Complacency and not valuations, real risk: BlackRock Quant Head

Mumbai: Valuations are rarely the biggest threat to equities; complacency is.

That's why Raffaele Savi, Global Head of BlackRock Systematic - the quant investing arm of the world's largest asset manager, overseeing $336 billion across equities, fixed income, and alternatives - is still optimistic about the outlook for the stock market.

"Valuations become a real risk when people think nothing can go wrong. Today, that doesn't look like the case," said Savi, who is also co-chief investment officer of Systematic Equities, the firm's quant-based stock-picking arm, in an interview with ET during his Mumbai visit.

"Growth drivers remain strong while geopolitics has made investors cautious," he said. Savi said outside the subset of US technology stocks, valuations across many markets and sectors are in line with long-term averages, and in some cases, below.

The San Francisco-based quant fund manager rejected comparisons of the rise in the US tech valuations to the dot-com era of the late 1990s.

"Many of these companies now have real revenues and cash flows. Stories like search, cloud, and now AI have already delivered in the past 15-20 years," he said. "That's different from the late 1990s, when many firms had no revenue and only business plans. So, I'm optimistic."

Quant Funds' Alpha Challenge
Quant funds shouldn't be judged only by how much alpha - portfolio returns over the benchmark performance - they capture in roaring bull runs, said Savi. Their edge, according to him, is in offering investors a steadier ride through booms, busts, and flat markets alike.

"Maybe in a strongly up market, we might do better than the benchmark, but lag the most aggressive long-only managers. But then, we tend to do proportionally better in flat markets," he said. "Our view is that the smoother the ride, the higher the chances that people will stay invested and avoid the classic timing mistakes human beings make." For many investors, said Savi, systematic strategies form the "core" of portfolios, complemented by thematic or higher-conviction allocations.

AI-Guided Investments
Savi underscored the need to combine systematic models with expert judgment that will enable AI-driven investing to adapt to both regular market patterns and rare structural shifts.

"If every single day were entirely new, it would be difficult for both systems and experts to function," he said. "The opposite risk is over-learning - assuming the future must look like the past," he said.

BlackRock Systematic designs its models in such a way that they do not "assume too much".

He said human judgment remains essential when structural changes occur.

"Covid, for example, required recognising the valuation gap between virtual and physical businesses. Or when rates rise after 15 years of zero interest rates, suddenly debt servicing costs matter again," said Savi. "Those big regime shifts need human portfolio managers."

60:40 Portfolio Construct
On portfolio construction, Savi argues that equities remain indispensable.

"Across countries, equity-heavy portfolios consistently deliver better retirement outcomes," he said.

The traditional 60:40 mix, in his view, is "not a bad place to be," though rising life expectancy means investors need more equity exposure, with alternatives and gold playing a supporting role in dampening volatility.

Despite the recent foreign outflows, Savi said India has developed a healthy market structure with breadth of listings, liquidity and sectoral diversity standing out. Domestic flows are an additional source of resilience. "Indian SIPs are a force to reckon with," he said.