Fundamental and Quantitative Investing Explained
Explore the different ways active investment approaches aim to capitalize on market inefficiencies and deliver better returns than a passive investment strategy.
You may be investing for retirement, a child’s education or other dreams. The “why” is personal to every investor. And so is the “how.”
Investors employing passive investment strategies seek to match an index's performance. Those using active strategies believe the financial markets are inefficient and it’s possible to beat the market—potentially generating returns above a market benchmark—by exploiting market inefficiencies.
Fundamental and quantitative investing are two popular methods that people use to identify the investments that they believe will maximize their returns over time.
Unlocking Market Inefficiencies
Market inefficiencies occur when investors disagree about a company's or industry's business prospects, and asset prices don't seem to accurately reflect their long-term potential.
Inefficiencies can also occur due to various non-rational factors. Fear and greed are commonly mentioned as reasons behind the crashes and bubbles that periodically upset financial markets.
Both fundamental and quantitative investors aim to capitalize on market inefficiency by identifying promising securities that may generate outstanding returns over time. But the way they go about it and the tools they use are different.
In general, quantitative investors view investing as a science and employ technology to remove emotions from the decision-making process, buying and selling securities based on specific metrics.
You could say fundamental investors see investing as more of an art, relying more on their deep research, experience and judgment.
Fundamental vs. Quantitative: A Breakdown
Fundamental Strategy
• Uses human insight into a security’s underlying financial standing and prospects to determine its attractiveness.
• Provides greater depth of analysis on a smaller opportunity set.
• Looks for compelling investment opportunities based on each security’s fundamentals and the investor’s own experience.
Quantitative Strategy
• Uses data-driven models to identify securities with specific characteristics or factors.
• Provides the opportunity to analyze a large opportunity set of securities.
• Aims to quickly build and maintain a portfolio of securities with desired characteristics and to avoid the personal emotions or biases of decision-making.
Combining Elements of Fundamental and Quantitative Investing
The finance industry is a leader in leveraging technology to synthesize large amounts of data, perform calculations quickly, identify trends and make data-driven predictions. Some portfolio managers have harnessed modern computing power to enhance the insights of their fundamental research and improve the efficiency of the portfolio construction process.
This combination enables investment teams to exploit small inefficiencies quickly that would be impractical to capture manually—potentially delivering excess returns with lower costs and greater consistency. Of course, investors must understand the trade-offs and align strategies with their objectives and risk tolerance.
American Century Disciplined Equity Strategies
The members of our Disciplined Equity team use quantitative and fundamental management techniques in a multistep process. The managers evaluate stocks based on an objective set of measures, which can include valuation, quality, growth and/or sentiment.
They then review the output of the quantitative model and consider other factors, such as economic events, corporate announcements, risk management, transaction costs and/or liquidity, to build a portfolio that they believe will strike a balance between risk and return.
Aim for Alpha With Fundamental and Quantitative Investment Management
Which is better, fundamental or quantitative active investing? There is no clear winner. Each approach seeks to uncover overlooked opportunities that passive strategies can’t capture and thereby pursue alpha—returns in excess of the market. They just go about it differently.
Every investment strategy also carries its own strengths and limitations and may excel in one market environment while underperforming in another. Rather than set quantitative and fundamental approaches against one another, consider how they might complement one another in a well-diversified portfolio.
Before investing, you’ll want to understand how a particular strategy is designed to help your money potentially work harder for you while staying aligned with your overall investment goals and broader financial plan.
Make Your Chosen Strategy Count
Too much cash on the sidelines may derail your goals.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
International investing involves special risks, such as political instability and currency fluctuations.
Diversification does not assure a profit nor does it protect against loss of principal.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.