Can fundamental fund managers improve performance and "put the odds in their favor" by incorporating quantitative models into their process? This was one of the ideas I debated this month during a panel discussion at The Trading Show in Chicago.
The featured topic was "Quantamental Investing—Is It Better than a Pure Quant Approach?" After a lively discussion with experienced fund managers from New Amsterdam Partners and BMO Asset Management who use this hybrid approach, I came away with these key learnings:
- Well-researched alpha models can very efficiently select companies that are likely to outperform from large universes of securities.
- Fundamental analysis, because of its ability to deeply analyze specific companies, can uncover insights and trends that quantitative models are not able to detect.
During the session, managers described how the powerful advantages of such a hybrid solution helped them achieve consistent benchmark-beating performance, while keeping costs low and clients satisfied.
One panel participant described how his firm's models analyzed the optimal time at which held securities should be replaced. He went on to discuss the list of candidate securities that was generated for his small team of fundamental analysts to review. The chosen securities were already "blessed" by the model; now the job of the analyst was to pick the best of the best and to develop a deep understanding of every company that was being added to the portfolio.
This approach is appealing on many levels. First, it is disciplined and based on solid factor-based research. Second, portfolio managers and their clients can feel confident that proper due diligence has been done, reducing the uneasy feeling that an unknown "black box" has been used. Third, relying on technology and science greatly reduces the number of people required to research and manage large universes, resulting in lower costs for both parties.
During my years of helping investment managers execute their strategies using FactSet's content and technology, I have seen this hybrid/quantamental approach used very successfully. The approach is efficient and effective, but not easy, and requires the dedication of skilled quantitative model builders and researchers. But once the approach is in place, I have seen how it can help managers grow in a very competitive space.
In particular, I've seen clients following these trends:
- Receiving brief, machine readable alerts for pre-announcements, earnings releases, and breaking news to stay in the know
- Measuring and managing the risks to portfolio companies from geopolitical and supply chain shocks
- Automating and scaling benchmark data management
- Consolidating data feeds to reduce cost
Overall, I left The Trading Show believing that Quantamental investing is just one way among many that investment managers are being creative so that they can bring the best results to their customers.