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However, with the "Magnificent 7" stocks accounting for over 50% of S&P 500 gains in 2024 and valuations appearing stretched, many investors are seeking broader market exposure and sources of alpha beyond just these handful of companies.
Aims to remove emotional biases by relying on empirical data.
May integrate human oversight or be fully systematic.
What is Quant Investing?
The magnificent 7 accounted for over 50% of S&P 500 gains in 2024. Today, valuations arguably look stretched.
MDT, part of Federated Hermes, believes an active, systematic approach can generate excess returns across an entire market cycle.
The firm uses proprietary machine learning techniques to model various return drivers across different types of companies, tailoring forecasting methods accordingly and subjecting them all to continuous review.
Quant investors can sift through vast amounts of data collected from a variety of sources, including:
Market history
Company fundamentals
Valuation metrics
Macroeconomic data
MDT, part of Federated Hermes, can offer a differentiated proposition to investors:
At Federated Hermes, quant investing goes beyond automation.
Human Decision-Making & Oversight
Every trade is reviewed before execution.
This involves:
This approach provides a broad range of potential alpha sources, leading to more consistent performance.
Quantitative investing (quant) encompasses a broad range of strategies that use data analysis, mathematical modelling and automated transactions seeking to deliver investment returns.
MDT Advisers’ Differentiated Approach
Potential for consistency of alpha delivery with no over reliance on any single factor over the long term
May produce diversification of alpha delivery relative to traditional approaches
Full active management based on bottom-up stock selection
Sophisticated modelling techniques
Since 2001, MDT has used human expertise alongside a differentiated machine learning investment model, an approach that employs decision trees to forecast stock returns.
Decision trees offer an intuitive, transparent framework to forecast stock returns.
Decision tree models use
a series of yes/no questions following a hierarchical, tree-like structure.
Within MDT’s model, the data used to ask these questions can include fundamental data (such as data from a company’s balance sheet, or income statement) with technical data such as price trends.
A decision tree begins with a simple question about company characteristics that is asked to the entire investable universe,
By asking a series of questions in sequence, decision trees allow MDT to focus on the most important characteristics for a particular stock, and downplay those characteristics that are less important.
MDT’s approach combines expert oversight with proprietary decision-tree models, ensuring strategies remain robust, adaptive, and transparent.
Intensive Risk Management
Uses risk modeling tools and a variety of benchmark-relative investment constraints, including sector, industry and company limits.
Transparency
Clear reasoning behind portfolio holdings and investment decisions.
Continuous Improvement & Supervision
Models evolve with new data for long-term adaptability.
Example: Decision Tree in Action
Has the company been a net issuer of equity or debt?
(Factor: Quality)
Q2
Have analysts been raising estimates for EPS, revenue and cash flows?
(Factor: Analyst conviction)
NO
Further splits based on valuation and momentum metrics.
Q1
Disclaimer:
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results.
This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries, does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient.
This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions.
Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions.
United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).
European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59.
Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).
Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”).
Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore.
United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.
and questions branch into further questions,
eventually leading to a return forecast of every company in the investable universe relative to a benchmark.
Group 5
Q3
Is the company's peer-relative valuation improving?
(Factor: Value)
Q4
Are recent prices improving?
(Factor: Momentum)
NO
NO
NO
Group 1
Group 2
Group 4
Group 3
YES
YES
YES
YES
Magnificent 7
Rest of S&P 500
Likely overperform
Likely neutral
Likely underperform
MDT US Equity
Quant Investing’s Secret to Finding Alpha
The U.S. is the world’s largest and most dynamic stock market.
Where Human Expertise Meets Advanced Quant Models
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The MDT All Cap Core strategy
Consistency has led to strong risk-adjusted returns
Average correlation of MDT active returns vs. active returns of fundamental strategies **
Low correlation to fundamental strategies may offer diversification benefits
Peer Rankings*
1-Year
Ranking
3-Years
Ranking
5-Years
Ranking
10-Years
Ranking
Net return (%)
Gross return (%)
Average correlation
MDT All Cap Core Strategy
0.08
63
# fundamental strategies
31.40
3
11.91
2
17.64
1
13.93
5
31.99
4
12.50
3
18.34
3
14.67
7
Information ratio
--
--
1.23
2
1.22
1
0.64
3
Sharpe ratio
--
--
0.46
3
0.80
3
0.78
4