In recent years, the growth of quantitative investment within publicly offered funds has been remarkable, attracting increasing attention from the marketplaceVarious asset management firms are actively diversifying their portfolios by introducing novel quantitative productsOne firm in particular, Nanhua Fund, has recognized the significance of quantitative funds in today’s financial landscape, viewing them as an indispensable segment of the market.

Helming Nanhua Fund's quantitative endeavors is Huang Zhigang, a seasoned veteran with over 16 years of experience in quantitative investmentHe has skillfully merged the principles of value-driven investing with quantitative stock selectionHuang emphasizes the importance of focusing on two critical aspects: “company pricing” and “margin of safety” when utilizing quantitative methods to aid in value investing.

Constructing a “margin of safety” from multiple dimensions is a fundamental tenet of Huang’s investment philosophyDuring his career, Huang has held several prestigious roles, including serving as the head of quantitative investment at Guotai Fund and Jin Ying FundIn 2019, he joined Nanhua Fund as the assistant general manager and head of the quantitative investment departmentOver the years, he has crafted his unique investment approach, using quantitative tools to enhance the efficacy of value investing.

Nanhua Fund’s approach to quantitative stock selection emphasizes breadth, allowing for a wide-ranging analysis across various sectors without being confined to any specific geometry or industryThis broad-based selection process not only helps minimize risks but also ensures that the potential for alpha—excess returns over a benchmark—is diversified and less volatile.

According to Huang, “We employ quantitative methods to identify well-priced companies that embody the principles of value investingThis differs significantly from subjective human judgment and allows for an objective, efficient, and disciplined investment approach.” In practical terms, the quantitative team at Nanhua Fund employs key performance indicators such as future Return on Equity (ROE) and Earnings to Price ratio (EP) as pivotal metrics to gauge “good companies” and “good prices”. By integrating these indicators into a comprehensive model resulting from extensive long-term research, the team can derive a stock’s potential returns to aid in their selection process.

Besides value pricing, Huang underscores the construction of a "margin of safety" as another crucial area of focus

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He explains, “At Nanhua Fund, we have developed a suite of methodologies to establish a margin of safety, such as identifying stocks with low valuations, low Price-to-Earnings ratios, and high dividends.” This approach has facilitated the creation of various products like the Nanhua Fengyuan Quantitative Stock Hybrid Fund and Nanhua Fengrui Quantitative Stock Hybrid Fund, with more slated for future release.

As the number of quantitative funds in the public market continues to grow, competition within the sector has intensified, leading to concerns about strategy congestion among investorsHuang reminds us, “Congestion primarily manifests at the trading level; however, our strategies are more fundamental in nature, making this issue less pronounced for us.” While Nanhua Fund does aim to generate revenues through trading, it primarily seeks to capitalize on opportunities presented by undervalued businessesBy prioritizing companies with a solid margin of safety, they consciously avoid excessively popular stocks which, if over-purchased, could diminish their value’s margin of safety.

To ensure the long-term effectiveness of their strategies, Huang has implemented several measuresThese involve extending the holding period of stocks and increasing the number of stocks selected to enhance the model’s confidence levelFurthermore, they consider the margin of safety in stock investments to mitigate the risk of short-term returns deviating from long-term potential returns, thereby reducing negative impacts from model residuals.

Discussing the ongoing efforts in fundamental research, Huang states that the heart of their quantitative investment strategy centers around forecasting ROEThis process is categorized into two facets: one that leans toward quantitative analysis, utilizing time series modeling for ROE; and the other aims to better integrate active research on companies with quantitative methodologies, which remains in a developing phase

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The unique ROE forecasts for each industry or company necessitate personalized approaches, highlighting the challenge of amalgamating these insights into a coherent quantitative framework.

Reflecting on industry trends, Huang shares his insights regarding the competitive landscape of the quantitative investment sectorAs the rivalry escalates, the challenge of acquiring alpha continues to growTake the widespread use of multi-factor models, for instance; while these strategies have become relatively established, the focus now lies in refining and enhancing themHowever, given their data-centric nature, should a substantial market downturn transpire, such strategies may falter, prompting Nanhua Fund to continuously explore newer factors.

Huang elaborates, “We choose to integrate quantitative techniques with active value investment principlesThe foundational logic behind this strategy is more fundamental and retains long-term validityOur challenge is to improve the accuracy of our fundamental predictions.”

Looking to the future, Huang expresses optimism about the growth potential within the public quantitative investment space. “Quantitative trading embodies a robust investment philosophy and method which, over the long term, shows resilience across various market conditionsCurrently, quantitative public fund offerings constitute a relatively small portion of equity fund products, indicating ample room for growth.” Meanwhile, he notes that quant hedge funds tend to rely heavily on high-frequency trading strategies to generate excess returns, rendering the alpha generated through stock selection comparatively minimalAs high-frequency strategies reach saturation, the advantages of public quantitative funds backed by fundamental research are expected to emerge more clearlyWith proven performance, quantitative products are likely to earn the trust and understanding of investors.

Huang also divulges Nanhua Fund’s future roadmap concerning quantitative investment product offerings, indicating the launch of the “Nanhua Fengli Quantitative Stock Hybrid,” set to debut on February 17. With a diverse range of investment styles already established, this new product is set to further complete Nanhua’s suite of actively managed quantitative offerings

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