BMO U.S. Equity Fund's quantitative approach

The approach differs from strategic beta for a few reasons, one of them being that it's not as mechanical and rigid, says portfolio manager Ernesto Ramos.

Ashley Redmond 17 October, 2014 | 5:00PM

 

 

Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I am joined by Ernesto Ramos. He manages the BMO U.S. Equity Fund. Ernesto, thanks so much for joining me.

Ernesto Ramos: You are very welcome. Nice to be here.

Redmond: You take a quantitative approach with this fund. Tell me about your strategy.

Ramos: Our quantitative approach is simply the implementation of a very fundamental investment philosophy, which looks to buy companies that are undervalued relative to their fundamentals.

Redmond: What sort of factors do you look at?

Ramos: There are three categories of factors that we’re looking at. We’re going to rank 1,000 stocks—the largest 1,000 stocks in the U.S. market—by factors in the categories of valuation, fundamentals and investor behaviour. On valuation for example, we’re looking at earnings based valuation, cash flow based valuation and also normalized metrics evaluation. In fundamentals, we’re looking mostly at quality and growth metrics. In investor behaviour we’re looking at short action and short activity and price action of the stock.

Redmond: What sectors are looking the most attractive right now?

Ramos: Well, the way we build our portfolio is really from the bottom up, so our sector over and underweights mostly reflect the attractiveness of each of the stocks in the sectors. One of the things that we focus on is making sure that there is no systematic bias that leads us to over and underweight sectors constantly. Right now for example, we’re finding very attractively valued stocks in the areas of retail and in regional banks.

Redmond: Let’s circle back to that. How do you protect the portfolio from biases using that strategy?

Ramos: That’s actually one of the strengths of our process [because] we spend a lot of time researching each of the factors in our strategy and when we find that there is a systematic bias, what we’ll do is, we’ll neutralize that factor relative to the sector. So for example, in valuation if you just use the P/E ratio, you will normally find that utilities are always cheaper than technology companies. What we do in that case is compare technology companies only to other technology companies and utilities only to other utilities. So we avoid the bias that way.

Redmond: How does your strategy differ from strategic beta?

Ramos: Strategic beta or smart beta is focused on delivering a portfolio of exposures or an exposure to you. For example, they deliver a value portfolio or a low risk portfolio and what’s important to them is the exposure. They don’t really care about the companies. We on the other hand are focused on finding great companies and making sure that those companies have high alpha potential. Of course there will be exposures associated with the companies that we’re buying, but we’re mostly focused on the companies.

The other important difference is that, for the most part, smart beta strategies are very mechanical and rigid. I call them push the button and walk away, whereas we use the power of the computer to help us narrow down our options. But at the end we have investors (us) looking at every single trade to make sure that it’s vetted, appropriately screened for hidden risks and that it makes investment sense. By and large we end up adjusting the computer output a lot based on what we’re finding in terms of current market action and hidden risks. So, we’re the best of both worlds. We get the power of the computer, but we also marry it to a very fundamental and investor based approach.

Redmond: Thanks, Ernesto.

Ramos: You are very welcome, Ashley.

Redmond: For more on BMO U.S. Equity Fund, visit the funds page at Morningstar.ca.

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Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.