During a media briefing, Matthew Picone, VP, portfolio manager at Acadian, discussed how a “quant” or quantitative analysis can be used to pick up the tone of management and predict the governance of the corporation.
A quantitative analysis is a complex model that blends mathematics, finance and computer skills, giving financial firms, investment banks and hedge funds an estimated worth of a share.
“There are research processes out there that look at natural language around accessing the words and the tone management use when they are talking to the investment community,” Mr Picone explained.
Mr Picone explained that these models are becoming more sophisticated, and through machine learning, these quants are becoming more evolved and are going beyond just positive and negative words.
“Are managers speaking more strategic – longer term over shorter term?” Mr Picone said.
The portfolio manager also showed how a quant can analyse key points of governance, which is the most subjective of the ESG metrics.
“There’s longer and shorter-term governance factors. Whether you’re looking at the structure of the board, what’s the experience of the board, is there a lot of turnover in boards, is there excessive turnover,” Mr Picone said.
He highlights how governance metrics are non-linear in payoffs.
“If you score well on something, you don’t necessarily outperform. But if you perform poorly, it’s a sign of trouble,” Mr Picone said.
“Thinking about how these factors work and constructing them in a way you’re only targeting the negative side or the positive side is how you can get value out of them” Mr Picone concluded.
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