Is "Quantamental" Stock Picking the Next Frontier?

According to a recent article in MarketWatch, quantitative analysts and fundamental stock pickers are “increasingly putting their heads together to produce better results for investors.” The blend of these two styles, it says, may soon make the term “quantamental” common among investors, but the jury is still out on the results.

Fundamental investors (i.e. Warren Buffett) track corporate earnings, balance sheets, industry trends, the economy and other data to make their investment decisions. Quantitative analysis, on the other hand, “uses mathematical and statistical modeling that pulls in a sometimes-dizzying array of inputs to screen investment ideas.”

Advances in quantitative investing strategies have fueled the rise in popularity of quantamental investing strategies, the article says, adding, “Pioneering quant-focused hedge-fund managers, such as Renasissance Technologies’ James Simons, are more famous than ever, at least in the financial world.” Quantitative hedge funds, it says, will soon reach $1 trillion in assets under management, and the number of quant-oriented hedge funds recently exceeded 2,000.

“At the same time,” the article reports, “fundamental stock pickers are under pressure from low-cost, passive, index-tracking strategies that have capitalized on the inability of the majority of active managers to beat their benchmarks in the long run.” An increasing number of these managers are starting to use computer-based methods to sift through piles of data. “Still,” the article says, “they’re not scrapping fundamental analysis, which relies on expertise and human judgement to add value.”

The combined strategy makes sense since quants sift through large amounts of data produced by fundamental analysts “who know their companies and sectors well.” However, the article notes, the acceptance of this seemingly symbiotic relationship between fundamentals and quants isn’t necessarily the case everywhere. In some firms, the combination can lead to culture clashes. Fundamental analysts, the article contends, “are often weary of computer-driven investing techniques,” citing the example of the “implosion” of Long-Term Capital Management in 1998, “whose computer-driven interest-rate-arbitrage bets went awry due to the firm’s reliance on heavy leverage.”

The article concludes with a comment from Brain Cho, head of quantitative research at Chiron Investment Management: “The investing public has to understand that not all strategies work all the time, and the quantamental process is not going to be immune to that.”