How Asset Managers Use Fundamental Research

In the fast-paced world of finance, the quest for superior returns often hinges on the ability to see beyond the numbers.

Fundamental research provides the deep, nuanced analysis that can uncover undervalued gems in a sea of market noise.

This approach empowers asset managers to build portfolios that are not only profitable but also resilient to economic shifts.

Understanding the Core of Fundamental Research

At its heart, fundamental research involves a meticulous examination of companies, economies, and markets.

It focuses on qualitative factors like management quality and industry trends, combined with quantitative data such as financial statements.

This dual approach helps identify opportunities that others might overlook.

Asset managers integrate this research into every stage of their work, from initial screening to ongoing risk management.

By doing so, they aim to achieve consistent, long-term growth for their clients.

A robust research framework is essential for effective asset management.

It typically involves multiple steps to ensure thoroughness and objectivity.

Screening criteria set minimum thresholds, such as a firm having over $75 million in assets under management.
Due diligence begins with quantitative evaluations against benchmarks and peers.
Qualitative assessments follow, covering firm stability, investment team expertise, and strategy clarity.

Information sources are diverse, including proprietary research and third-party data.

This structured process reduces biases and enhances decision-making accuracy.

Due diligence is where fundamental research truly shines, transforming data into actionable insights.

It involves rigorous checks across key areas to assess an investment's potential and risks.

Firm and product evaluation looks at history, operational controls, and compliance records.
Investment professionals are assessed for their depth of knowledge and incentive structures.
The investment approach is scrutinized for transparency and adaptability to market changes.
Performance metrics analyze both absolute returns and risk-adjusted measures like Alpha and Sharpe Ratios.

Organizations like Mercer employ large teams with decades of experience to synthesize this information.

Their forward-looking insights help identify competitive edges that drive alpha generation.

While fundamental research offers depth, quantitative strategies bring breadth and speed to the table.

Many asset managers now blend both approaches for a more holistic view.

Fundamental analysis focuses on human judgment and deeper narratives behind securities.
Quantitative methods use data models to scan large datasets for patterns and factors.

This hybrid model enhances efficiency and reduces emotional biases in investment decisions.

For example, American Century uses quant screening to identify candidates, followed by fundamental review to assess economic risks.

The reasons for adopting quantitative tools are compelling.

They provide a second opinion to avoid emotional attachments to stocks.
Tools help understand portfolio risks, such as sector overweights that may increase volatility.
They align with client metrics for better communication and reporting.
Optimizers enable efficient construction for the best risk-return combinations.
Performance is enhanced by avoiding unintended exposures through disciplined rebalancing.

Leading firms demonstrate how fundamental research translates into tangible results.

RBC Wealth Management emphasizes on-site meetings with senior management for qualitative depth.

This approach is particularly valuable in alternative investments where data can be scarce.

Mercer's global team of over 200 researchers provides forward-looking insights that adapt to portfolio changes.

Their synthesis of interviews and data helps identify repeatable alpha opportunities in dynamic markets.

American Century's Disciplined Equity strategy blends quant models with fundamental overlays.

This balanced approach aims for consistent risk-adjusted returns across market cycles.

These examples highlight the practical power of integrating rigorous research into everyday management.

Performance evaluation relies on a suite of metrics to gauge success and risk.

Common measures include Alpha, which indicates excess returns, and the Information Ratio for risk-adjusted performance.

Sharpe and Sortino Ratios assess return per unit of risk, with Sortino focusing on downside risk.
Volatility metrics like standard deviation and beta help understand market sensitivity.
Drawdown analyses and capture ratios reveal how investments perform in up and down markets.

These tools empower asset managers to make informed comparisons and adjustments.

They ensure that portfolios align with client goals and market realities.