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Aug. 16, 2019, 10:40 a.m. EDT

How a quant strategy outperformed by picking fast-growth Facebook and a decimated Stamps.com

Federated MDT’s automated decision process takes emotions out of the equation

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By Philip van Doorn, MarketWatch


MArketWatch Illustration

In this age of index funds and exchange traded funds, mutual fund companies have brought new offerings to the table.

That’s the case with the MDT team at Federated, whose core strategy has beaten its benchmark in recent years, as the Boston-based firm’s evolving quantitative model enables it to remove human emotions from investment decisions.

MarketWatch’s William Watts has written about the trend toward “quantamental” money management, which blends quantitative analysis with traditional fundamental analysis.

The MDT team uses its quant process to manage seven funds. The strategy has led the firm to hold shares of companies that may seem to be strange bedfellows. Here are examples of stocks favored by MDT’s factor-based automated “decision trees,” with a detailed explanation of how they were selected. The first six are held by the flagship Federated MDT All Cap Core Fund /zigman2/quotes/206359824/realtime QKACX +0.99% and the last two are held by the Federated MDT Small Cap Core Fund /zigman2/quotes/205173764/realtime QLSGX +1.02%

Company Ticker Type Market capitalization ($ million) Total return - 2019 through Aug. 13 Total return - 3 years
Facebook Inc. Class A /zigman2/quotes/205064656/composite FB Internet Software/ Services $453,358 44% 51%
Mastercard Inc. Class A /zigman2/quotes/207581792/composite MA Finance/ Rental/ Leasing $275,384 46% 191%
HubSpot Inc. /zigman2/quotes/209389444/composite HUBS Information Technology Services $8,191 53% 227%
Atlassian Corp. Plc Class A /zigman2/quotes/207177221/composite TEAM Packaged Software $16,872 65% 389%
Biogen Inc. /zigman2/quotes/201531540/composite BIIB Biotechnology $43,019 -22% -19%
EOG Resources Inc. /zigman2/quotes/204634330/composite EOG Oil & Gas Production $45,570 -9% -12%
Stamps.com Inc. /zigman2/quotes/202777086/composite STMP Internet Software/ Services $987 -63% -34%
Peabody Energy Corp. /zigman2/quotes/203600175/composite BTU Coal $1,947 -34% N/A
Source: FactSet

MDT Advisers has about $6.2 billion in assets under management, including mutual funds and private accounts. The firm has been a subsidiary of Federated Investors /zigman2/quotes/200048489/composite FII +0.66%  since 2006.

Dan Mahr, the head of the MDT team, described the firm’s quantitative methods in an interview Aug. 13.

Very active management

MDT uses quantitative methods to analyze 12 factors for every company in a benchmark index and incorporates them into an automated “decision tree” to select stocks and decide the timing of purchases and sales. The goal is to identify stocks that are most likely to rise over a three-month period. The analysis is done each day, incorporating all financial reports from each company and changes in analysts’ earnings estimates, with changes made to the portfolio if the model points to sufficient gains, factoring in trading expenses.

When discussing the performance of actively managed funds, investment managers will typically say that any long-term strategy can take years to play out. But a three-month outlook for the quantitative model means MDT is a very active fund manager and that comparisons with index benchmarks over relatively short periods are valid.

Distinguishing a quant method

Mahr said the typical approach followed by multi-factor exchange traded funds and other quant managers tends to lead to a list of “companies that are a little bit above average in many of these factors,” because the factors are equally weighted. This cookie-cutter approach may be overlooking stocks of troubled companies whose shares have been pushed down so far by panicking investors that all the bad news is more than baked in, leaving upside potential because of some redeeming factor (or more than one) identified by the MDT model.

“Very few companies simultaneously have very high growth prospects, have extremely high quality and are underpriced by the market,” Mahr said. MDT’s decision-tree approach is designed to “ask the right questions of all different types of companies,” he said.


FayFoto/Boston
Daniel Mahr, head of the MDT team at Federated Investors.

Mahr said MDT’s automated decision-based approach differs from “smart beta,” which has been gaining popularly as an enhancement to index investing. A smart beta manager will favor certain factors, such as value or growth, for example, and take slightly greater or smaller positions than an index, in an attempt to beat the index consistently.

The decision tree

Here is a simplified illustration of the decision tree used to run the Federated MDT All Cap Core Fund:

/zigman2/quotes/206359824/realtime
US : U.S.: Nasdaq
$ 29.69
+0.29 +0.99%
Volume: 0.00
Dec. 6, 2019
loading...
/zigman2/quotes/205173764/realtime
US : U.S.: Nasdaq
$ 24.65
+0.25 +1.02%
Volume: 0.00
Dec. 6, 2019
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 201.05
+1.69 +0.85%
Volume: 12.27M
Dec. 6, 2019 4:00p
P/E Ratio
32.11
Dividend Yield
N/A
Market Cap
$568.67 billion
Rev. per Employee
$1.57M
loading...
/zigman2/quotes/207581792/composite
US : U.S.: NYSE
$ 290.40
+0.55 +0.19%
Volume: 2.43M
Dec. 6, 2019 4:10p
P/E Ratio
43.10
Dividend Yield
0.45%
Market Cap
$292.30 billion
Rev. per Employee
$1.01M
loading...
/zigman2/quotes/209389444/composite
US : U.S.: NYSE
$ 152.01
-1.54 -1.00%
Volume: 1.01M
Dec. 6, 2019 4:10p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$6.58 billion
Rev. per Employee
$194,458
loading...
/zigman2/quotes/207177221/composite
US : U.S.: Nasdaq
$ 123.36
-0.59 -0.48%
Volume: 874,394
Dec. 6, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$30.57 billion
Rev. per Employee
$391,879
loading...
/zigman2/quotes/201531540/composite
US : U.S.: Nasdaq
$ 300.26
+0.87 +0.29%
Volume: 2.26M
Dec. 6, 2019 4:00p
P/E Ratio
10.68
Dividend Yield
N/A
Market Cap
$54.02 billion
Rev. per Employee
$1.55M
loading...
/zigman2/quotes/204634330/composite
US : U.S.: NYSE
$ 73.96
+3.37 +4.77%
Volume: 4.37M
Dec. 6, 2019 4:10p
P/E Ratio
14.35
Dividend Yield
1.55%
Market Cap
$41.07 billion
Rev. per Employee
$6.17M
loading...
/zigman2/quotes/202777086/composite
US : U.S.: Nasdaq
$ 82.91
-1.24 -1.47%
Volume: 290,006
Dec. 6, 2019 4:00p
P/E Ratio
18.50
Dividend Yield
N/A
Market Cap
$1.44 billion
Rev. per Employee
$497,820
loading...
/zigman2/quotes/203600175/composite
US : U.S.: NYSE
$ 9.63
+0.40 +4.33%
Volume: 1.36M
Dec. 6, 2019 4:10p
P/E Ratio
3.40
Dividend Yield
5.82%
Market Cap
$893.46 million
Rev. per Employee
$739,054
loading...
/zigman2/quotes/200048489/composite
US : U.S.: NYSE
$ 33.79
+0.22 +0.66%
Volume: 420,316
Dec. 6, 2019 4:10p
P/E Ratio
13.42
Dividend Yield
3.20%
Market Cap
$3.40 billion
Rev. per Employee
$604,708
loading...
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