VettaFi sat down with Fidelity Investments' head of Quantitative Research & Investments, Neil Constable, for a chat about the firm's quantitative and fundamental research. The firm looks to differentiate itself with its quantitative team, with the discussion touching on the company's use of nontraditional data sources, how its ETFs use AI, and more.
How would you describe quantitative investing at Fidelity?
Quant has two main roles within Fidelity. First, we partner with the fundamental investment teams across Fidelity to ensure they have access to the most relevant data, analytics, and modern risk management and portfolio construction tools needed to compete in today’s active management business. Second, we develop quantitative products and solutions that enable us to deliver Fidelity’s best investment thinking to our clients and customers in a manner that is customized to their specific goals and needs. Satisfying both objectives requires significant investment in data, technology, and quant investment talent that collectively enhances our ability to deliver world-class active management solutions at scale.
How has Fidelity’s approach to investment management evolved over the last five years?
Fidelity's heritage has always been in active management. Simply put, the goal is to pick stocks, bonds or make asset class calls that outperform benchmarks. Twenty years ago, finding a great investment idea was a bit like looking for a needle in a haystack. Portfolio managers and analysts had to sift through large quantities of information obtained by interviewing companies, attending conferences, and debating colleagues, all augmented by financial statements and other traditional data sources.
This all remains highly relevant. However, with the massive amounts of economically relevant data now being generated via online activity, social media, and mobile devices, the complete set of relevant information for every sector of the economy has grown enormously. The task of active management is now more like looking through 1,000 haystacks, some of which have needles in them some of the time. The tools and techniques required to be a top-class active manager have, correspondingly, changed dramatically. In addition to finely tuned fundamental analysis, the best active managers now deploy advanced statistical techniques, data science, sophisticated trading, and risk management as well as many other quantitative tools to be competitive in the zero-sum game of adding alpha for our clients. In other words, the quant skill set is more important than ever.
How do your fundamental and quant teams work together to support your strategies?
Because Fidelity has always been and always will be an active management shop, we like to think of ourselves that way. Not just a fundamental shop. Not a quant shop. An alpha shop.
In the modern active investing world, to consistently generate alpha, you need to excel at both fundamental analysis and making use of the new tools, data, and technologies to efficiently extract relevant information from the myriad sources of data available. We need to have great investment ideas and we must also get those ideas vetted and into the portfolios before the competition learns about them. The basic principle is to always use the right tools for the job at each stage of the investment process – whether that is the data collection stage, the idea generation stage, portfolio construction, risk, or trading. Across all of these, being best in class requires expertise at both fundamental and quantitative techniques.
So, we use every tool at our disposal to add alpha in our clients' portfolios. And that requires, increasingly, data, technology, and the quantitative skill set blended together with traditional, deep understanding of companies and issuers of bonds, and so on. Those things need to be melded to help give our clients the best opportunity to add alpha in their portfolios.
How do you think quant will impact the future of investment management? What gives Fidelity an advantage in this space?
Quant will be critical on two fronts. Firstly, it is critical for identifying active management opportunities. And secondly, for packaging those opportunities in personalized products/vehicles that meet the increasingly diverse needs of our customers. In essence, the quant skill set will be needed as a critical component for identifying great investments, building portfolios, managing risk and allowing us to incorporate our customer’s specific goals and objectives into solutions that work for them.
The rapid evolution in the influx of information has changed the nature of how firms identify opportunities and construct portfolios that efficiently and prudently trade off return and risk. Increasingly, having a competitive edge, requires firms to either have data that others don’t or be able to process data in ways that others can’t. This in turn requires that fundamental and quantitative investment professionals partner to deliver the returns our customers expect.
Fidelity has, for decades, been amassing proprietary data through our breadth and depth of research – we have had researchers and analysts across the globe for more than 75 years. In addition, there is a culture of diversity of thought and an open dialogue – there is no one way to consume investment ideas to affect outcomes. And as a privately held firm with a large footprint, we are able to invest in innovative technology and talented investors to move quickly and be nimble but take that long-term view that's required to take measured risks. At the end of the day, we can make sure we have the best possible investment process to create the best possible investment solutions for our customers.
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