Quant funds have delivered outstanding results and therefore enjoyed increasing popularity among the investors in recent years. Facing with the new competitive landscape, as an active fundamental manager, we have been exploring ways to combine the advantages of active fundamental as well as quant research.
The strength of active fundamental strategy is via in-depth research on listed companies, the investment logic is easy to explain and be understood by the investors. The weaknesses are limitation on the number of companies one can perform in-depth research and human judgement error does exist. These two weaknesses are actually the strengths of the quant strategy, which can easily extend full China equity market coverage over 5000 stocks and effectively reduce subjective misjudgment.
The effective investment approach is always evolving, and in order to keep up, we must evolve faster than our peers. From momentum trading, to fundamental analysis, to studying behavioral biases, to quant methodology, every evolution of investment approach was driven by market changes. We observed the market changes, and have been learning and exploring “quandamental” approach over the past three years.
It is not easy for active fundamental manager to transform to the quantitative way. The team’s knowledge base, research method and investment framework all need to be transformed. It is a test and challenge to any investment team’s learning ability. It is likely to fail if the transformation direction is unclear, the determination is half-hearted or the method is wrong.
Firstly, the investment team must equip itself with new knowledge. We encouraged our existing investment team members to study quant method and also added new quant analyst. Our investment team is young and learns fast. They managed to transform quickly.
Secondly, the investment method must be adjusted. We face strong competitors in both active fundamental and quant space. In order to win, we must have differentiated strategy. In the past, we generated alpha and avoided crowded trades by focusing on low-valuation blue-chip stocks strategy. Now, we must also think of a unique and effective way to reap alpha in the quant arena.
“Quandamental” is the right way to go in our opinion and it allows us to utilize our deep experience as a successful active fundamental manager. Both fundamental and quant have their respective advantages. Quant strategy has an extensive coverage and can uncover investment opportunities via back-testing and empirical-testing, whereas fundamental strategy goes deep in individual stock and can explain the investment logic easily. There are not many “quandamental” managers in the market and it is worth exploring. We developed a new way in stock selection – quant model will be used in initial screening, and fundamental analysis will be utilized in the further selection, taking advantage of both methods.
We will start with low-frequency fundamental quant and only invest based on explainable fundamental logic. With the expansion of quant funds’ AUM in the market, high-frequency quant arena is currently highly crowded. Even the top-tier quant funds have introduced some form of low-frequency fundamental strategy as an alpha extension. Fundamental quant strategy replies both on investment logic and quant factor, and it will be an easy way for us to enter into.
The new “quandamental” strategy is gradually being introduced and applied to our existing products. Since 2022, we took opportunity of market volatility and increased the growth stocks exposure using our “quandamental” method in our existing products. We will increase such exposure gradually.
We are also launching “quandamental” new products. We launched Minority Growth Fund in April this year, co-invested by the PM and the investment team. Together with a few other new products, we will launch more quant-featured products to a wider audience once the internal test has completed.
Apart from the “quandamental” evolution mentioned above, we also extended our research ability to the Convertible Bond and Property High Yield Bond market over the past two years. The Convertible Bond is a complement to our low-risk strategy while the Property High Yield Bond is a natural extension of our in-depth coverage on property stocks. We expanded our product lists in order to offer our investors more choices to suit different needs and preferences.
The performance was at low period in past two years, but we never give up, instead, constantly reflecting and trying to improve. The market has been changing, and we need to evolve accordingly. Learn from the leading investment method and combined with our own experience and advantage to form an effective and differentiated strategy. Keep in this way certainly will prevail in the long competition ahead.