Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 163

Quant plus fundamental: two methods are better than one

When it comes to market forecasting, too many people thinking the same thing is almost always cause for concern. That said, in the current environment, an enormous amount of creative optimism is required to formulate a contrarian view.

Central bank activity saved the financial system from collapse in 2008 and stimulated the second-longest bull market in stocks. Unfortunately, the tools at their disposal were insufficient to engineer a return to high and inclusive rates of economic growth or durable financial stability. Terms like the New Normal, the New Neutral, or Secular Stagnation describe a global economy with sluggish growth, rising inequality, high unemployment and ever-increasing market volatility.

Rising demand for absolute returns

There has been significant asset price appreciation since the GFC. However, over the past 10 years, a traditional balanced portfolio allocating 60% to equities and 40% to fixed interest securities has only outperformed what most would consider a reasonable investment objective of CPI+5% in 41% of months on a rolling five-year basis. It is therefore not surprising that financial advisers and their clients are increasingly looking for new ways to build absolute return portfolios, where the investment objective is wealth creation rather than beating a traditional benchmark.

Portfolio construction, diversification, and the incorporation of alternative investment strategies all have roles to play in this endeavour. An ideal portfolio would likely contain non-correlated assets with positive return expectations. This means that all the assets in the portfolio would go up and down at different times - although the general direction would be positive. The ups and downs would partially cancel each other out and the investor would have a smooth, stable and stress free journey. Unfortunately, such assets are very difficult to come by, particularly for retail investors in Australia.

A fundamental approach to managing equity funds is normally associated with human insight and in-depth forward looking analysis across a narrow range of companies. With quantitative funds, the association is usually unbiased, disciplined, repeatable and scalable across a broad universe of stocks.

For some time, fundamental managers have recognised the value of incorporating quantitative techniques into their processes. Common examples of earlier approaches are: fundamental managers relying on quantitative screens to filter a large universe of stocks; and using multi-factor models to help managers control and eliminate exposure to unwanted risks.

Quantitative plus fundamental using unique data insights

The recent arrival of big data has ushered in a new era of investing, sometimes referred to as ‘quantamental’, which requires the seamless integration of quantitative and fundamental techniques. Obtaining valuable insights, often relating to future corporate earnings, from unrelated and unstructured sources requires the skills of creative analysts, expert programmers and significant computing power.

Twitter offers an intuitive example of this. It is now possible to obtain insights and indications of current stock trends by accessing all real-time tweets (approximately 6,000 per second) delivered via the Twitter Firehose service. People are better at many things but such analysis is beyond human capability. The demands are even greater for those managers who store tweets historically to reveal a changing pattern of sentiment and provide an advanced signal for a short term trading strategy.

The most valuable data is also the hardest to obtain and insights should be fundamentally generated from unique data sources, many of which would only ordinarily be used by the members of individual industries. Quantitative techniques are then used to scale these insights across a vast universe of industries and global stocks. Our new fund aims to deliver market neutral returns by simultaneously going long the companies with the best long-term prospects and short-selling those with the worst.

In the pharmaceutical industry as an example, the portfolio manager has developed an automated process to extract data from websites that allow doctors and patients to log complaints about the side effects of drugs. This frequently provides glimpses into future issues these companies or others providing drugs with similar chemical compositions may encounter. Trading strategies may then be developed which short sell these companies and go long on the companies marketing drugs with similar therapeutic application, but with fewer complaints.

The airline industry provides another good example of how the manager combines generally accepted valuation metrics with unique but common sense insights. In most developed countries, departure and arrival times of all flights are published electronically. If flights of a particular airline tend to take off late but arrive on time, it is likely that they have burned more fuel to catch up. That airline is thus operationally inefficient. An astute quantamental analyst can also rank airlines in order of baggage lost. Used in conjunction, these signals provide insights about future revenue because airlines with more late flights and more lost baggage are unlikely to retain their customers.

At its most simple, the quantamental approach involves two things. The first is the obtaining, aggregating and processing of information from numerous sources. The second is applying fundamental principles to generate differentiated returns. The result should be the construction of a well-diversified investment portfolio that provides superior outcomes in these challenging market conditions.

 

Adam Myers is Executive Director at Pengana Capital. They have brought the Pengana PanAgora Absolute Return Global Equities Fund to the Australian market. This article is general information and does not consider the circumstances of any individual.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

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.