3 Questions: Federated MDT
“3 Questions” delves into the investment approach used by Federated Investors strategists. This installment features Dan Mahr, managing director of research for Federated MDT.
Q: Can you briefly explain the Federated MDT strategy? MDT uses systematic, fundamentally based stock-selection tools to drive a rigorous and repeatable portfolio construction process. Rather than make subjective investment decisions that can be harmed by human biases, we employ a quantitative stock-selection process that relies on objective statistical analysis to help make investment decisions. Because of investor behavioral biases, there always are mispriced securities—and thus opportunities—in the marketplace.
The thinking behind our approach is simple: we want to discover and capitalize on the ways in which stocks typically tend to be mispriced, in part by avoiding market or manager psychology that can cloud security selection. For example, most managers find it difficult to buy stocks with recent precipitous price declines, often out of fear that these companies have just experienced a negative development in their business and may not recover. Our process, on the other hand, seeks to find companies with depressed stock prices that we think are likely to recover in price because their businesses are sound. We also seek to reduce investment style volatility by investing in different classes of companies simultaneously, such as “deep value” stocks that have experienced recent price declines and "momentum" stocks that have experienced recent price increases.
We further attempt to manage risk by using diversification constraints that limit exposure to individual companies and groups of correlated companies. Finally, before making any trades, the experienced investment professionals on our team review daily the recommended security selections given to us by our quantitative stock-selection engine. The purpose of this pre-trade review is to help ensure we do not miss any pertinent information before we trade, such as an after-hours earnings announcement or an analyst forecast update.
Q: How is the strategy performing in the current stronger growth but more volatile environment? As of the end of the third quarter, a number of our portfolios have performed quite well year-to-date. Our investment strategies have benefited from holding a diversified portfolio of different types of companies with various combinations of factors that our research has validated as being meaningful drivers of stock returns over time. While some factors have worked better or worse throughout 2018, in general, companies with stronger growth traits have performed better.
Q: What is the outlook and positioning for the strategy over the next 3 to 6 months? We do not attempt to time the broader macroeconomic and geopolitical environment; we are centered on security selection driven by individual corporate performance. As we’ve noted, we rely on multiple layers of risk management to help reduce macro influences and behavioral biases on our security selection, and prefer a more diversified rather than concentrated approach to building a portfolio. We believe the evidence shows that this quantitative, bottom-up approach has the potential to deliver superior returns in different market environments over the long run.
Thank you, Dan.