Understanding the difference between fundamental and quantitative investing

Author: Sound Choices

October 11, 2019

Portfolio managers (also known as investment managers) use various styles and approaches when managing money. Here we examine two well-known methods – fundamental and quantitative.

Fundamental investing

A portfolio manager who bases their investment decisions on fundamental analysis will attempt to determine a security’s intrinsic value by examining factors that could affect its price. Many focus on aspects that are qualitative and subjective in nature in order to get an “edge”.

There are two approaches to performing fundamental analysis:

Top-down. The analysis begins by looking at the “big picture” and examining the broader market, sector, or industry, before narrowing down to a specific security.
Bottom-up. The analysis begins with examining the fundamental factors of a specific security, like the financials or management of a company, before considering the overall market.

Managers can use either approach to come up with a value for a security that they can then use to compare to the security’s price, thereby determining if the security is overvalued or undervalued. Based on this analysis, the portfolio manager will build a portfolio of stocks that he or she believes have the optimal risk/return profile for a specific investment strategy and then routinely monitor the performance of each stock. The goal is to buy each stock when it’s undervalued and sell when it’s overvalued.

Quantitative investing

Quantitative (“quant”) investing employs a computer-based model to guide investment decisions. A software model, developed by a team of programmers and investment professionals, is used to identify patterns in large quantities of stock and trading data.

Once a pattern that could potentially form the basis of an investment strategy is identified, an algorithm is developed to:

determine the optimal time to buy or sell a set of securities (within a set of parameters and according to various factors)
target or limit exposures to securities that exhibit the characteristics of the desired factors
assess and manage risk levels

This model is then vigorously stress-tested in different market environments to ensure that it performs in the way that it was programmed to.

Quant managers rely on their computer programs to varying degrees. Some use their models to form the optimal portfolio (as mandated by their investment strategy and risk profile) and then make the trades manually. Others will rely on the model to optimize the portfolio and automatically execute trades at set time intervals mandated by a rebalancing schedule.

Regardless of the extent to which the manager automates the investment process, the model is constantly reviewed in order to assess its ability to generate excess returns.

Can be a mixture of both

In fact, in the increasingly data-driven investment industry, computer modelling and algorithms are becoming table stakes in the pursuit of better portfolio returns. Which is why investment managers of various style and disciplines are looking to integrate them into their investment processes. Members of AGF’s Investment Team explain more in the Evolution of the money manager.

To better understand how your investments are managed, visit AGF.com or contact your financial advisor.

The commentaries contained herein are provided as a general source of information and should not be considered personal investment or tax advice. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or reliance on the information contained here.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

AGF Management Limited (“AGF”), a Canadian reporting issuer, is an independent firm composed of wholly owned globally diverse asset management firms. AGF’s investment management subsidiaries include AGF Investments Inc. (“AGFI”), AGF Investments America Inc. (“AGFA”), Highstreet Asset Management Inc. (“Highstreet”), AGF Investments LLC (formerly FFCM LLC) (“AGFUS”), AGF International Advisors Company Limited (“AGFIA”), AGF Asset Management (Asia) Limited (“AGF AM Asia”), Doherty & Associates Ltd. (“Doherty”) and Cypress Capital Management Ltd. (“CCM”). AGFI, Highstreet, Doherty and Cypress are registered as portfolio managers across various Canadian securities commissions, in addition to other Canadian registrations. AGFA and AGFUS are U.S. registered investment advisers. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. AGF investment management subsidiaries manage a variety of mandates composed of equity, fixed income and balanced assets.

^TM The ‘AGF’ logo and ® ‘Sound Choices’ are registered trademarks of AGF Management Limited and used under licence.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.