Partner Insight: Dual Engines - Combining Fundamental and Quantitative Equity Approaches in Portfolios

Author(s)

Luke Barrs Chief Business and Client Officer for Fundamental Equity

Hania Schmidt Head of QIS in EMEA and Global Co-Head of Client Portfolio Management for QIS

Carolyn Tavares Head of Portfolio Construction and Manager Research for Multi-Asset Solutions

Key Takeaways

1	Different Dimensions of Alpha Generation Fundamental and quantitative equity strategies operate differently. Fundamental investing relies on deep, human-led research to build concentrated, high-conviction portfolios focused on long-term idiosyncratic opportunities. Quantitative investing leverages systematic, large-scale data analysis to construct highly diversified, benchmark-aware portfolios that prioritize numerous small bets over concentrated positions.
2	Complementary Across Market Regimes In our view, the two approaches excel in opposing market environments—quantitative during macro- or policy-driven rotations, and fundamental during idiosyncratic, stock-specific stress events. Because they generate alpha from independent and often opposing sources, they may maintain structurally low-to-negative correlations, providing a potential diversification benefit that dampens overall portfolio volatility.
3	Elevated Information Ratios and Style Flexibility Combining fundamental and quantitative approaches also has the potential to improve a portfolio's information ratio, making active risk work harder to compound alpha. Furthermore, broader style choice across the fundamental manager universe offers the implementation breadth needed to calibrate growth and value exposures across changing market cycles.

Source: Goldman Sachs Asset Management.

Fundamental investing leverages human-led research to analyze company financials, competitive strengths, and management quality. By embedding teams locally and engaging not only with a company's multiple layers of management but also directly with that company's ecosystem, including suppliers and competitors—fundamental equity managers can seek an information edge, particularly where data is scarce or unreliable. This selective, high-conviction, human-led approach focuses on idiosyncratic, sometimes off-benchmark opportunities to identify businesses that appear well positioned to compound value over time.

Fundamental approaches tend to be more concentrated than quantitative approaches, with larger active position sizes and greater deviations from the benchmark. Risk is managed through continuous review and debate, with portfolio manager oversight of sector, industry, quality, and market cap exposure. Conviction is expressed through rigorous selectivity and a disciplined human review process underpinned by a continuous cycle of debate regarding both owned and unowned names backed by deep and ongoing company-specific research. Fundamental managers can also leverage advanced portfolio optimization tools to supplement manager conviction with rigorous risk-modeling. These tools help managers build balanced portfolios and control unintended exposures. The overall goal of fundamental approaches is to have stock-specific insights, rather than broad market trends or sectoral exposures, drive long-term returns.

Quantitative investing leverages large-scale data analysis to drive systematic stock selection insights with the help of advanced techniques including AI. By integrating manager insights with massive datasets—including fundamentals, consumer activity, investor behavior, sentiment, and news flow—quant models can evaluate thousands of stocks simultaneously. The scalability of a systematic approach enables daily, broad coverage of the investment universe. This allows managers to complement long-term fundamental views with real-time insights into possible stock attractiveness, while accounting for how macro conditions and market regimes may influence near-term returns.

More diversified by design, long-only quantitative approaches often aim to keep a beta of 1 (benchmark-like market exposure) and take a larger number of smaller active bets across a broad set of pockets of the market. Risk is managed systematically by controlling exposures with precision and aiming to ensure every trade's alpha potential exceeds risk and transaction cost implications. Conviction is expressed through the design of a systematic process that derives insights from large pools of data on an ongoing basis, underpinned by a continuous cycle of model enhancements backed by fresh factor research. The overall goal of quantitative approaches is to build broad, diversified, benchmark-aware portfolios that prioritize numerous small bets over concentrated positions, seeking precise control over style, sector, and geographic exposures.

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We believe framing fundamental versus quantitative investing as mutually exclusive choices misses an opportunity. Integrating both approaches allows investors to move to a multi-dimensional portfolio framework.

Importantly, the distinction between fundamental and quantitative investing is not always binary. In practice, a number of managers could incorporate elements of both investment approaches by combining fundamental stock selection with systematic portfolio construction and risk management tools. Quantitative managers also vary widely in their investment philosophies and methodologies. Some managers ground their systematic models in economic and fundamental reality. For instance, factor investing or smart beta approaches target fundamental characteristics like value and quality. At the other end of the spectrum are strategies that have little to no grounding in fundamental business analysis and rely purely on mathematical models and statistical patterns.

For the purposes of the following analysis, to ensure consistency with available eVestment universe classifications, we have grouped managers into "Fundamental" and "Quantitative" categories. However, we recognize that hybrid approaches may be valuable, and that a robust manager selection process should include a deeper evaluation of how these elements are incorporated into the investment process.

The Potential Advantages of Combining Fundamental and Quantitative Approaches

Our analysis suggests that integrating fundamental and quantitative equity strategies may create a structural portfolio advantage that is greater than the sum of its parts. This advantage stems from four reinforcing dynamics, which we explore below:

1. Complementary performance across different market regimes
2. Structurally low-to-negative correlations
3. Alpha compounding via elevated information ratios
4. Flexibility in selection, style expression, and sizing

Risk considerations and disclosures

International securities may be more volatile and less liquid and are subject to the risks of adverse economic or political developments. International securities are subject to greater risk of loss as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

Equity investments are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. Different investment styles (e.g., "growth" and "value") tend to shift in and out of favor, and, at times, the strategy may underperform other strategies that invest in similar asset classes. The market capitalization of a company may also involve greater risks (e.g. "small" or "mid" cap companies) than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements, in addition to lower liquidity.

Emerging markets investments may be less liquid and are subject to greater risk than developed market investments as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

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