Triguboff calls for ‘quant/qual’ marriage

Investment processes have traditionally gravitated toward either quantitative or qualitative analyses, with the two disciplines rarely being combined. But MIR Investment Management managing director Michael Triguboff believes both drivers can be used on an equal footing basis to enhance investment methodologies.

“Both the ‘quant’ and the ‘qual’ processes can be alpha additive. Neither is mutually exclusive of the other,” Triguboff said at a gathering held by fund manager Advance last week.

Quantitative and qualitative methods have a common objective, and that is to maximise alpha. However, each approaches the task in a totally different manner, encouraging the belief that one has to be used in favour of the other.

“‘Quants’ believe their value add is using proprietary screens on public databases. The qualitative analysts, on the other hand, believe their value add is actually speaking to management and identifying proprietary data,” Triguboff explained.

In order to use both techniques effectively, the strengths and weaknesses of each must first be understood according to Triguboff. He said this would allow the investor to exploit the strengths of each method to mitigate the weaknesses of the other.

He added the advantages of quantitative processes include having a greater breadth of analysis, a greater degree of discipline due to their mechanical nature, an ability to be back tested with simulated data, a lower tendency for behavioural biases, and a diminished capacity for key-man risk.

The strong points of qualitative practice, according to the MIR managing director, include the ability to incorporate stock-specific information, a greater depth of analysis due to the need to establish the critical factors of a company’s management capabilities, and greater flexibility that allows non-quantifiable elements to be taken into account.

As such, combining the two techniques will enable a more comprehensive approach to stock selection, and will help investors avoid the pitfalls that stem from being too reliant on just one of the methods. The pitfalls of relying only on quantitative approaches include incorporating too much portfolio diversification, which results in alpha being diversified away, while the pitfalls of relying only on qualitative processes include benchmark hugging, where investors gravitate towards the more popular stocks in the market.

However, Triguboff warned the disciplines must be combined with an equal weighting in order to achieve significant enhancements to investment processes.

“Unless they are combined at an inception where both sides own the process, one side will cannibalise the other. It will become a horse race where ‘I, Mr Quant, can add more to the portfolio than you, Mr. Qual’. That is an issue which needs to be managed through discipline to treat them as a team,” Triguboff said.