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Fundamentals based quantitative strategy: Combining the best of two investment methods

The fundamental quantitative strategy relies on bottom-up stock specific data, but aims to extract more juice from it by processing and integrating the information in a more efficient way

May 31, 2021 / 03:27 PM IST

As the asset management industry expands, product offerings too have improved in scope. This increase in the breadth of product profiles has provided investors with better avenues that address their requirements. The latest additions are Quantitative Funds, which while being at a nascent stage, are getting investors’ attention.

Quantitative investing is a well-established approach in the west with a significant number of products and Assets Under Management (AUM). Smart Beta ETFs, the simplest version of a quantitative offering, has a collective AUM of $1.09 trillion worldwide and, in the US, these products account for 21 percent of the ETF market (Source: Morningstar report on Smart Beta ETFs).

What is a Quantitative Strategy?

The strategy employs a systematic approach to investing that is data intensive and leverages on insights from mathematical & statistical models. This rules-based approach makes it quite a disciplined offering and guards it from manual interference and human biases in stock selection and portfolio construction.

Further, the fundamental based quantitative strategy in particular is firmly rooted in fundamental theory, inputs and economic rationale. It employs a bottom-up stock selection approach and is similar to traditional funds as it too looks for the most rewarding characteristic in stocks.


Besides, there are several other reasons why an investor might want to consider adding these strategies to their portfolio of funds.  Let us take a look at a few of those.

Ability to monitor a large universe of stocks: Quantitative strategy’s edge is in its ability to monitor and analyse a large universe of stocks in a systematic fashion that is better than any human analyst, thanks to an abundance of computing power and extensive databases that the process relies on. This in-turn can result in potentially greater number of investment ideas and also help unearth new stocks before broader markets latch on to it.

Bottom-up stock selection approach: The approach is focused on constructing a portfolio based on bottom-up stock selection approach. Therefore, it will use fundamental metrics that a traditional manager will also consider central to the process. What a fundamental manager refers to as ‘thematic investing’ is referred to as ‘factors’ in the quantitative world.

For instance, a traditional manager may look for stocks that trade at less than their intrinsic value or businesses that have an improving growth outlook. In quantitative terminology, managers refer to the above two scenarios as value and quality styles, respectively.

In fact, there are even ways of quantifying management intent by looking at insider trades, share pledges etc.  Effectively, while the terminology that both managers use to describe the style is different, the intent is the same. Some parallels are shown below for illustrative purposes

Strong Risk Management Process: Quantitative strategies consider stock risk concurrently with return expectations, thus placing equal emphasis on both aspects. Therefore, during portfolio construction, stock weights are not solely a function of expected returns but expected return to risk ratio. This rules-based approach also stringently enforces any security, sector and portfolio level constraint, thus adding another layer of fortification. Fundamental Managers on the other hand normally take a step-wise approach to portfolio construction, focusing first on returns followed by portfolio level constraints and lastly risk.

Thus, in a nutshell, the fundamental quantitative strategy, as the name suggests, while relying on bottom-up stock specific data, as in the case of a traditional process, aims to extract more juice from it by processing and integrating the information in a more efficient way across a wide range of stocks.

Quantitative strategy would be ideal for investors looking to add a product with a novel approach to investing that has low correlation to their existing portfolio of funds, both in terms of holdings and returns. Further, it will also appeal to savvy clients keen on leveraging the strategy’s scientific, unbiased and data-based approach to stock selection and portfolio construction.

Disclaimer: Securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Fund will be achieved. As with any securities investment, the value of a portfolio can go up or down depending on the factors and forces affecting the capital markets.  Past performance of the Fund Manager or AMC may not be indicative of the performance in the future. This document is for informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investments mentioned in it. Investors are not being offered any guaranteed or indicative returns through these services. The contents of this document should not be treated as advice relating to investment, legal or taxation matters. The material is prepared for general communication and should not be treated as research report. All investors must read the detailed disclosure document, contribution agreement and annexure to the said documents, including the Risk Factors and consult their stockbroker, banker, legal adviser and other professional advisers to understand the contents of this document and/or before making any investment decision/contribution to PMS/AIF.
Karthik Kumar is Portfolio Manager, Axis AMC
first published: May 31, 2021 11:11 am
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