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An optimized, risk-managed approach to quant investing

If you’re reading this, you’re interested in learning and more about and using quantitative stock portfolios in your investment arsenal. And hopefully you’re familiar with the basics of this type of quant investing. The basic principle is to take a quantitative and portfolio approach to picking stocks . For an introduction to what this type of quantitative investing is see the post  here . And here is a  post  on getting started with quant investing and how you can get started if you’d like to try to do it for yourself. But if you find doing this on your own daunting, and want some help, read on…

Another way to look at quantitative investing is that it is an algorithmic (rules based) approach to choosing individual stocks and constructing portfolios based on them. What are the benefits of a quantitative approach to stock picking ? Here are just a few:

  1. Higher absolute returns
  2. Higher risk-adjusted returns
  3. Less work
  4. Less noise. Eliminates many behavioral biases that cause investors to fail.
  5. Broad diversification

Just like Tactical Asset Allocation (TAA) strategies, that use a rules based approach to choosing asset classes, quantitative stock investing uses an analogous approach for individual stocks. But what rules? Similar to the TAA approach, we want to use time-tested methods to generating above market returns and managing risk. These are the famous factors you’ve probably read about: value, momentum, company size, quality, profitability , etc. There are literally thousands of quantitative systems and methods used for picking stocks. But by focusing on a limited number of strategies , based on proven factors , and putting them together carefully in portfolios it is possible to generate great risk-adjusted returns over the long haul.

What we’re offering with QuantPulse  is to provide a  select number of proven quantitative stock strategies, apply proven risk management techniques to them, and put them together in portfolios . Which strategies? I’ve blogged about many of these strategies for years. Here is a list of basic ones I talk about all the time with a link to a post describing each strategy in detail.

These are all very powerful strategies. They are based on factors that have stood the test of time like momentum, value, size, quality, and profitability  that have provided differentiated and persistent returns over long periods of time. Performance statistics for these strategies are shown in the table below. There is performance data on these strategies going back to 1969 from What Works On Wall Street. The stats post 2009 are out of sample and are my implementations of these strategies.

 

And for the Volatility Curve Models:

 

Unfortunately, most investors have found that it is not that easy to implement these strategies on their own. I’ve tried to help investors for years to implement quant strategies with tutorial posts, but readers have still struggled to implement the strategies on their own. Partly this is because they require access to specialized (and relatively costly) investment software and the capability to do some programing. And that is the main reason for QuantPulse . Basically, I do the work of creating, running, and tracking the strategies and you focus on executing the strategies. There are literally thousands of quantitative strategies for stocks. It can be quite overwhelming. The value in QuantPulse  is that I curate and select from many strategies, and only provide a handful of proven ones for you to use. But I also take it a few steps further.

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** During registration you’ll be able to choose subscribing to all the strategies or individual strategies.

Most quant services just provide a litany of strategies from various ‘gurus’ with great historical performance and then just give you the list of stocks. That’s fine, but in my experience, it is not enough. It wasn’t for me. First, many quant strategies with fantastic historical returns are simply not investable for most people. For example, deep value strategies with great returns but 60% drawdowns simply will not work for most people. Second, to truly make an impact on your investing results the quant stocks and strategies need to be put together into an integrated portfolio approach. Investing in a few stocks from a quant screen is not going to make a big difference to your overall portfolio. In order for quant investing to be tolerable for most investors and for it to make a difference to your overall portfolio we apply risk management rules to every strategy and we help you put the strategies together into portfolios. The table below shows the results of applying a simple risk-management tool ( the SPY-UI indicator ) to these strategies. Compare the Max DD in the table below to those from a pure buy and hold approach above. In QuantPulse  we apply a better risk management method, SPY-COMP, from our Economic Pulse Newsletter . Results using SPY-COMP from the newsletter would be better than results below.

The last key feature of the QuantPulse  approach, is that these strategies work even better when they are put in a portfolio. In general, strategies perform differently in different market environments. Sometimes certain strategies are in favor and at other times they go out of favor. They can also be combined with a risk-off asset like bonds to further reduce volatility and optimize overall portfolio performance. For example, one of my favorite combinations is putting together the Large SHY, Consumer Staples, Utilities, and Enhanced Value Strategies (70% equally split). Then add a layer of bonds to reduce volatility (30% IEF allocation). Then re-balance annually. The example below is the performance of such a combination from 1999 to 2017. I benchmarked this ‘All Value’ Quant Portfolio vs the 60/40 classic portfolio.

That is a powerful combination. And it’s just one of many. For example, the bond allocation can be dialed up to increase returns while targeting a certain level of drawdowns. That’s just a sample of what can be done with a portfolio level approach to quant investing.

The initial launch of QuantPulse  includes the following features:

  • The 8 quant stock strategies listed above based on proven factors and tested over many market cycles
  • 25 stock and 10 stock versions updated on a monthly basis, each tracked as a separate portfolio and a continuing portfolio
  • Exclusive strategies for subscribers (I already have 2 ready to go, a low vol and a Greenblatt “Magic Formula” portfolio)
  • Use of my SPY-COMP system for risk management from the Economic Pulse Newsletter
  • A portfolio approach to the quant strategies – combinations of quant portfolios for diversification and better risk-adjusted performance

To implement this level of features on your own you would need to spend over $120/month. Even simple, basic, stock screening tools will run you $16 to $25/month. Mid-level platforms cost around $50/month, have no risk management, have no portfolio construction advice, and you still do all the work . QuantPulse  provides a total solution that allows you to make quant investing a key part of your investment strategy. If you’re interested in the benefits of a quantitative approach to stock picking that I described at the outset then QuantPulse  is for you.

Pricing: $40/month. You can also subscribe to the most strategies individually (not all). Each strategy individually is $15/month (except for the Microcap strategy which is $25/month and the VOL Curve Strategies which are not available individually).

If you are already a subscriber to my Economic Pulse Newsletter you will get a discount for the QuantPulse  service.

Pricing for Economic Pulse subscribers: $25/month  (see Econ Pulse Member Home Page for Discount Code). If you’re not a member of Econ Pulse yet, but are interested in both, start by signing up to Econ Pulse, grab your coupon code, and then register for QuantPulse.

 

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** During registration you’ll be able to choose subscribing to all the strategies or individual strategies.

 

A personal note on why I use both TAA and Quant approaches to investing.

Quantitative strategies like these changed the way I invest. I believe they represent a fundamentally better way to invest in individual stocks. I have used these strategies for my own portfolio since 2012. The balance of my equity portfolio is in the TAA strategies that are in the Economic Pulse Newsletter . So, why do I use both?

For many investors, the simplicity and effectiveness of TAA strategies is more than enough. However, the addition of quant stock strategies to a diversified portfolio can improve returns, improve base rates , increase diversification, and still keep risk in check . For example, below is an example of the ‘All Value Quant portfolio from above, with no bonds, and adding an equal weight allocation to the simple SPY-UI. (I can’t simulate the real SPY-COMP in Portfolio123)

As we should expect we get higher returns by eliminating the bond component but still half the drawdowns of a 60/40 portfolio and the portfolio is even less correlated to the 60/40 portfolio than before. Finally, what is really hidden here is that the combination of TAA strategies and quant strategies in a portfolio increases the base rate of the total portfolio and can provide more consistent returns . Both TAA and Quant strategies on their own have base rates in the high 70% range. When combined in a portfolio the base rate of the combined approach increases to the high 80% range. If we compare the average returns from the quant portfolios to the returns of various TAA portfolios you can also get an idea of what each type of strategy has to offer. Below are the performance of the TAA strategies I use to compare to the ones I use in the Economic Pulse Newsletter but this time I added the average quant portfolios stats.

As you can see from the table, quant strategies can give you higher performance and more consistent performance (compare 5yr, 10yr, full period returns). TAA portfolios can at best give you what a certain asset class will achieve and no more. The downsides? higher turnover vs TAA strategies (but not vs some other TAA strategies), higher drawdowns, and some more work. Personally, I think it is worth the trade off. But only you can decide.

When the biggest challenge to any investment system is your ability to stick with it, high base rates and consistency are the biggest insurance you can have against abandoning a particular strategy .

I hope you’ll give quantitative stock investing a try. I think you’ll be pleasantly surprised with the methodology and results over the long term.

 

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** During registration you’ll be able to choose subscribing to all the strategies or individual strategies.