Philosophy and process

Perpetual Quantitative Investments (QI) is a manufacturer of investment returns within a risk-controlled framework. Our philosophy is based on the following:

 We identify pricing factors based on sound economic and investment theory and pragmatic ideas. This approach mitigates many risks typically associated with less transparent quantitative approaches and avoids the risk of data mining.

Market mispricing occurs because of the behavioural biases of participants and their relative informational deficiencies.

 Opportunities exist that can be exploited using a quantitative approach that is systematic and disciplined and avoids succumbing to the same behavioural biases we seek to exploit.

 Applying an investment signal to a relevant industry sector rather than across the entire market will capture additional value adding “information” (or excess returns above the benchmark). 

Investment process

Step 1: Research

Continuing research is fundamental to our process and ultimate objective of superior performance within a controlled risk framework. We apply a four pronged approach.

 Signal research – We generate analytics for individual signals and consider their behaviour throughout market cycles, and in relation to the existing model and signals.

 Testing - Signals are incorporated into the model with realistic constraints and rigorously back tested, creating realistic portfolios. The testing process and infrastructure allow the flexibility to simulate a wide range of products.

 Portfolio construction – We consider the trade-off between return and cost. Research infrastructure allows the decomposition of expected risk along any dimension: style, asset, etc, with the objective of a complete understanding of the model’s explicit and implicit risk exposures.

 Performance attribution - The value-add is measured for each individual signal. Signal performance is continuously monitored to ensure signal behaviour is consistent with our expectations.

Research is undertaken by the quantitative portfolio managers and quantitative analysts. The keys to the success of our research can be summarised as innovation, portfolio management implementation, and data quality.

Step 2: Alpha model

QI’s alpha model combines a number of different factors. Each factor is a weighted combination of rigorously back-tested signals.

• Earnings revisions
• Momentum reversal
• Value measures
• Quality indicators
• Expected returns

Step 3: Portfolio construction

Portfolio construction is a critical part of our approach. The portfolio is neutralised along all the other risk indices such as size, industry etc. We also incorporate a trade size constraint that takes into account a stock’s liquidity and ensures that the model does not recommend unrealistic or costly changes in portfolio positions. The risk in the portfolio is managed using risk analytical tools and is further controlled by limiting individual stock position, based on risk and liquidity.

This process takes into account the following:

1. Current alpha of the stock as generated by the factor model.
2. Transaction costs, including a constraint on the size of trades.
3. Neutralisation of portfolio to all other dimensions of risk. For example the portfolio is neutral for industries, size, and style factors not correlated to QI signals. The portfolios have no unintended active positions.
4. Targeted risk and leverage.

The tools we utilise include Barra, Axioma, Calibre RMS database, Matlab, IRESS, FactSet and direct broker feeds.

The other important factor in portfolio construction is the portfolio guidelines which include:

• maximum stock weights
• maximum percentage holding of a single company
• maximum cash weighting
• number of stocks
• turnover
• tracking error

Step 4: Dealing and execution

Dealing and transaction cost management is a key principle in our investment process. We minimise transaction costs associated with portfolio rebalancing by the following:

1. Running a small portion of the portfolio in cash equitisation.
2. Crossing internally wherever possible to minimise market impact cost.
3. Ensuring our borrowing arrangements are optimal both in terms of cost and access to stock.
4. Minimising execution costs.

We also perform regular monitoring of transaction costs and adjust parameters where necessary. 

More information

Contact our Institutional sales and servicing team.