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A meeting of minds: fusing fundamental and systematic analyses

For decades, investment managers have been largely split into two groups: fundamental investors and quantitative investors. And so, it is not surprising that we are often asked to choose a side. But it’s not that simple: we use a unique style, marrying a systematic approach, which minimises behaviour biases, with a fundamental analysis.

In our latest edition of Equitorial, we explain why we adopt an integrated investment approach and how it shapes our research agenda.

More Insights

Going mainstream: how ESG investing has evolved in the past six years
We examine how ESG investing has powered into the mainstream since 2014.
Global Equity ESG marks six-year anniversary
Today, we look back on six years of Global Equity ESG.
ESG investing: a social uprising
Our seminal paper, ESG investing: does it just make you feel good, or is it actually good for your portfolio?, published in 2014, demonstrated the performance benefits of integrating environmental, social and governance (ESG) factors into investment decisions. 
Are ethics really the only way?
Inflows into ethical funds topped £164m in July, up from £101m the previous month, according to the Investment Association Monthly Statistics for July 2018 from The Investment Association. Lewis Grant, Global Equities Senior Portfolio Manager at Hermes Investment Management, questions what ‘ethical investing’ really means, its implications and dispels investors’ common misconceptions. Let’s start at the very beginning When deciding whether to shift to an ethical investment portfolio, investors first need to go back to basics and set a clear definition of what they constitute as ‘ethical’. Since there is no universal definition, it can be surprising how much variation there is between investors. Exclusion or ‘negative screening’ perhaps offers investors the most direct approach to aligning their money with their morals. It is the oldest ethical investment method, and it’s easy to see why. Carving out entire sectors, companies or countries from a portfolio offers a relatively simple and transparent way for investors to express their particular ethical views and removes subjectivity.
Avoiding the hype
Market behaviour can be extremely erratic which can create a huge amount of uncertainty when predicting the future. In this insight, Lewis Grant, Global Equities Senior Portfolio Manager at Hermes Investment Management, explains why he therefore favours a consistent, boring approach over one that is fuelled by sentiment and hype. Excitement in investment is rarely a good thing. It can create hype which in turn can lead to irrational behaviour. If we take Bitcoin as an example, hype around investment in the cryptocurrency drove the asset class to grow at a phenomenal rate and for a while, this sentiment-led growth may have left investors feeling excited about potential returns. Price momentum can act as an incredibly effective investment signal but it can also be a dangerous one. We believe it is important to remain emotionally unbiased as euphoria should not be the goal of investing. That is not to say such hyper-growth investments need to be avoided altogether, but instead understood in a risk controlled portfolio and as part of a disciplined, diversified approach.
The Alpha Model: laying the path to consistent returns
A mix of geopolitical stresses, political instability, monetary policy tightening and, more recently, global trade tensions, have dominated international news flow – and impacted equity markets – in the last 12 months. Amid such volatility, our all-weather approach enabled us to focus on time-tested company fundamentals. Our proprietary Alpha Model assesses a company’s long-term prospects, by identifying those with the most attractive combination of fundamental characteristics or “factors”. It is then used to create a portfolio that aims to generate consistent, positive relative returns regardless of market direction or the wider geopolitical environment. In this issue of Equitorial, we explain how our model-driven fundamental analysis has generated consistent alpha during a 12-month period of heightened volatility. Defining factor investing For Hermes Global Equities, consistency is key. We believe that the best way to generate superior consistent returns is to apply a systematic approach, which minimises behavioural biases, with disciplined subjective analysis. To do so, we cannot simply categorise ourselves as value, growth, or indeed, quality investors. Such style portfolios can deliver excess returns to the patient investor over the long term, but by definition no form of style investing works consistently. For this reason, we classify our investing style as ‘core’.