's where I believe the industry is heading and that's where the competitive advantages are going to come from.

Paul O'Connor:
Vinva has been working with machine learning and language processing since I guess well before the term AI was even, I guess, broadly used. What's genuinely changed for you in the last couple of years and what's more hype than substance?

Morry Waked:
Yeah, I think it relates to my response to your earlier question. There's a lot of commoditization now of certain tools and certain data. We still have some proprietary data sets that we've been curating for a long time, over 10 or 15 years. We don't talk about them, but really a lot of the data that's available is available to everyone, whether it's be more sort of commonly referred to data or more what we call alternative data. Most investment managers around the world, if they want it, they can find it. So really what's changed is not necessarily the access to information because that's become more readily available, but it's how you process that information is really what's changed and where the edge and the moat's coming from.
And also with the increase in the use of AI, I think critical thinking and problem solving in a healthy amount of skepticism is going to become more and more important. A lot of people, the real risk is people using similar models on similar data and getting similar concentrated outcomes. That's a real risk I think going forward. Our job as an active manager is to ensure that how we use, whether it be AI tools, how we use certain pieces of information that may be more commoditized, needs to be a little bit different and needs to be focused on things that are differentiated and also not to just believe everything that comes out of the data or that comes out of a particular AI agent or AI tool. And that's where the critical thinking and problem solving becomes very, very important. And it ties back into what I said earlier on, it's really about the people who design the process, who understand what parts of the investment process need to be done in a particular way, and ultimately how information is processed and transmitted around the world.

Paul O'Connor:
The core strength of systematic investing is that it strips emotion and behavioral bias out of decision making. And so the process, I guess, stays more disciplined where humans can tend to waiver. How does that discipline work in practice and does it let you capitalize on the behavioral mistakes other investors make?

Morry Waked:
Yeah, I mentioned earlier on, we're big believers that on average, emotion detracts from investment performance. If you look at the universe of active managers globally, and certainly if you look at the universe of global active equity funds that are available in the Australian market for retail and wholesale clients, I think there's over 300 funds available, over 90% of those funds have underperformed the global equity benchmarks over the last five, 10 to 15 years. So really the majority of active managers underperform. Personally, I think a large part of that is portfolio construction and also emotion that can sometimes get in the way of better decision making. So really when we talk about a systematic approach, taking emotion out of the process, it's really about, as I said earlier on, you have an investment thesis and a group of investment ideas, you put them and design them to work together in a particular way, and yet then you stick to that discipline. You embed it in technology.
If you think about ourselves in our day-to-day lives, we are exposed to data and technology every day. You hop into a car or you've got a mobile phone and you want to travel from point A to point B, you don't get the old map, the old physical map that you used to 20 or 30 years ago, you put into your navigation and you trust the navigation's going to get you there. And that's similar to what we're doing in investment management. We have a process, we embed it in the technology and we trust the process. So part of that does allow us to capitalize on some of the behavioral mistakes and exploitable biases of other investors in the marketplace that allows us to take advantage of those, but also ensures that we don't overreact to short-term information or certain types of news and other things that can sort of drive emotions from day to day. And we try and look through that and focus more on the medium and longer term expectations, which really flow through that discipline framework that we have.

Now that doesn't say that certainly when we're trading every day, we have to take into account market conditions and market liquidity and other types of potential corporate events that we need to navigate our way through the market. But the actual decisions of what to buy and what to sell every day are relatively unemotional. So that means we've got both strong buyer disciplines and strong sell disciplines, which I think is extremely important.

Paul O'Connor:
You've talked in the past about innovation needing a balance of progress and prudence. How do you decide when a new technique or data set is ready to go live into a portfolio versus staying in, I guess, a research or a model portfolio that you might be running in the background?

Morry Waked:
Yeah, and that's a big part of what we do every day. It gets back to what I said earlier on. Everything that we do starts with the investment sensibility. Like any good active manager, I would argue that if you spoke to any good active manager in Australia or around the world, they should be able to articulate what their investment thesis or what the ideas are that they're trying to exploit in their portfolios and why they think that those ideas will pay off over time and over different horizons.
When it comes to innovation, the prudence is what's the investment insight? What's the idea? How does a market process that information? What horizon does it process that information? And what's the competitive landscape around that? That's the prudence. Obviously, you want to progress. And progression's really about innovation and so forth, but you also don't want to get too caught up in things that may sound like they're progressive and may sound like they're great ideas, and you may hear that other investment managers doing those things, but it's really ultimately about will this thing pay off?
And so firstly, we start with the basic. If there's a particular data set or a particular idea that we have or a new technique that we're looking to use, we'll start with a very basic form of that and test it in a particular market in different regimes, and then we'll test in other markets around the world. And if the basic looks like there's [inaudible 00:23:51], then we'll start to add a bit more complexity and more nuances to that and maybe start differentiating between different markets around the world, different industries and so forth. So that's typically the way we go about it, start with the investment idea, the insight behind it, articulate what that insight is and why we think it'll work. Start with a basic construct first, and then we add the complexity later on.

Paul O'Connor:
I digress a little bit. You just got me thinking, Morry, that in terms of momentum and sentiment, is that more embedded in your process as, I guess, buy signals and sell signals?

Morry Waked:
Yeah, firstly, from our perspective, momentum and sentiment are different things. We understand momentum to be ideas that chase past performance or certain trends that people think are going to continue into the future. And if you look at the last three or four years, momentum has a particular style. Price momentum in particular, has performed really, really well, but it's also a very well-known quantity in investment markets. So from our perspective, we typically don't focus on momentum type ideas. We focus on things that might be a little bit more differentiated.

When it comes to sentiment, yes, sentiment is an important part of our investment process, but sentiment is really more driven by trying to understand certain views and certain thematics that may be driving certain industries or certain stocks in certain markets around the world. We try and extract that sentiment using some large language models, using unstructured and other types of textual information to really garner what's the market's view of a particular stock industry or thematic. There are certain sort of trends that we can pick up as a result of that and exploit those in our investment process. But as far as sort of more pure momentum type strategies, we typically shy away from those.

Paul O'Connor:
As, I guess, systematic capabilities become available to advisors and clients through platforms like ours at Netwealth, what should an advisor be thinking about, understanding about how a systematic manager behaves through different market conditions?

Morry Waked:
Yeah, I can only speak on behalf of our approach here at Vinva. Firstly and foremost, what advisors to think about and understand about Vinva is really, first and foremost, it's an active strategy that's investing in a broad suite of global stocks around the world. When it comes to the return of an active strategy, there are really two components to total performance. One is the market return or what people may refer to as the beta, and the other part is the alpha or the outperformance. Really, we don't control the equity market return. We don't control what the S&P 500 does or what the European markets are doing. Those returns are driven by sort of market beta, as we call it.

Our job is really to focus on the alpha component or the active performance. So really our style is what we refer to as style neutral. We're trying to develop active strategies where the outperformance is not driven by a particular style, whether it be value or growth or large cap or small cap. We're relatively style neutral. So we expect that our strategy will be able to outperform irrespective of the market cycle that we're in.

Now in saying that, as an active manager, there have been periods of underperformance and there will be periods of underperformance, but typically a bit more of a risk controlled investment approach like the one that we have is more diversified across stocks, has a lot more sort of embedded risk control. So typically our active risk is lower than more traditional concentrative strategies out there. And hopefully that leads, and certainly history's proven this, that at least it's more consistent outperformance. Typically, market conditions that have been a little bit more challenging for us would be markets that may be a little bit noisy, markets that are exhibiting short and sharp turning points, and markets where typically some of the longer term fundamentals are being ignored and people are chasing the hype. Those things do happen from time to time, but generally over the long term, markets do focus on fundamentals, do focus on what's important, and our risk controlled diversified approach typically performs well and consistently over a long period of time.

Paul O'Connor:
Maybe just as a final question, Morry, and I sort of touched on it in my opening, but I guess we've all become well aware of the smaller concentrated number of stocks that have been driving the returns in global equity market. What's your view on the concentration risk in global equities at the moment?

Morry Waked:
Yeah, people refer in global equity markets to the Mag 7. If you look at their share of the global market, I think they're over 25% of the global equity market capitalization, that's been increasing over the past 10 to 15 years. So a lot of the return that you've seen that's driven global equity markets has been driven by those bigger uber caps in the market.

Now, as I said before a moment ago, when you think about constructing a portfolio, there are two components to constructing a portfolio. One is getting the equity market exposure that the client wants, and two is then taking active decisions around that equity market to generate the outperformance. So if you take a strategy like ours, our global equity strategy, one of our global equity strategies or any of them actually, we do have holdings in Nvidia and Apple and Microsoft, but we don't spend a lot of our active risk budget in those stocks because they're quite large and very well known. And we'll spend more of our active risk budget in the mid-caps and the small cap part of the portfolio. So we'll typically take larger active positions there.
If you look at our portfolio at the moment, we do think there's a bit of overpricing in some of those larger names. And while we do own those stocks that I mentioned before, in aggregate across the Mag 7, we do have a slightly underweighed position to those larger stocks in the market. So concentration risk is really there and it's helped drive the equity market returns, but when it comes to the active decision making, at the moment, our active risk budget is spent away from those large uber cap stocks in global markets.

Paul O'Connor:
That's very rational and makes a lot of sense to me there, Morry. Still looking for that alpha in the mid and the smaller cap section of the market. And obviously not making any big, I guess, active decision around stocks like the Mag 7 there, because as we know, markets can continue to run well beyond any individual may consider what is reasonable pricing there. So yeah, certainly makes sense to me, Morry.

Morry Waked:
Yeah. And on that point, Paul, as I said a moment earlier on, that the two components to a portfolio return being the equity market beta and the manager's outperformance are alpha. As I said before, the majority of active managers have underperformed. And generally, what you'll find is over a long period of time, the majority of client portfolio returns is actually going to be driven by the equity market. If equity markets over time can deliver 9 or 10% return, as an active manager, if we can add 2, 3 or 4% return on top of that, we can take a 10% market return and turn it into a 14% total active strategy. But still, the majority of the total return is coming from the equity market. So you do have to respect the equity market and the construct and those Mag 7 stocks and have some of them in your portfolio.

Paul O'Connor:
Morry, thank you very much for your time spent with us today on the Netwealth Portfolio Construction Podcast. It's been a really interesting discussion. I guess I've found that systematic investing, there haven't been a lot of, I guess, managers in Australia offering this investment style. And I guess I came across it many years ago and the varying degrees of the old quant managers, particularly the Boston based ones there. So it certainly makes sense to me. And particularly I guess I consider it as more of a core holding in a portfolio, a real anchor around maybe your global equities exposure there. So yeah, congratulations on the success of the business and certainly the returns that you've generated there.

Morry Waked:
Well, it's been a real pleasure, Paul. And thank you for having me. Really appreciate it. Thank you.

Paul O'Connor:
And to the listeners, thank you for joining us again today on the podcast. I certainly hope you've enjoyed the discussion that I've had with Morry on systematic investing. I know I've certainly learned a bit out of this discussion, so I thank you there, Morry.

And I certainly hope you, the listeners, have also got some value out of today's discussion.
Thanks for joining us. Have a great day and I'll look forward to seeing you or you joining us on the next installment of the podcast series.