The Quantitative Low Volatility U.S. Equity strategy is a diversified, actively-managed portfolio that seeks to provide significant long-term capital appreciation through investment in equity securities of U.S. corporations, but at a reduced level of risk as compared to traditional equity portfolios.
To achieve the strategy’s objectives, we use a fundamental quantitative investment process to build a portfolio that minimizes expected volatility, and maximizes expected risk-adjusted returns.
Strategy overview
- Quantitative low volatility approach with overall goal to maximize risk-adjusted returns by reducing overall volatility compared to traditional equities.
- Proprietary quantitative model with two-step optimization developed in-house.
- Focus on Stability, Profitability, and Quality factor characteristics in portfolio construction.
- Diverse and experienced team dedicated to proprietary research, including model enhancements, with an emphasis on continuous development.
Our approach
Investment philosophy and style
- The overall objective of our suite of Quantitative Low Volatility strategies is to build portfolios that minimize expected volatility and maximize expected risk-adjusted returns as measured by the Sharpe ratio.
- The core philosophy that underlies our quantitative equity strategies is a belief that quantitative-driven processes can respond swiftly and systematically to market inefficiencies.
- The team seeks to systematically validate, enhance, and implement fundamentally sound and economically relevant investment principles, while leveraging the advantages of quantitative investment processes.
Investment process
- The Quantitative Investments team’s process assesses securities using three security alpha factors derived from traditional fundamental investment principles:
- Stability: The Stability score is the most important of these three factors, and is a composite of seven measures (or signals), both technical and fundamental, which are better predictors of future share price risk than traditional measures such as beta.
- Profitability: Assesses a company’s ability to sustainably grow earnings, particularly for mature businesses. We include measures such as cash flow return on equity and EBIT margins.
- Quality: Quality means different things to different investors. We use this measure to assess a number of items that provide insight into management behavior and balance sheet strength, including the quality of earnings and sources of financing.
- This subset of factors was selected for their risk and return characteristics. For example, companies that score higher for Stability, Quality and Profitability tend to have both higher returns and lower risk. The same is true for companies that score lower on these factors: they exhibit both lower returns and lower risk.
- The other factors they consider – risk factors – are designed to assess individual company risk. Risk factors measure those characteristics of a stock that can impact returns, but where the direction and magnitude is unpredictable.
- Main objective: Build a portfolio that minimizes expected volatility and maximizes expected risk-adjusted returns.
Portfolio construction
- Portfolio construction is done through a two-stage optimization process, followed by a trade review before trade execution:
- First stage: The team builds a minimum variance portfolio using risk forecasts from the proprietary risk model.
- Second stage: The team uses both the risk model and alpha forecasts to build the portfolio with the highest forecast risk-adjusted returns (subject to a tracking error constraint relative to the portfolio created in the first optimization).
- The optimization’s inputs are the team’s alpha and risk forecasts, quantified by the team’s proprietary factor model, in addition to constraints and transaction costs.
- The team scores companies based on their style characteristics (stability, quality, and profitability), and then combines them into a portfolio with a combination of these factors.
- The team is cognizant that other unintended exposures within the portfolio could potentially overwhelm the positive contributions from the factors that are emphasized. Therefore, the team will also quantify and neutralize the impact of risk factors – such as value, currency, beta, or market cap size – as much as possible within the portfolio construction process.