Forty years of fundamentals: Ram Rasaratnam on the evolution of quant investing

The rapid evolution of technology has not altered the core challenge of equity investing: understanding fundamentals. That is the view of Ram Rasaratnam (pictured), chief investment officer of equity quant investing (EQI) at AXA Investment Managers, who believes that although quant investing has changed dramatically over the past four decades, the essence of good investing remains the same.

“We’ve been consistent to that model of how we solve equity markets” Rasaratnam said, explaining that EQI’s approach is grounded in replicating what a traditional analyst does, just at greater scale and speed. “We try to do what an equity analyst does, but in a systematic, repeatable way, across 20,000 stocks every single day.”

This consistency is underpinned by a deep belief in modelling fundamentals, not prices or returns. “We model fundamentals,” Rasaratnam said, “and ultimately, in the long term, if you can get the fundamentals right, there is some locus to which the price has to be anchored.” This long-view thinking anchors EQI’s resistance to transient fads that often permeate financial markets, including superficial applications of AI.

While AXA IM has adopted AI tools early – it built its first neural network eight years ago – the firm has avoided blindly embracing black-box models. Rasaratnam pointed to the implementation of a “white box” framework, a layer of linear regression built atop the neural network, designed to offer transparency into variable importance. “The problem with neural networks is that they are black boxes. You don’t know what has been learned,” he said. “So we put a white box around it.”

This commitment to transparency reflects EQI’s cautious optimism about AI. “It feels like magic when you use these tools,” Rasaratnam said, referencing technologies like ChatGPT. “But the difference is that the data going into those tools is pristine. Equity markets are full of noise.” In his view, training AI on equity market data without robust fundamental context is a recipe for failure.

EQI’s approach is technology with purpose. The firm recently integrated five terabytes of global patent data, millions of pages of filings, into its investment models. “It’s all text,” Rasaratnam explained. “And for us, it’s converting that text into matrices that we can then use in our models.” EQI uses this data to calculate a “cosine to narrative score” to assess corporate innovation, especially as a proxy for future intangibles.

This ties into a broader shift in corporate balance sheets, Rasaratnam noted. Forty years ago, companies were balance-sheet heavy. “Now it’s all intangibles. R&D and capitalising R&D isn’t good enough anymore. You need to understand the patents, the innovation and what that says about future fundamentals.” Understanding innovation is not only about future earnings, but also about identifying how companies position themselves in relation to carbon transition and sustainability.

Indeed, AXA IM’s quant platform was early in integrating ESG into its core strategy. “The carbon repricing in markets hasn’t happened,” Rasaratnam said. “When it does, it will happen quickly, and by the time we realise it’s happened, it’s too late to chase.” Hence the early adoption. The firm’s Australian strategy, launched 11 years ago, was the first within EQI to integrate ESG as deeply as it did.

To deepen its ESG understanding, EQI returned to the patent data. “We wanted to get into this green patent space, to help us identify companies that could impact the future fundamentals of their income statement or balance sheet in a positive way.” Rasaratnam believes this is not only good investing, but also good stewardship – technology serving a larger thesis, not simply chasing buzzwords like ‘AI’ or ‘sustainability.’

Rasaratnam is also a firm believer in the importance of earnings and their forward trajectory. “It’s not just about fundamentals. It’s the forecast. It’s what the fundamentals will be in 12 months’ time.” EQI builds forecasting modules to anticipate market expectations and earnings surprises. “You have to be in that kind of beauty parade mindset, it’s not just what you’re delivering, it’s how the market views what that delivery is and what the forecast is.”

He is less enamoured of price momentum, despite its popularity among quants. “You might think following price momentum is dumb, but it turns out there is actually information in price.” Still, AXA IM exited momentum strategies years ago in favour of earnings-estimate revisions. “There’s much more stability around that, and again it’s anchored in fundamentals.”

These insights reflect a measured approach, one that sees technology as a means to enhance core investment beliefs, not replace them. This mindset also extends to infrastructure. EQI’s entire platform, from the code base to the signals, is proprietary. “There’s no third party,” Rasaratnam said. “We’ve been evolving that code base nonstop for over 40 years.”

As an anecdote, Rasaratnam referenced an academic paper titled The Boats That Didn’t Sail, which examined stock price volatility in London and Amsterdam during the 18th century. The finding? In the absence of information, volatility increased. “This is the human condition,” Rasaratnam said. “In the absence of information, people inject volatility.” It is this behavioural insight that reinforces the EQI team’s belief that systematic investing, rooted in fundamentals, offers a correction to market noise.

EQI’s story, then, is not one of reinvention. It is a case study in intellectual and technological evolution grounded in a durable investment philosophy. “Stay on course,” Rasaratnam said. “It’s not about trying to reinvent ourselves. It’s about doing what we’ve always been doing.” In a world that often prizes novelty over nuance, it serves as a reminder that consistency, clarity and curiosity are still some of the most valuable traits in investment management.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.