This is a sponsored advertorial from Federated Hermes.

Author: Daniel Mahr, CFA, senior vice president, head of MDT Group

Advances in computing have transformed quant investing. 

Once academic, quant now drives strategies like Federated Hermes MDT US Equity, though past failures bred scepticism.

We believe today’s quant is fundamentally different. Crises such as 2007’s “quant quake” and 2008’s Global Financial Crisis exposed risks of leverage and concentration. Today’s strategies diversify across multiple versions of factors like value, size, and momentum.

Behavioural factors now complement traditional inefficiencies, and recent volatility hasn’t sparked quant crises — evidence that lessons were learned.

Data! Data! Data!

Consider data: terabytes now fit in your pocket, and storage costs have plummeted. Since Clive Humby’s 2006 declaration that “data is the new oil,” digitisation has made data easier to collect and more central to the economy. Traditional datasets remain, but we now tap into deep, novel sources, such as real-time credit card transactions or satellite images of parking lots worldwide.

If data fuels quant strategies, we live in an age of superabundance.

Superhuman insight

Yet data alone is not enough. Interpretation is key, and here, machine learning and advanced analytics shine. These technologies extract insights beyond human capability. Machines can count cars globally and update forecasts daily. Real-time data, like truck movements from factories, offers unbiased insights that company statements may not.

A fusion of data and understanding

MDT Advisers uses machine learning to process vast data and identify equity opportunities objectively. The team continually refines tools and ensures transparency in decision-making. This approach excels when combined with human insight into how factors drive alpha.

One example is MDT’s incorporation of the ‘economic moats’ factor into our modelling — an idea linked to Warren Buffett, focusing on companies with advantages that protect profitability against encroaching competition. Examples include strong brands such as  Coca-Cola or patents in pharmaceuticals.

Creating lasting value

Share prices often fail to reflect the benefits of wide economic moats because accounting treats moat-building costs as current expenses rather than long-term investments. This misclassification can make strategic spending look like value destruction, even though it often enhances profitability for years.

To capture this, MDT aggregates moat-related data across industries to create an Industry Moat factor, smoothing inconsistencies in company reporting. This factor is most effective for identifying out-of-favour stocks. Those with strong moats tend to rebound better than firms in commoditised sectors like basic goods. Wide-moat industries such as software, retail, and pharmaceuticals typically show stronger recovery potential.

We believe the Industry Moat factor works particularly well within our investment process. Companies with high market sentiment, those that are beating earnings estimates quarter after quarter, or those with other strong quality characteristics, are typically already well appreciated by the market. So, the presence or lack of a wide economic moat tends not to significantly impact expected returns for those companies.

Holding competitors at bay

However, even successful companies can fall out of favour for various reasons, some within their control, others beyond it. An established moat can help out-of-favour companies keep competitors at bay while re-establishing operating results. Thus, we have begun using this factor to identify companies that may be more likely to overcome negative sentiment/momentum and return to in-favour status, and avoid companies whose stock prices continue to tailspin. We believe it helps us identify, to paraphrase Buffett, wonderful companies at wonderful prices.

Avenues to risk management

Although factors such as Industry Moat play an important role in discovering alpha, it’s important to stress that they are not the be-all and end-all of our ‘new quant’ approach to investing. We do not have to have a view on which sectors or factors will outperform at any given time. Thus, we set sector limits and use risk models to avoid unintended risk exposures, focusing instead on stock selection to generate excess return potential.

Leveraging our computer capabilities, we update our stock forecasts – predicted alpha – each day for the entire universe of stocks. However, before we place trades, our team will review these to ensure we incorporate the most recent information. In addition, we review portfolio positioning daily, enabling us to adapt our strategies to take advantage of timely market opportunities. This active approach is designed to help ensure our clients’ portfolios always reflect our best, most current ideas.

Federated Hermes MDT US Equity

Federated Hermes MDT Advisers apply an active, systematic investment approach which seeks to generate excess returns by leveraging sophisticated modelling to identify forecasting techniques tailored to different company types. The recently launched MDT US Equity Fund in UCITS format builds on MDT’s 30-year track record of successfully managing the same quantitative US equity strategy through various market cycles. Targeting long-term capital appreciation, the fund invests across all market caps and styles within the Russell 3000, using MDT’s proprietary model to enable disciplined stock selection, enhance returns, and manage risk.

Visit www.federatedhermes.com/mdt.

 

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Disclaimer

For professional investors only. Capital at risk.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

Issued and approved by Hermes Investment Management Limited (“HIML”) , as distributor, which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. 

This is a sponsored advertorial from Federated Hermes.