Sunday, September 16, 2007

Quant Portfolio Construction

One of the more scientific ways to invest is to actually create a quant portfolio and simply rebalance it periodically. Sounds very chim huh? But it's actually quite straightforward. But unfortunately, it is not exactly suitable for retail investors unless

1. You have tons of money
2. You have tons and tons of money

Well, but it's still quite useful to know how quant works, so don't yawn. And don't click the "x" at the top right corner.

Quant is simply the short-form for Quantitative and it is named as such because it uses mathematical models to drive investment decisions. Quant can be very successful because it reduces emotional influences (screw Mr Market man!) and can generate as well if not better an investment performance as fundamental analysis or other types of investment analysis. (Woah that's a statement huh?)

As a very simplistic introduction, we introduce a 2-step quant portfolio construction process here.

1. Use criteria or factors like PER, PBR, ROE, EV/EBITDA to screen out a list of stocks and buy the top 30-50 stocks.

2. Rebalance the portfolio after the pre-determined period like 6 mths or 1 year etc. (ie repeat Step 1 after 6 mths or 1 year.)

Ok, analogy time, say we want to create a 50 stock portfolio and rebalance it every 6mths and we want to use 2 factors, Low PER and High ROE.

For retail, Poems have quite a good screen in its system so can just utilize that. If not, can ask those good-for-nothing Citibank/UOB privilege sweet-young-bankers to generate these screens. Of course, that's like trying to strike Toto, bcos chances are, they ARE good-for-nothing.

Anyways, so you get this list of stocks, and just simply buy the top 30-50 names on it depending on how many stocks you want to hold. But it has to be at least 30 names in order to smooth out the idiosycracies of individual stocks. So now we know why you need lots of money, to buy that 30-50 stocks.

So that's Step 1. And after 6 mths, simply do the screen again, and buy the top 30-50 names. Of course, if the same stock appeared on the first list. You don't sell off what you hold and buy back the same stock lah. Unless you are trying to please your good-for-nothing Citibank/UOB privilege sweet-young-bankers or something.

So simple as that, if you can do this based on some winning factors (that's the catch huh!). Chances are you can make some money. May or may not beat the market average (to do that, the odds are slightly better than finding a good-for-something sweet-young-banker), but you should not have negative return if you invest over the long run (ie 20 yrs or more).

See also Investment Horizon


  1. Hmmm...why not just buy a Unit Trust? Try to find one that has a clear and well-defined strategy with low expense and turn-over ratio?

    Even better, you don't need a large sum of money to start of with!

    Just my thoughts...

  2. Quant portfolio is definitely not for everybody. The purpose of the post is to hopefully just give an illustration how it works and is employed by institution to capture Alpha.

    Unit trusts in general does not benefit the retail investors bcos they simply charge too much for sales and mgmt fees. 90% of all unit trusts underperform their respective benchmarks.

    The good way to earn a good return passively is actually to buy index funds or ETFs.

  3. Hi 8percentpa,

    thanks for sharing!

    Yes I agree that problem with UT is that they have high expense ratio.

    But at the same time, is it possible that UT "might be able" to beat the market average, while ETF "will never" be able to beat the average?

  4. That is true, UT may give you a chance to beat the market. But that is a 10% chance.

    90% of the time, you will earn sub-market return.

    buying index fund gives you near market return 90% of the time.

    Near market return bcos fees are deducted.

    There is no free lunch. Hehe.

  5. Hi,
    Good work on your blog.
    Being a value investor, i also maintain a blog at

    Do you mind if we exchange blog links?


  6. sure thing, will put on your link asap!

  7. I see, didn't realize that that Quaint methods are so simplistic, not difficult to follow at all. Thanks for the explanation.

    And all along I thought they are based on complex mathematical algorithms like Black Box trading.

    To think Quaint Hedge Funds can be so damaging to the market whenever they sell off their shares and rebalance their portfolios

  8. Oh yah to those who are reading, DBS Vickers Clarity also help you to list out a list of stocks with ROE, PTB, Forward PE, etc.

    Business Times recommend PTB, but I am not sure about that model because Gems Tv has a good PTB and we all know how that stock turns out.

  9. The method you describe aren't quantitative methods per se.

    They're actually portfolio construction methods based on scanning the markets according to pre-set parameters like low P/E (out of favour stocks) etc.

    There are other problems with this method:

    1. You may not be able to get all the stocks at the price you bought. Given enough trading volume and money, you can raise the stock price based on ur action alone.

    2. Must incorporate trading fees. Its not cheap.

    There's a book called the Contrarian investor that talks about constructing portfolios of stocks which are out of favour based on low PE ratios etc.

  10. Yes quant investing have definitely evolved. But valuations and fundamentals are still the basis, I guess.

    Today, quant models have become dynamic and can incorporate different factors depending on markets. So it can be valuations today, momentum tomorrow, growth next week etc.

    Arbitrage is definitely employed as one factor well.

    I heard that some investment houses build offices nearer to the stock exchanges so that their computers can send orders faster by milliseconds and beat others to it.

    It is a different world out there!