Quantitative Value Strategy

Quantitative investing, also known as systematic investing, is the disciplined application of data-proven economic ideas. Quantitative active equities investing involves using mathematical and statistical models to identify and select stocks for investment. We capture and apply ideas like good value, good management, strong market sentiment or quality of earnings growth in ways which we believe are performance enhancing, taking risk and the cost of trading into account.

Our approach differs from fundamental investing in two distinct ways. Firstly, our insights are diversified and empirically proven, offering a scientific approach that ensures scalability and repeatability. Secondly, our portfolios are constructed to capture excess return while directly taking risk into account.

Underpinning our approach is a focus on extensive high-quality data sets and robust research and production systems, as well as a team that is both technically very strong and market aware. We use our own advanced tools and techniques, including the most recent advances in data science such as Artificial Intelligence and machine learning to analyse large amounts of data in real time and identify patterns whilst translating these insights most efficiently into our clients' portfolios.

We use an active and quantitative approach to manage exposure to stocks by creating a Core Value portfolio that allocates weights to stocks in an investible universe based on accounting metrics (sales, book value, cash flows and dividends). We then apply our proprietary alpha signals to help reduce the portfolio’s exposure to value traps i.e. stocks that maybe cheap for a good reason, and incorporate additional information beyond the accounting fundamentals to improve the overall risk and return characteristics. In this way, we can optimise our portfolios whilst maintaining the value characteristics, to take advantage of opportunities overlooked by the market, with the objective of beating the benchmark over the long term. 

Our proprietary alpha signals, or insights, are derived from quantitative analysis of various data sources, including financial statements, market data, news articles, conference calls and sentiment. These signals consider value, momentum, quality, volatility, and sentiment. Value signals look for stocks that are undervalued by the market, while momentum signals look for stocks that are trending upward. Quality signals assess a company's financial health and profitability, while volatility signals measure a stock's risk level. Sentiment signals analyse public opinion and market sentiment to identify potential market-moving events.

We employ a multi-faceted approach to Environmental, Social and Governance (ESG) and our portfolios align with First Sentier Investors’ Responsible Investment and Stewardship Policy.

As part of our stewardship responsibilities, we have implemented two firm-wide exclusions for companies involved in the manufacture of controversial weapons* or tobacco products** or own more than 50% interest in entities that derive any revenue directly from the manufacture of controversial weapons or tobacco products.

Additional areas that we embed ESG considerations into our value portfolio include:

• Carbon intensity exposure constraints: Rather than changing sector allocations, we rotate to stocks with similar alpha and risk profiles but with lower carbon exposure within sectors using intelligent portfolio optimisation.
• ESG alpha signals: we have actively implemented carbon efficiency-based signals, board and senior management diversity-based signals and actively research other related signals.

* Controversial weapons include anti-personnel mines, cluster weapons, biological and chemical weapons, depleted uranium, nuclear weapons produced in support of the nuclear weapons programs of non-nuclear weapon State Parties and non-signatories to the Treaty on the Non-Proliferation of Nuclear Weapons and white phosphorus munitions. 

** Tobacco products includes traditional cigarettes and other tobacco products (including cigars and chewing tobacco), and not vaping or e-cigarette products.

Value investors seek ‘cheap’ stocks that the broader market might be underestimating, which can reward the investor in the long-term as the market realises the intrinsic worth of the stock. However, investors must also exercise caution to avoid value traps – a stock that appears to be cheap at face value but fails to perform as expected.

Our alpha signals enable us to reduce the likelihood of being captured by value traps by tilting our exposure towards stocks that display characteristics such as good quality, value, momentum and sentiment.