Active equity investing may reflect a variety of ideas about profitable investment opportunities. However, with regard to how these investment ideas are implemented—for example, how securities are selected—active strategies can be divided into two broad categories: fundamental and quantitative.
Fundamental research forms the basis of the fundamental approach to investing. Although it can be organized in many ways, fundamental research consistently involves and often begins with the analysis of a company’s financial statements. Through such an analysis, this approach seeks to obtain a detailed understanding of the company’s current and past profitability, financial position, and cash flows.
Quantitative strategies, on the other hand, involve analyst judgment at the design stage, but they largely replace the ongoing reliance on human judgment and discretion with systematic processes that are often dependent on computer programming for execution.
The majority of investment approaches can be classified as:
- Systematic or discretionary: The degree to which the manager follows a set of systematic rules, rather than using discretionary judgment.
- Bottom-up or top-down: The degree to which the manager uses bottom-up stock-specific information, rather than macroeconomic information.
|Decision-making process||Discretionary||Systematic, non-discretionary|
|Primary resources||Human skill, experience, judgment||Expertise in statistical modeling|
|Information used||Research (company/industry/economy)||Data and statistics|
|Analysis focus||Conviction (high depth) in stock-, sector-, or region-based selection||A selection of variables, subsequently applied broadly over a large number of securities|
|Orientation to data||Forecast future corporate parameters and establish views on companies||Attempt to draw conclusions from a variety of historical data|
|Portfolio construction||Use judgment and conviction within permissible risk parameters||Use optimizers|