Listed-equity
Quantamental Investing Methodology & Process for Listed-equity Portfolios
We use Fundamental, Quantitative, and Technical analyses to build targeted equity porfolios.
Quantamental Investing
Investment Methodology
We view equity as a continuous spectrum starting from large-caps, followed by mid-caps, small-caps, micro-caps, and nano-caps, to mature funded companies and early-stage companies.
A Quantamental Investing approach which uses fundamental, quantitative, and technical analyses, allows us to construct portfolios across this spectrum. While public markets use more quantitative inputs because of the easily available data, private markets still depend more on fundamental reasoning. Both of these markets rely on technical inputs for timing.
More importantly, a quantamental approach due to its nature of mixing narratives and numbers, blends the experience and insights of humans with the raw processing power of machines.
Quantamental Listed-Equity
Fundamental Analysis
The human capabilities of reasoning and financial data of companies are used to arrive at the fair value of a business in comparison to its actual value. We use financial statements, management guidance, macroeconomic setup, etc. to estimate the future performance of a business.
Quantitative Analysis
We use statistical tools to find and exploit anomalies in the markets which are in the form of Factors (momentum, size, volatility, quality, etc) or Statistical Arbitrages (correlations, mean-reversions, etc.). Models showing promising results over historical data are converted into algorithms for trading and investing.
Technical Analysis
Technical Investing relies on time-based price patterns considered over sliced timeframes (like 5 minutes, 15 minutes, 1 hour, 1 day, 1 week, and so on). We plot prices against time and predict price action by studying patterns visible to the trained eye or recognized by a machine. We use technical analysis to time entries and exits.
The QVGS Framework
Investment Process
A Quantamental Investing methodology comes down to designing effective strategies that are systematic in operation and each focused on a particular solution only. We focus on 3 specific solutions (styles of investing):
- Value
- Growth
- Sentiment
Each of these styles of investing has different risk and reward curves when applied to different sets of investment universes. Investment universes can be defined using market cap (such as large, mid, small, micro, multi, or all cap) or even across geographies (such as India-equity or U.S.-equity).
Each of the styles of investing crossed with the appropriate universe yields an investment strategy that is run as a systematic process governed by tactical management, stock selection, position sizing and timing algorithms of the QVGS (Quantamental Value Growth Sentiment) Framework.
Quantamental Construction & Management
The 3 Processes
At Modulor Capital, we run QVGS Framework’s 3 processes to create and operate portfolios. These are:
- The Tactical Management process for timing the markets,
- The 3 Flag process for rejecting, ranking, and selecting securities, and
- The Risk Management process to optimize exposure.
The processes are run like clockwork in 5 stages on a weekly, monthly, and quarterly basis.
The 5 Stages
Tactical Stage
At this stage we determine whether to take up the risks of the market or seek the safety of alternate assets. This is done independently using Value, Growth or Sentiment market-cycle algorithms.
Red-Flag Stage
Red-flag stage invoves rejecting "known bad opportunities" to trim investment universe. Rejection parameters are chosen depending on the investment style (Value, Growth, or Sentiment) and are fundamental/ quantitative heavy.
Yellow-Flag Stage
The stocks in the qualified universe are assessed on multiple quantitative factors specific to the investment style of the strategy. The composite score is used to generate a rank list bucketed into quartiles, pentiles or deciles.
Green-Flag Stage
Ranking securites alone does not ensure efficient deployment of captital to generate alpha. In this stage we select securites exhibiting specific technical price patterns or time their exits. Both technical and quantiative components are significant here.
Risk-Management Stage
All stages including tactical as well as red, yellow and green flags are combined to express the confidence for taking posuition in a security. The combined scores are used to position-size each trade dynamically.
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