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Human Insight, Computer Power: What is Quantamental Investing?

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Quantamental Investing

Quantamental Investing

What is Quantamental Investing?

The world is awash in data like never before. From a person’s morning Uber ride and favorite coffee spot, to the emails sent from their office—all these activities create massive amounts of data, but also behavioral and investment insights.

Warren Buffett’s investment style exemplifies the fundamental approach: “Which companies offer the best returns?”

On the other hand, hedge fund manager James Simons of Renaissance Technologies is a notable example of the quantitative approach: “What is the best way to predict returns?”

Both techniques have one thing in common—they seek excess return from the marketplace, or what is known as “Alpha”.

Quantamental: Combining Quantitative & Fundamental

Today’s infographic from GoldSpot Discoveries outlines quantamental investing as the blending of these two styles, human insight with computer power.

Despite both methods seeking excess returns in the market, there are some key differences:

Quantitative Analysis Fundamental Analysis
  • Seeks to understand behavior by using mathematical and statistical modeling, measurement, and research
  • Aims to represent reality in terms of a numerical value
  • Can measure or value a financial instrument, and/or predict real-world events
  • Trading focuses on broad market factors (data)
  • Attempts to measure a company’s intrinsic value based on its earnings outlined in its financial statements
  • Can identify securities that are not correctly priced by the market
  • If the fair market value is higher than the market price, then the stock is undervalued and a buy recommendation is given
  • If the fair market value is lower than the market price, then the stock is considered to be overvalued and a sell recommendation is issued
Cons Cons
  1. Takes financial data at face value to assume an economic reality
  2. Lacks in offering unique insight
  1. Analyzes a small subset of the investment universe
  2. Chasing glamor stocks or holding on to losing stocks which reflect behavioral biases
Pro Pro
  • Analyzes the investment universe, quickly
  • Offers deep, proprietary insights

The arrival of advanced sensor technology and computer processing power is creating huge opportunities for capturing the complexity of human activity on a larger scale.

Could these two distinct methods be fused together?

A New Frontier for Data: Combining Man and Machine

On a larger scale, tracking and storing data can reveal economic patterns over long periods of time. For example, satellite images of a mall’s parking lot can determine the mall’s sales volume. In the finance world, software can track sentiment in earnings call transcripts, and detect word patterns of executives.

The applications of sensor technology stretch across various cases, and could improve overall performance in different industries.

Case #1: Sabermetrics

Picking a winning baseball team is a lot like investing: with limited capital, one needs to optimize player selection and performance to beat the competition. That is why the Major League Baseball Association installed StatScan in 30 ballparks for 3 seasons (2015-2017).

These radar and camera systems captured the raw skills of players in ways that were previously available to or only understood by the baseball scouts.

Scouts are the stock pickers of the baseball. They know the ins and outs of a potential major league player, and consider health, family history, body mechanics and even personalities.

Team managers can use a scout’s insight, against the vast amounts of data collected during a baseball season, to uncover the exact metrics to predict the success of the next great home run or strike-out king.

Case #2: Mineral Exploration

Resource companies spend huge amounts of money on exploration to collect data. However, the volume of data generated is too much for one geologist, or even a team to sift through in a reasonable time.

Machine learning in mineral exploration can take in training data to help identify prospective land for a mineral deposit.

Computer Power with a Human Touch

Quantamental investing seeks to understand the depth and the breadth of the investment world. The goal is to produce superior returns in the marketplace by answering two questions.

  1. What are the best metrics for predicting success?
  2. Which are the companies performing the best on these metrics?

Quantamental investing harnesses the raw power and scale of data, coupled with human insight — increasing market returns by finding the next great investment.

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China

How Chinese Financing is Fueling Megaprojects Around the World

A look at how Chinese diplomacy spending is fueling global megaprojects, as well as growing the country’s influence on the world stage.

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How Chinese Financing is Fueling the World’s Megaprojects

On a mountaintop a few miles north of the bustling streets of Harare, Zimbabwe, a curving, modern complex is beginning to take shape. This building, once completed, will be the home of the African country’s parliament, and the centerpiece of a new section of the capital city.

Aside from the striking design, there’s another unique twist to this development — the entire $140 million project is a gift from Beijing. At first glance, gifting a country a new parliament building may seem extravagant, but the project is a tiny portion of China’s $270 billion in “diplomacy spending” since 2000.

AidData, a research lab at the W&M Global Research Institute, has compiled a massive database of Chinese-backed projects spanning from 2000–2017. In aggregate, it creates a comprehensive look at China’s efforts to grow its influence in countries around the world, particularly in Africa and South Asia.

Beijing has ramped up the volume and sophistication of its public diplomacy overtures, […] but infrastructure as a part of its financial diplomacy dwarfs Beijing’s other public diplomacy tools.

– Samantha Custer, Director of Policy Analysis, AidData

Below, we’ll look at three diplomacy spending hotspots around the world, and learn about key Chinese-funded megaprojects, from power plants to railway systems.

1. Pakistan

In 2015, Chinese President Xi Jingping visited Islamabad to inaugurate the China-Pakistan Economic Corridor (CPEC), kicking off a $46 billion investment that has transformed Pakistan’s transportation system and power grid. CPEC is designed to cement the strategic relationship between the two countries, and is a portion of China’s massive One Belt, One Road (OBOR) initiative.

CPEC investment China to Pakistan

One of the largest projects financed by China was the Karachi Nuclear Power K2/K3 project. This massive power generation project is primarily bankrolled by China’s state-owned Exim Bank which has kicked in over $6.6 billion over three phases of payments.

Billions of dollars in Chinese capital has also funded everything from highway construction to renewable energy projects across Pakistan. Pakistan’s youth unemployment rate sits as high as 40%, so jobs created by new infrastructure investments are a welcome prospect. In 2014, Pakistan had the highest public approval rating of China in the world, with nearly 80% respondents holding a favorable view of China.

2. Ethiopia

Ethiopia has seen a number of changes within its borders thanks to Chinese financing. This is particularly evident in its capital, Addis Ababa, where a slew of transportation projects — from new ring roads to Sub-Saharan Africa’s first metro system — transformed the city.

china ethiopia investment

One of the most striking symbols of Chinese influence in Addis Ababa is the futuristic African Union (AU) headquarters. The $200 million complex was gifted to the city by Beijing in 2012.

Though Ethiopia is a clear example of Chinese investment transforming a country’s infrastructure, a number of other African nations have experienced a similar influx of money from Beijing. This financing pipeline has increased dramatically in recent years.

chinese loans to africa

3. Sri Lanka

In the wake of political turmoil, Sri Lanka is increasingly looking to China for loans. From 2000 to 2017, over $12 billion in loans and grants have poured into the deeply-indebted country.

Perhaps the most contentious symbol of the relationship between the two countries is a port on the south coast of the island nation, at a strategic point along one of the world’s busiest shipping lanes. The Hambantota Port project — which was completed in 2011 — followed a now familiar path. Eschewing an open bidding process, Beijing’s government financed the project and hired a state-owned firm to construct the port, primarily using Chinese workers.

By 2017, Sri Lanka’s government was burdened by debt the previous administration had taken on. After months of negotiations, the port was handed over with the land around it leased to China for 99 years. This handover was a strategic victory for China, which now has a shipping foothold within close proximity of its regional rival, India.

John Adams said infamously that a way to subjugate a country is through either the sword or debt. China has chosen the latter.

– Brahma Chellaney

Playing the Long Game

Africa’s economic rise will likely be a major contributor to global growth in coming years. Already, six of the 10 fastest growing economies in the world are located in Africa. China is also the top trading partner on the continent, with the United States sitting in third place.

OBOR spending has also earned China plenty of influence in the rest of Asia as well. If the ambitious megaproject continues along its current trajectory, China will be the central player in a more prosperous, interconnected Asia.

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Business

The Future of the CFO: From Number Cruncher to Value Driver

About 41% of CFOs spend the majority of their time on non-finance related activities. This infographic explores the expanding role of the CFO.

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Future of the CFO

Future of the CFO: From Number Cruncher to Value Driver

View the high resolution of this infographic by clicking here.

In today’s fast-paced business landscape, a company’s chief financial officer (CFO) is more integral to operations than ever. In fact, about 41% of CFOs spend the majority of their time on non-finance related activities, fueling data-driven decisions across the business.

The only problem? Leaders outside of finance still see CFOs contributing the most value in traditional finance areas, such as accounting and controlling.

Today’s infographic from Raconteur explores the expanding scope of CFO responsibilities, as well as the perception gap between CFOs and non-finance leaders when it comes to the former’s primary value-driving activities.

The CFO’s Expanding Role

Traditionally, the CFO was focused on financial reporting and issues such as compliance, accounts, and taxation. However, the scope of a CFO’s duties has increased dramatically in recent years. Thanks to technological advances, CFOs are now able to access massive amounts of data on their organization’s operational and financial performance.

“This puts the finance function at the heart or, arguably, the mind of the business from the outset, with many now being crowned as the ‘stewards’ of the long-term enterprise vision.”

Robin Bryson, Interim CFO at Impero Software

Armed with data, CFOs can help predict headwinds, forecast performance, and make informed decisions across departments. In a global survey, McKinsey asked finance leaders about the breadth of their responsibilities. Of the CFOs who said they spend they a majority of their time on non-finance tasks, here’s where their attention is focused:

Activity% of CFOs Focused on Activity
Strategic leadership46%
Organizational transformation45%
Performance management35%
Capital allocation24%
Big data and analytics20%
Finance capabilities18%
Technology trends5%
Other (e.g. risk management)5%

However, other business leaders remain in the dark about this broader role.

Differing Views

While the CFO’s job description has evolved considerably, outside perceptions of it have not. In a survey of both CFOs and non-finance leaders, there is a clear difference of opinion with regards to where financial leaders create the most value:

Areas in which CFOs have created the most financial value% of CFOs who agree% of others who agree
Performance management39%19%
Strategic leadership39%25%
Traditional finance roles33%47%
Organizational transformation33%21%
Finance capabilities30%15%
Speciality finance roles30%27%
Cost and productivity management26%42%
Support for digital capabilities and advanced analytics15%10%
Mergers and acquisitions (including post-merger integration)14%23%
Capital allocation10%22%
Pricing of products and/or services10%8%
Management of activist investors3%3%

CFOs see their largest contributions in the areas of performance management and strategic leadership, while others still consider the CFO’s value to be derived primarily from traditional finance and cost/productivity management.

How can CFOs demonstrate their increased responsibility to leaders outside of the finance realm?

Closing the Gap

According to McKinsey, CFOs can demonstrate their expanded role in three main ways:

1. Actively head up transformations.

While CFOs are already playing a role in transformations, non-finance leaders are less likely to perceive them as making strategic contributions. CFOs also tend to initiate the most transformations in the finance function alone.

To change perceptions, CFOs can lead enterprise-wide transformations, and communicate their strategic value through activities like high-level goal setting.

2. Lead the charge towards digitization and automation.

Few organizations have initiated the shift in a substantial way, with only ⅓ of finance respondents saying their companies digitized or automated more than 25% of their work in the last year.

However, the payoff is well worth the effort. Among those that have undertaken this level of change, 70% reported modest to substantial returns on investment.

3. Develop talent and capabilities across the organization.

CFOs have begun increasing their value through talent-building, but there is still a significant amount of room for further growth.

For example, CFOs can build capabilities during transformations, teach financial topics to non-finance leaders, and develop top talent across the organization.

Through these various strategies, CFOs can foster collaboration and understanding between departments—and succeed in their broader roles.

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