15 – M4 L1B 16 Fundamentals V1

The other commonly used data in factor construction are called fundamentals. These are measures derived from financial statements such as price to earnings ratios. Price volume factors and fundamental factors are the most commonly used factors for quant trading, and it’s possible for some active fund managers to rely primarily on these two types of factors. A practical difference with fundamental factors compared to technical factors is that financial statement data is usually updated on a quarterly basis, not daily. This means that if a fund is trading at a daily frequency, they use the most recent fundamental data for the three months until it’s refreshed in the next quarter. Fundamental factors allow for higher capacity, which means that one can potentially put more capital on that particular trade. This is in part due to lower turnover, as we would only update our portfolio when new financial statements arrive every three months. Lower turnover generally means lower transaction costs, which means we can put more capital behind a strategy based on fundamental factors. One factor you’ve seen before is the market cap, which is a measure of the size of a company. Generally, small cap companies have historically outperformed large cap companies. So strategy may involve overweighting small cap stocks and underweighting large cap stocks.

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