A fundamental research process forms the foundation for a large proportion of global fund managers. All managers that adopt a fundamental research methodology in their investment process however, suffer from the same technical challenges or malady – Excel®.

Don’t get me wrong, I truly believe Excel to be one of the most useful and powerful tools in the computing era and particularly the financial markets. The fact is Excel has allowed everyone to become a developer. And I do not agree with CTOs that claim to want to get Excel out of their research process. So what is this technical challenge or malady that I am talking about?

A Fundamental Investment Research Process

A fundamental investment process differentiates itself from say a purely quantitative or passive process in that heavy lifting needs to happen before one can compare the companies in a fund’s investable universe. The universe can comprise of various geographical regions (emerging and developed markets) and sectors (resources, IT and retail). A fundamental analyst therefore needs to consider multiple aspects in their research report, particularly

  • the economic conditions in which the company is operating, be it global or local.
  • the current forecasted growth of the industry the company belongs to e.g. mining, retail.
  • a detailed analysis of the company, including understanding the company’s financials and how their current strategy will impact their balance sheet and income statement.

The goal of the analyst is to estimate the future profit outlook of the said company. Models vary, but most fundamental analysts produce a forecasted EPS, DPS and Forward PE for at least the next 3 years. This information allows the analysts to estimate the expected total returns for the company over the next couple of years. Consolidating all the fundamental research allows the manager to establish a ranking model on the investable universe.

The ranking model is a powerful tool for the fund manager. The ranking model provides various views such as

  • the portfolio’s current active bets versus the ranking of the respective companies.
  • a snail trail showing how the ranking of a company has evolved over time.
  • exception reports showing companies with large active bets and low rankings or vice versa i.e. companies with a negative active bet and a high ranking.
  • ranking attribution reports showing the contribution to the forecasted active return from the EPS, DPS and Forward PE estimates.
  • trigger reports showing when analysts last updated their forecasts and the period between their last forecast and the last declared interim financial report.
  • the effect that changing allocations to specific fundamental data will have on the rankings.

The ranking model drives, constrains and focuses the conversations held every morning in the investment meetings and around coffee tables. It is the pivotal key to all fundamental research processes.

Extracting information from a universe of differing spreadsheets

If one asks a fundamental analyst to produce a research report on a copper mining operation in Angola or a retail company in the UK, they would immediately reach for Excel. Excel provides the framework with which the analyst can navigate and model the effect of a particular strategy on the company’s financial statements. Furthermore, a spreadsheet provides all the tools required to come up with a model to forecast the EPS, DPS and Forward PE. The one fact that you can be certain about is that the spreadsheets used to model the mining and retail companies mentioned above will look very different. And it is here that the malady arises. How does a fund manager access and combine the relevant output from these myriad of differing spreadsheets into a single ranking model? And how can this be seamlessly maintained going forward?

Combining Fundamental Research in Excel

This is where Quintessence steps in. I have written articles on this generic problem statement and how Quintessence technically solves this problem. In short, we allow analysts to continue working in spreadsheets yet ensure that all common information, such as that required to generate a ranking table, is warehoused centrally.

Quintessence allows analysts to continue using Excel in their unique way and at the same time ensures that the outputs from their models are centrally accessible by other systems and users. This allows for the dynamic creation of ranking models and other reports required by the fundamental investment process.

Contact us for more information regarding Quintessence features and how we can facilitate your fundamental research and investment process.

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