Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 334

What is quant investing and why is it different?

The essence of a quantitative investment approach is straight-forward: it is the utilisation of rational economic and fundamental investment insights in a disciplined and consistent fashion.

Of course, all investment managers use quantitative tools in various ways. Many use simple screens to help focus their detailed research on a smaller set of companies. This is especially important when managing global portfolios. The detailed research element often includes modelling a company's financial statements and company visits to gain a deep stock specific perspective. The final step is then to incorporate the research insight into portfolios to meet both risk and return objectives.

Investment styles move in and out of favour

One problem with this traditional approach is that no one investment style or theme is consistently rewarded. A better approach is to research and use a range of disciplines to determine which stocks to own or not. These range from longer-horizon, financial statements-based disciplines such as valuation, quality, sustainability and growth through to shorter-horizon strategies that aim to capture investor sentiment, company news and market events. Applying this breadth of insight is where a systematic quantitative approach is different to managers who take a fundamental focus on one dominant theme or philosophy.

Another key difference is a fundamental manager will examine the absolute depths of specific companies and industries, whereas a quantitative manager will work across a broader range of individual stocks and industries.

Quantitative managers undertake fundamental research upfront to formulate various investment ideas. These ideas are then tested with complex mathematical and statistical modelling to ensure that they are supported across different markets and investment environments.

Both are legitimate and credible means through which to approach investing and can have varying degrees of success depending on the point in the cycle.

Quant working alongside other investment styles

A quantitative approach can effectively work in tandem with other investing approaches in the one portfolio. A diversified quantitative approach can act as a scalable core exposure assisting with both capacity constraints and cost in other styles or managers.

The fact that the quantitative portfolio utilises a range of investment insights can also lead to improved after-tax outcomes. As the value manager sells his winners (realising a taxable gain) some of them may have become attractive to the growth manager. Inside the diversified quantitative portfolio, the same position simply transfers from the ‘value’ allocation to the ‘growth’ allocation without the need to realise the position.

While ‘off the shelf’ systematic strategies are growing in number, investors need to be careful to avoid inadvertently investing into potentially crowded trades or poorly-structured exposures with large unintended risk exposures. Using last year’s earnings relative to today’s price can often be a poor proxy for company valuation. A quantitative approach will model the financial statements of listed companies to derive a forecast of future earnings. This will include specific handling of accounting anomalies, country and industry effects.

Risk control is also critical as stock selection insight can often be drowned out by unintended portfolio bets caused by naïve approaches to portfolio construction, signal rebalancing and trading.

Quantitative managers are also well-equipped to manage the increasingly important area of sustainable investing, including a direct incorporation of ESG metrics. For some active managers, having an investor ask to invest in certain stocks or to avoid certain stocks while remaining tied to the benchmark can be problematic, but is less of an issue for quantitative managers with a view on every stock in the investment universe. They can make effective risk and return trade-offs even when required to exclude specific companies from their investment universe.

Valuations and performance

As with all investment disciplines, the performance of systematic quantitative investment strategies is largely influenced by the market and economic environment.

The post-GFC investment landscape has been dominated by central banks doing all in their power to meet growth and inflation targets. This monetary stimulus has fuelled risk appetite to the point where both equity and bond market valuations are stretched.

Price volatility has fallen as investor confidence has responded to the implicit view that monetary stimulus will always be applied by policy makers to mitigate downside events. This skewing of markets has been a difficult environment for active managers to outperform in.

In our experience, increases in uncertainty and volatility across financial markets makes the investor focus more on the fundamentals of the company they’re buying. This is usually when traditional active and active quantitative-style management is in a better position to outperform and offer investors the best possible return.

Outlook and examples

Diversification in investment insights is key. An investor focus on one particular style may not pay off. A robust quantitative approach can aggregate multiple investment disciplines in the one portfolio.

Looking ahead, there are opportunities for a valuation discipline to be rewarded but it’s skewed towards avoiding stocks that are expensive. Within the current economic cycle, there’s not a lot of cheap valuation opportunities available.

Valuation in some financial services stocks, such as the local major banks, is attractive, but whether earnings will contract from here, or exactly how they can grow earnings in the future, is unclear. The risk is though they are relatively cheap, they may be cheap for good reason. Any sensible investment approach must seek to discern between the value opportunity and the value trap.

A recent case in point is the turmoil which has engulfed AMP Limited (ASX:AMP). Since the start of 2018, the share price has more than halved from over $5 to below $2. Making sense of the company’s financial position has required a detailed investigation of a range of events and data. Our quantitative assessment was that AMP was unattractive on valuation grounds when trading at $5. The company’s interim and financial reports through 2018 and 2019 raised a number of flags, determining that the stock remained a value trap rather than an opportunity as its share price fell. Our analysis flagged events such as increases in cashflow volatility, uncertainty across the financial statements and analyst estimates.

Taking a simplistic approach such as a focus on reported earnings or past dividends paid could have led investors to view the stock as attractive as the share price fell. However, a quantitative approach can include complex and detailed rules with the added benefit of being unemotive in decision-making.

Another sector with a question mark is local discretionary retailers, who appear to be trading below reasonable valuations. Again, the risk for such firms is that if there’s any dislocation, such as any impediment to consumer spending, then they may be at risk of underperformance.

Overall, the combination of investment insight, risk-managed portfolio construction and manager oversight afforded by many quantitative managers serves to mitigate these uncertainties. 

 

Max Cappetta is Chief Executive Officer and Senior Portfolio Manager at Redpoint Investment Management. This information is of a general nature only and is not financial product advice. Opinions constitute our judgement at the time of issue and are subject to change, and do not consider the circumstances of any investor. 

 

RELATED ARTICLES

Dividend investors, your turn is coming

The wisdom of buying absurdly expensive stocks (or not!)

Why Europe is back on the global investor map

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.