It can still be that simple, but finding the right asset among today’s vast array of investment possibilities is usually trickier, especially perhaps in equities where you can buy and sell shares in thousands of companies listed on stock markets around the world.
Consistently picking winners from a pool of candidates this large and complex involves dealing with massive amounts of information and research of a sophistication heretofore unknown in the world of finance.
Robust investment strategies
This is where the Quantitative Research Group (QRG) for Equities at BNP Paribas Asset Management comes in. Its objective is to design and develop increasingly robust investment strategies for quantitative and fundamental portfolio managers.
These solutions rely on quantitative techniques to help managers in three ways
- by enabling them to improve their equities investment performance
- to construct portfolios while integrating various investment constraints
- to better manage risk.
“Our job is to deliver solutions that help clients outperform the equity indexes both in specific regions, say Europe or the US, or globally,” says QRG’s senior researcher Benoît Bellone.
“This involves working closely with portfolio managers to determine what they’re seeking in terms of investment themes, performance, risk and a variety of other considerations. Then we get to work designing a final product, which usually involves a process of continuous improvement.”
Benoît Bellone explains that QRG Equities products can be either passive or active, which is to say either conservative or aggressive in terms of their performance ambitions, or tailor-made.
“Today’s investors have a growing list of requirements that must be considered,” says Benoît Bellone. One such constraint is known as the tracking error. This is a client’s degree of tolerance when it comes to deviating from a given equity index’s performance (3% below or above, for example).
Portfolio turnover, or the frequency with which fund managers tend to buy and sell equities, is another constraint since each stock transaction carries fees that can add up and affect overall performance.
Most clients also now wish to avoid investing in
- companies with poor environmental records
- those involved in controversial industrial sectors such as weapons, mining, fossil fuels, tobacco and palm oil
- those with significant social issues such as child labour, worker health and safety issues
- those with significant governance issues around conflicts of interest, oversight and transparency.
“More and more clients require that we build a variety of constraints into their solution,” says Benoît Bellone. “For example, it might happen that we are asked to design a product based on a conservative large-cap benchmark, but which outperforms that universe’s index only slightly while featuring a 50% lower carbon footprint. We can do that.”
With this type of investment customisation in mind, the QRG Equities group relies on BNP Paribas Asset Management’s proprietary methodology to classify some 12 000 companies and 200-odd countries in terms of environmental, social and governance (ESG) performance.
Sometimes the QRG Equities group is approached by fund managers with special needs. For example, in 2019, a request came in from fund managers specialised in value investing. This considers only 'value companies', which is to say shares in largely undervalued companies on which considerable profit might be made through spectacular recoveries.
The value fund managers wanted the team to develop a scoring system to detect 'value traps' - i.e. 'broken' companies that may misleadingly appear to be good value. How did QRG Equities proceed?
“We concocted a 'secret sauce' based on years of proprietary research,” says Benoît Bellone. In other words, the team selects different indicators which, when put together, raise the probability of identifying poor companies.
These indicators include measures of the quality of a company’s balance sheet, the volatility of its stock, certain gauges of financial leverage and accounting tricks that the company might be using to 'cook' its books. “With this tool in hand, our value fund managers can, in our view, significantly reduce their chances of buying a loser,” says Benoît.
The way ahead
Natural language processing (NLP), or transforming text into quantitative information, is yet another way the QRG Equities group is adding to the panoply of valuable investment tools available to fund managers.
Over the past two years, the team has developed a new NLP indicator that tracks the fundamental momentum of companies to determine whether their financial integrity is getting stronger or weaker. And as if that’s not enough, QRG Equities continues to research the NLP question, using new databases and new text mining strategies to improve their solution’s quality and performance.
“Ours is a never-ending task,” says Benoît Bellone. “There are and always will be new ways to improve equity investment performance. It’s up to us to find them.”
- Building a new investment paradigm
- Adding insights to investments with BNP Paribas Asset Management ESG scores
- Taking savings seriously
- No madness in this – quantitative – method
- AI and machine learning – new tools of an old trade
- Just what the doctor ordered
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.