Oil and water do not mix!
They are said to be immiscible. You can temporarily mix the two if you put the two liquids in one container and give it a rather vigorous shake. However, after a while, the two will once again separate.
Fundamental and quant investors are also immiscible. Just like their liquid analogues, these two groups of professionals are in some ways similar but mostly different and don’t mix well. That vigorous shake, in investment organizational terms, can be either a strong incentive to collaborate, perhaps combined with a structure or a process which makes the two strongly interdependent. Over the intermediate to long term, however, nature will prevail and two groups come apart and/or one of them disappears.
The question you might ask yourself is why does that happen and how can we overcome that?
There are a number of reasons the two groups of investors don’t mix. People working in these companies usually come from different educational backgrounds (quants learn math and engineering and take a top-down approach to investment decision making that starts with a vast quantity of market data; fundamental investors (aka quals) study economics and learn a bottom-up investment process that seeks to identify the future value of a single stock). Quants and quals have different personalities, speak different professional languages (acronyms), look at the world in a different way and use completely different processes. The outcome of their work, their portfolios, look very different and (perhaps most importantly) clients will put them in completely separate boxes and treat them differently.
If you were to strike up a watercooler conversation about their positioning, they would also be quite different. A fundamental investor is very likely to know why a company exists, how it makes money, have an outlook for its business and industry (presumably different from what is already priced into the shares), have had numerous meetings with its management team, competition, certain large customers and regulators, where relevant. A quantitative investor will frequently not know much beyond the ticker of the company but instead be well aware of the types of factors the portfolio is exposed to and very little beyond that. Don’t be surprised if they don’t know what the company actually does or whether it’s expected to be free cash flow positive over the next few years.
Now, suppose that conversation is not by the watercooler but after a few drinks, following a period of bad performance in client portfolios. Necessitating some explanation and attribution, fundamental investors would say quants are a bunch of geeks who don’t understand how the world works; quants would describe fundamentalists are a bunch of overpaid idiots.
An interdisciplinary approach in bringing quantitative tools to fundamental management is a tremendous opportunity. Such a differentiated approach allows for delivery of superior returns which are not correlated with quantitative strategies. At the same time, the process is highly repeatable and scalable, does not have behavioural biases, and is transparent.
Using an innovative, differentiated approach means we will have to continue explaining to our potential clients about how this process ends up giving them potential upside to their portfolios and investment returns. So, just like understanding the chemical properties of an emulsifier in keeping oil and water together, it takes a bit of patience and reading up to understand how this process can bring the best of both worlds from fundamental and quant.
