Equity Valuation and Portfolio Management

CURRENT TRENDS

Let's look at some recent trends in the quantitative investment industry.

Many quantitative equity investors are looking for additional sources of alpha by using alternative data sources to help select stocks. One notable source is industry-specific data (e.g., banking, airlines, and retail). Additionally, quantitative investors are turning to the Internet to better understand news flows for companies through Web-based search engines. Furthermore, quantitative investors are using more conditioning models. Conditioning occurs when two characteristics are combined together rather than choosing them side by side in a stock selection model. Traditional models would look for companies that have either attractive margins or growth. With conditioning models, companies that have both attractive margins and growth are sought.

Dynamic modeling is gaining a renewed popularity. It consists of timing characteristics, determining when they should enter or leave a stock selection model based on business cycle analysis, technical market indicators, or other information. For instance, during recessionary periods, a quantitative investor may want companies with strong profitability, while in expansionary periods companies with good growth prospects are sought. A stock selection model would contain profitability when the economy is entering a recession, and then include the growth characteristic once it felt that the economy is moving into an expansionary period. This is an example ...