“The democratization of information has made it much harder for active management,” Larry Fink, Black Rock’s chief executive officer, told the New York Times back in March 2017.
“We have to change the ecosystem, which means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies.” Mr. Fink made a reference that a market shift in his firm’s investment strategy would see some $30 billion in assets (about 11 percent of BlackRock’s active equity funds) designated for a fundamental stock-picking method also incorporate a quantitative approach based on modelling and algorithms. The firm was adopting an investing a strategy or more so a combination of two distinct investment strategies that came to be known as quantamental investing.
The term quantamental is, in fact, a portmanteau of quantitative and fundamental and thus refers to an investment strategy that involves combining quantitative and fundamental approaches to investing, with the aim of improving returns. This combination is often regarded as a melding of man and machine: the investor harnesses the scale and power of data and blends it with the benefits of human insight in order to unearth winning investment strategies. When these two approaches of investing are merged, computer power with human insight, we can hope by adopting these quantamental investing can deliver superior returns from its approaches. Fundamental investing means the traditional bottom up method of picking individual stocks based on the quantity of their fundamentals like their earnings and market share. There can be exploitation and mispricing to generate alpha value by identifying securities with prices that are not reflective of the true market value of their companies by the fundamental investors. Alpha means the excess return an investment in relation to the return of the market or the bench mark index. The likes of Warren Buffett and Charlie Munger of Berkshire Hathaway represent the best proponents of this approach, using detailed analysis of company balance sheets, coupled with sound judgment and experience, to consistently generate alpha.
But there are doubts over whether the fundamental investors can efficiently adapt to these challenging disciplines like switching to quantamental investing is likely to involve sizeable structural and organizational changes within a fundamental investment firm. It will require change in the hiring policy to employ more personnel with quantitative research and development skills, in addition to significantly upgrading internal systems to cope with the strain on resources imposed by the big-data analytics process. And these changes are linked with a substantial dollar investment. Asset managers can employ a three-step process in order to make the transition towards a more quantamental investing style smoothly.
- The firm’s leadership must ensure that the organizational structure is aligned with a measured approach to its data strategy.
- The firm should hire an effective head of quantamental investing strategies to lead the effort whilst also ensuring the firm can accommodate new personnel with different skills.
- Invest in change management to bridge the divide between traditional approaches and the heightened reliance on analytics.
On the other hand behavioral and cultural change may seem like an arduous challenge. And it is appearing to be very necessary. With technology playing a consistently more influential role in the asset-management process, and with traditional asset managers being consistently outperformed by passive strategies and quant investors, it has become imperative that fund managers adapt to this new paradigm. If they can successfully make the transition towards a quantamental strategy, it would seem that traditional asset managers will have a better chance of surviving, evolving and ultimately thriving in this new world.
