By Jessica Wee
In the investment circle, everyone is comparing losses this year instead of profits. Those who invested in traditional equities saw their portfolio decline and those who invested in a relatively new asset class, Bitcoin – saw incredible performance followed by a 2021 reversal and a complete meltdown in 2022. Alongside with crypto, meme stocks peaked in 2021 and suffered a mega drop.
In the last decade, five Mega-Tech stocks were on fire, dominating the S&P 500 and Tech indexes, and the amount of wealth created during the period was astronomical. Retail investors wanted in on the action and dove head first into get-rich-quick meme stocks, cryptocurrencies, and leveraged ETFs. As reported by CNBC,
“America’s stock wealth nearly doubled, from $22 trillion to $42 trillion. The bulk of that wealth went to those at the top, since the wealthiest 10% of Americans own 89% of individually held stocks, according to the Federal Reserve.”
The law of gravity as dictated by Isaac Newton say “ what goes up must come down’. Investors that were once flying high have now fallen fast, and hard. This past year with high market volatility, meme-stock mania, and FOMO fear of missing out have cost investors trillions.
Between market declines, unprofitable spec techs, crypto scams, and the fallout from FTX, headwinds to consumer spending and economic growth could result in a loss to real GDP growth by nearly 0.2%, as highlighted by Mark Zandi, chief economist of Moody’s Analytics.
The swiftness of the FTX failure is unprecedented, and the 64% decline in Bitcoin this year has many investors weak at their knees. Even the popular Technology Select Sector SPDR ETF is down 24% YTD.
With this in mind, investing does not have to be a game of chance, and it does not have to be ruled by emotion or a charismatic influencer that was a great athlete or incredible singer; an individual’s superior performance on the football field or a musical stage does not mean they are a world-class investor.
The best investors are well-informed, and being informed does not require much time or resources. Investors can perform their own investment research, and with the right tools, they can do it fairly quickly.
One tool that can help minimize portfolio losses and make well-informed investment decisions is gaining momentum. It is called quantitative investing aka quant investing aka factor investing. This method is mostly used by global hedge funds and institutional investors, is now start to be offered to the masses.
How does Quant strategy work?
By deploying advanced mathematical modelling, the computer system picks stocks purely based on comparing their financial metrics to the same metric average or median for the sector, removing the most primal human element – fear and emotion.
The removal of emotion allows investors to make decisions based on a data-driven assessment. Not only does quant investing highlight the best stocks based on powerful computer processing, this strategy also uses an algorithm to pick stocks using five popular investment characteristics – Valuation, Growth, Profitability, Momentum, and EPS Revisions. Investors can instantly identify the strength or weakness of each metric compared to the sector based on the allocated A+ to F grades.
Measuring a stock’s metrics and comparing it to other stocks in the same sector is incredibly powerful for making smart investment decisions.
This year alone in the Malaysian market has seen a few banks adopting quantitative technologies:
- Maybank Asset Management Sdn Bhd – Maybank Asia Mixed Assets-I, a retail fund that uses data science and AI-powered quant investing technology to complement the work of fund managers. Its target fund is Maybank Asian Growth and Income-I, managed by Maybank Asset Management Singapore.
- HSBC Amanah Malaysia launched the AI-powered US Equity 5 Index (AiPEX5). The structured product uses IBM Watson, an AI product for businesses, to pick up data from millions of sources, turn it into insights and select the stocks that go into the index every month.
- Kenanga Investors Bhd went into this area by launching its first AI-powered wholesale quant fund in 2017, which feeds into the TCM Global Index Fund managed by Singapore-based Taaffeite Capital Management.
While quant investing, which uses historical data, is not a foolproof predictor of the future and does not account for macroeconomics and geopolitical factors, quant risk management through systematic styles is a proven advantageous technique which every investor should consider hereon.