Applied Investing: Quant Tilt, Fundamental Pick
Tilt a concentrated core portfolio toward the factors that are working, then pick stocks inside them
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 82%
Slimmon splits equity return into two layers. The first layer is macro exposure: geography, market cap, sector and style, which he says explains roughly two-thirds of any stock's return in a given year. A quantitative factor model estimates which of those exposures has the highest likelihood of outperforming over the next twelve to eighteen months, and the portfolio is tilted accordingly. The second layer is fundamental stock selection inside the favoured exposures, which keeps the holding count low enough to generate genuine active share instead of a high-fee index clone. Crucially, the tilts are partial: because factor turns cannot be timed cleanly, exposure is reduced gradually rather than switched wholesale. The behavioural payoff is that the manager never has to ask a client to hold an out-of-favour style for longer than their patience lasts.
Origin
Built by Andrew Slimmon after fifteen years as a Morgan Stanley private wealth advisor watching clients chase whatever had just worked, combined with the factor training he picked up at Chicago Booth. He named the team 'Applied Equity Advisors' partly so it would sit near the top of alphabetical manager lists.
Core principles
- 01About two-thirds of a stock's one-year return comes from style, size, geography and sector, not the company
- 02A dedicated style manager spends their life justifying a style instead of making money
- 03Tilt, never go all-in: timing factor turns precisely is not achievable
- 04Concentration is what creates active share; 150 holdings is a closet index
- 05The point of flexibility is keeping the client invested, not winning a style argument
How to run it
- 1
Split return into macro exposure and company fundamentals
Accept that most of a single year's stock return comes from geography, size, sector and style rather than company-level news. Treat getting the exposures right as the first job.
Pro tip Ask of any holding: how much of last year's move was the factor and how much was the firm?
- 2
Run a forward-looking factor model
Score each exposure on its likelihood of outperforming over the next twelve to eighteen months. Relative valuation versus its own history matters more than recent performance.
Pro tip Look for migration in the opposite direction before acting, not just an extreme reading.
Watch out A backward-looking screen simply encodes the recency bias you are trying to avoid.
- 3
Tilt, do not switch
Move the portfolio toward the favoured exposures while keeping meaningful weight in the others. Reduce expensive exposures gradually over time.
Pro tip Set a maximum tilt size in advance so conviction cannot turn into an all-in bet.
Watch out Timing factor turns precisely is very tricky; wholesale switches convert a good signal into a coin flip.
- 4
Pick stocks fundamentally inside the tilts
Use company-level research to choose the names within the favoured exposures, since part of every stock's return is genuinely idiosyncratic.
Pro tip Listen to what companies say about their own demand rather than to macro commentary.
- 5
Concentrate to earn the fee
Keep the holding count low enough that positions matter: thirty to sixty names for a US core sleeve, roughly twenty for a global one.
Pro tip A portfolio you can print on one page is a portfolio with real active share.
Watch out Own two or three names in every sector and you are charging active fees for index performance.
- 6
Control risk through uncorrelated themes
Inside the concentrated sleeve, hold names that express different themes so a small number of positions does not become a single bet.
Pro tip Pair a cyclical theme such as infrastructure with a structurally different one such as luxury brands.
In the wild
Through the 2022 bear market, investors crowded into dividend, low-volatility and defensive strategies. Slimmon's factor work showed that the safety factor itself had become expensive. Coming out of the bear market the team tilted away from consumer staples, healthcare and utilities rather than owning the products that had just been popular, which he cites as one of the calls the team got most right in 2023.
→ The team avoided the lagging defensive complex in 2023 by treating crowding and valuation of a factor as the sell signal.
The global concentrated strategy holds roughly twenty positions and can include US mega caps such as Microsoft and Costco alongside international names such as LVMH. Because the mandate is not international-only, the manager is not forced to defend non-US exposure through a period when the US is beating the rest of the world.
→ Flexibility of mandate let the fund own the region that was working instead of explaining why it could not.
Common mistakes
Going all-in on the favoured style
A factor signal tells you where to lean, not when the turn happens. Full rotations turn a probabilistic edge into a timing bet.
Diluting the portfolio to feel safe
Adding names until every sector has three holdings removes the active share that justified the strategy in the first place.
Buying the factor that just worked
Popularity pushes a factor's valuation to an extreme, which is exactly when its forward odds are worst.
Is it for you?
Best for
Active equity managers and allocators who want high active share without betting the fund on one style surviving a full cycle.
Not ideal for
Investors who want a pure, mandate-locked style exposure or a low-cost passive core.
From the transcript
“setting a signal that they'll work in the future.”
“So you have to have some flexibility in your approach.”
“we needed very concentrated portfolios but control the risk.”
From the episode
Andrew Slimmon on Quantitative Factors in Markets
Andrew Slimmon