helsinki capital partners€¦ · § the excess return of value stocks over growth stocks globally...
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Asset management to be proud of. TM
Asset management to be proud of. TM
January2019
HELSINKI CAPITAL PARTNERS
Asset management to be proud of. TM
HELSINKI CAPITAL PARTNERS HCP QUANT FUND
A NON-UCITS FUND INVESTING IN SMALL- AND MID-CAP STOCKS
Asset management to be proud of. TM
Helsinki Capital Partners (HCP)
§ First fully transparent fee-onlyassetmanager inFinland,offeringservicefor institutional and private wealth clients, including artists andprofessionalathletes
§ Specialisinginglobalmulti-strategyandvaluedrivenequitystrategies§ Assetmanagementtobeproudof.Foundedin2007,builtandownedby
HCPteam.§ FirmtotalAUM€75.1m(asof31thofDecember2017)
1
26.2
31.8
12.3
4.8
TotalAUM€75,1M
Black Focus Quant ManagedAccounts
0102030405060708090
FirmTotalAUMinM€
Asset management to be proud of. TM
HCP Quant Fund Basics
§ FocusingonValueinvestinginsmall-capstocksinboththedevelopedandemergingmarketsusing quantitative tools to aid in selecting companieswith strong financials and low stockmarketvaluations
§ Strategylaunched4thofOctober2010withcurrentAUMof€7.27m(31stofDecember2018)
§ Fundvehiclecharacteristics– Maximumtwoinvestmentwith20%weight,restwithmaximum10%weight
– Quarterlyliquidwithaonemonthnotice
– Bloombergticker:QUANT4UFH,ISINCode:FI4000090451
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Asset management to be proud of. TM
HCP Quant Fund Sources of Alpha
§ Valuedrivenapproachfocusingonthefundamentalsofcompanies– Returnsfrompricinginefficiencies
– Buywhensufficientlybelowfairvalueasassessedbyquantmodelsthatshortlistsandordersbuytargets
– Holdingperiodof6months
§ Mid-smallmarketfocus– Under-researchedandgreaterrisk/returnprofile(wheresufficientliquidityexists)
§ Quantitativeapproachtofilteringdownandorderingabuylisttargets– Thealgorithmlooksthrough7,700listedcompaniestofindabuylistof~30stockswithfavorablecharacteristics
– Dataqualitycrosschecks
– Discretionarytrading
– 20%Stoplossonthecompanylevel
– 2Xannualportfolioturnover
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1. 2. 3. 4.Quantmodelsfiltersmall-capuniverseforundervaluedcompanieswithstrongfundamentals.
Quantmodelfurtherfiltersoutcompanieswithpossiblereportingmanipulations.
Modelordersabuylistof30stocks.Tradestoportfolioarediscretionaryandequallyweighted.
Activeriskmanagementwithstoplossandprimaryholdingperiodof6months.
Asset management to be proud of. TM
HCP Quant Fund Investment System
4
Whathasworkedinequityinvesting?Successful investment strategies
What causes undervaluation? Influencingfactors
How to improve investment returns? Utilizationofquantitativemethods
”It’s a bumpy road ahead” Nothingisperfect
Asset management to be proud of. TM
Small-cap stocks
Smallcompanieshavereturnedacrosstheworldbetterthanthemarket
5
Country Timeperiod Excessreturn(p.a.) Research
Australia 1985-1996 5.9% Liew&Vassalou(2000)
Itävalta 1978-1995 5.8% Hestonetal.(1999)
Belgia 1978-1995 -1.2% Hestonetal.(1999)
Kanada 1960-2001 5.0% L’Heretal.(2003)
Tanska 1978-1995 3.5% Hestonetal.(1999)
Ranska 1978-1995 3.1% Hestonetal.(1999)
Saksa 1978-1995 1.3% Hestonetal.(1999)
Kreikka 1982-1997 0.5% Rouwenhorst(1999)
Irlanti 1977-1986 5.6% Coghlan(1988)
Source: ”International Evidence on the Size Effect” (Savina Rizova, 2006)
Asset management to be proud of. TM
Small-cap stocks
6
Country Timeperiod Excessreturn(p.a.) Research
Italia 1978-1995 -0.2% Hestonetal.(1999)
Japani 1975-1994 4.2% Hawanini&Keim(2000)
Alankomaat 1978-1995 3.5% Hestonetal.(1999)
Uusi-Seelanti 1977-1984 6.1% Gillan(1990)
Norja 1978-1995 5.6% Hestonetal.(1999)
Portugali 1989-1997 -8.9% Rouwenhorst(1999)
Singapore 1975-1985 4.9% Wongetal.(1990)
Espanja 1978-1995 9.0% Hestonetal.(1999)
Ruotsi 1978-1995 4.1% Hestonetal.(1999)
Sveitsi 1978-1995 1.7% Hestonetal.(1999)
UK 1955-2001 1.8% Dimsonetal.(2003)
Source: ”International Evidence on the Size Effect” (Savina Rizova, 2006)
Asset management to be proud of. TM
Small-cap stocks
7
Country Timeperiod Excessreturn(p.a.) Research
Argentiina 1982-1997 46.1% Rouwenhorst(1999)
Brasilia 1982-1997 15.8% Rouwenhorst(1999)
Chile 1982-1997 3.7% Rouwenhorst(1999)
Kiina 1994-2001 11.1% Drewetal.(2003)
Korea 1982-1997 3.8% Rouwenhorst(1999)
Meksiko 1982-1997 28.7% Rouwenhorst(1999)
Taiwan 1986-1997 8.2% Rouwenhorst(1999)
Intia 1982-1997 -4.2% Rouwenhorst(1999)
Turkki 1989-1997 8.6% Rouwenhorst(1999)
Source: ”International Evidence on the Size Effect” (Savina Rizova, 2006)
Asset management to be proud of. TM
Small-cap stocks
Focusingonsmall-capstockshasworkedwellinboththedevelopedandemergingmarkets
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Market Timeperiod Excessreturn(p.a.) Research
Europe 1978-1995 3.5% Hestonetal.(1999)
USA 1962-1989 ~8% Famaetal.(1992)
Developedmarkets 1986-1996 11.2% Baumanetal.(1998)
Emergingmarkets 1982-1997 8.2% Rouwenhorst(1999)
Sources: ”International Evidence on the Size Effect” (Savina Rizova, 2006), ”Is Size Dead? A review of the Size Effect in Equity Returns” (Mathijs A. Van Dijk, 2011)
Asset management to be proud of. TM
Value investing
§ Valueinvestinghasoutperformedthemarketinthelong-run§ Severaloftheworld’smostsuccessfulinvestorsarevalueinvestors:
WarrenBuffett,JoelGreenblatt,MohnishPabrai,GuySpieretc.§ Valueinvestingreferstoinvestinginundervaluedcompanies§ Valueinvestorvaluescompaniesusingdifferentratios,forexample:
– P/E(PricetoEarnings,–marketpricepersharedividedbyearningsper
share)– P/B(PricetoBookvalue,marketpricedividedbybookvalueofequity)– P/S(PricetoSales,marketpricedividedbysales)– Dividendyield(dividendsdividedbymarketprice)
– FCF(FreeCashFlow)
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Asset management to be proud of. TM
Value investing
ValuestocksoutperformedgrowthstocksinEuropeby10%p.a.betweenyears1985-2007
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Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Value investing
Inthedevelopedmarkets,valuestockshavereturned12%p.a.betterthangrowthstocksbetween1985and2007*
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* In the sample, stocks have been arranged in an order based on their multiples: P/E, P/B, P/CF, P/S and EBIT/EV. A stock’s ranking in each multiple is added together and stocks are put in order based on the total sums. Value stocks are the cheapest 20 % of the stocks based on their summation value and growth stocks are the expensive 20 %. The minimum market capitalization in the sample is 250 million dollars. Returns are calculated in U.S. Dollars.
Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Value investing
Intheemergingmarkets,valuestockshavereturnedover18%p.a.morethangrowthstocksand11%p.a.morethanthemarketbetween1985and2007*
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* In the sample, stocks have been arranged in an order based on their multiples: P/E, P/B, P/CF, P/S ja EBIT/EV. A stock’s ranking in each multiple is added together and stocks are put in order based on the total sums. Value stocks are the cheapest 20 % of the stocks based on their summation value and growth stocks are the expensive 20 %. The minimum market capitalization in the sample is 250 million dollars. Returns are calculated in U.S. Dollars.
Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Value investing
§ Aportfolioconsistingofstocksfromthecheapestfifthindevelopedandemergingmarketsreturnedonaverage18%p.a.*
§ Growthstocksreturnedlessthan3%p.a.*§ Theexcessreturnofvaluestocksovergrowthstocksgloballywas15%
p.a.*
13
* In the sample, stocks have been arranged in an order based on their multiples: P/E, P/B, P/CF, P/S ja EBIT/EV. A stock’s ranking in each multiple is added together and stocks are put in order based on the total sums. Value stocks are the cheapest 20 % of the stocks based on their summation value and growth stocks are the expensive 20 %. The minimum market capitalization in the sample is 250 million dollars. Returns are calculated in U.S. Dollars.
Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Value investing
§ ThefalloftheJapanesestockmarkethasbeenrecordlong§ Between1990and2011theJapanesestockmarketdropped-62.21%§ Valueinvestinggeneratedexcellentreturnseveninthisdifficultmarket
environment§ LowP/Eratiostocksreturned16.9%p.a.between1990and2011§ LowP/Bratiostocksontheotherhandreturned10.6%p.a.
§ Between1975and2011lowP/Eratiostocksreturned23.6%p.a.andlowP/Bratiostocks19.3%p.a.
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Source: ”Performance of Value Investing Strategies in Japan’s Stock Market” (Hong Kong University of Science and Technology Value Partners Center for Investing, 2013)
Asset management to be proud of. TM
Value investing
15
Source: ”Performance of Value Investing Strategies in Japan’s Stock Market” (Hong Kong University of Science and Technology Value Partners Center for Investing, 2013)
Asset management to be proud of. TM
Value investing
Regardlessofgoodreturns,riskinvalueinvestinghasbeenlower
16
Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Value investing
Duringmarketdistress,valuestockshavelostlessoftheirvaluethanthemarketorgrowthstocks
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Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Value investing
§ Between1975and2007,valuestocksintheU.S.returned13%p.a.duringarecessionand22%p.a.duringaexpansion
§ Growthstocksreturned5%p.a.duringarecessionand17%p.a.duringaexpansion
§ Valuestocksoutperformedgrowthstocksinbothrecessionandexpansion
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Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Small-cap value investing
§ Small-capandvalueinvestinghaveperformedwellinthepast§ Howwouldvalueinvestinginsmall-capstockshaveworkedinthepast?§ IntheU.S.small-capvaluestocksreturned5.28–8.40%p.a.morethan
growthstocksbetween1979and1997
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Source: ”The Value Premium for Small-Capitalization Stocks” (Manjeet S. Dhatt, Yong H. Kim & Sandip Mukherji, 1999)
Asset management to be proud of. TM
Small-cap value investing
§ Therisk(volatility)ofsmall-capvaluestockswaslowerthantheriskofgrowthstocks
§ Theamountofexcessreturnsgeneratedvarieddependingontheratioused(e.g.P/EorP/S)
§ Usingdifferentratiossimultaneouslyimprovedtherisk-adjustedreturnsrelatedtoindividualratios
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Asset management to be proud of. TM
Small-cap value investing
Between1926-2004small-capvaluestocksintheU.S.returned15.9%p.a.whilelarge-capgrowthstocksreturned9.26%p.a.*
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* The New York Times used as the source of the graph Eugene S. Fama ja Kenneth R. French’s research and allocation of stocks.
Source: ”The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks” (Ian Wyatt, 2009)
Asset management to be proud of. TM
Small-cap value investing
§ Small-capvaluestockshavereturnedbetterthanlargebluechipstocksuptotoday
§ Russell2000ValueETF,whichbegantradingin2000investsinsmall-capvaluestocksintheU.S.
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IWN (white) = Russell 2000 Value, SPY (green) = S&P 500. Source: Bloomberg
Asset management to be proud of. TM
Small-cap value investing
§ Inthedevelopedcountries,oneofthemostrecentstudyistheresearchdonebyNobelPrizeLaureateEugeneFamaandKennethFrench”Size,Value,andMomentuminInternationalStockReturns”,whichwasreleasedin2012
§ FamaandFrenchstatethefollowing:”Ournewevidencecentersonhowinternationalvalueandmomentum
returnsvarywithfirmsize.ExceptforJapan,valuepremiumsarelargerforsmallstocks.”
§ Accordingtothestudies,investinginsmall-capvaluestockshasworkedglobally
§ Usingseveraldifferentratiossimultaneouslyhasimprovedthechancestogenerateevenhigherreturnswheninvestinginsmall-capvaluestocks
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Asset management to be proud of. TM
Small-cap value investing
24
Source: ”What Works on Wall Street” (James P. O’Shaughnessy, 2005)
Asset management to be proud of. TM
Small-cap value investing
§ SimilarresultscanbefoundinEurope.Forexample,belowisatableofreturnsbetween1991and2011,whereP/Bratiowasusedasaprimaryfactoramongotherratios
§ STOXXEurope600returnsinthesameperiodwere0.91%p.a.
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Source: ”Quantitative Value Investing In Europe: What Works for Achieving Alpha” (Philip Vanstraceele & Tim du Toit, 2012)
Asset management to be proud of. TM
Focused portfolio
§ Diversificationlowersportfolio’stotalrisk§ Inanequityportfolio,diversifyingtoapproximately30stocksgives
alreadyaclosetomaximumbenefitfromdiversification
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Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Focused portfolio
§ WarrenBuffett:”Diversificationisprotectionagainstignorance.Itmakeslittlesenseifyouknowwhatyouaredoing.”
§ Worldwide,thecheapestfifthofstocksreturned18%p.a.between1985and2007*
§ Thatgroupincludes1800stocks§ Thatkindofdiversificationistoobroadwhenconsideringthebenefits
receivedfromdiversification§ Howwouldaportfolioinvestedinthe30cheapeststocksintheworld
haveperformed?
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* In the sample, stocks have been arranged in an order based on their multiples: P/E, P/B, P/CF, P/S ja EBIT/EV. A stock’s ranking in each multiple is added together and stocks are put in order based on the total sums. Value stocks are the cheapest 20 % of the stocks based on their summation value and growth stocks are the expensive 20 %. The minimum market capitalization in the sample is 250 million dollars. Returns are calculated in U.S. Dollars.
Asset management to be proud of. TM
Focused portfolio
Thecheapest30stocksworldwidereturned25%p.a.
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Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
HCP Quant Fund Investment System
29
Whathasworkedinequityinvesting?Successful investment strategies
What causes undervaluation? Influencingfactors
How to improve investment returns? Utilizationofquantitativemethods
”It’s a bumpy road ahead” Nothingisperfect
Asset management to be proud of. TM
Majority of companies are small-cap companies
Therearealotmoresmall-capstocksthanlarge-capstocks
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Sources: Montanaro, FactSet. As of 3.1.2012.
Asset management to be proud of. TM
Majority of companies are small-cap companies
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Companies in the U.S. stock market divided into groups based on market capitalization. Apple’s market cap is more than 2.6 times the combined value of all 2021 micro-cap stocks
Source: ”Analyzing the Analysts: A Survey of the State of Wall Street Equity Research 10 Years after the Global Settlement” (Timothy J. Keating, 2013)
Asset management to be proud of. TM
Minimal coverage
Eventhoughtherearealotmoresmall-capstocks,feweranalystscoverthem
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Source: ”The herd vs the reward, or in praise of contratian investing” (Stacy-Marie Ishmael, Financial Times, 4.11.2009)
Asset management to be proud of. TM
Minimal coverage
§ TheU.S.Stockmarketisconsideredtobetheworld’smostefficient§ Still,attheendof2012almost29%oflistedcompaniesdidn’thavean
analystcoveringthemorthecoveragewasinadequate*
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* The tables last column represents how big percentage of the companies doesn’t have analyst coverage at all. For example, 30 % of 74-248 million dollar market cap companies weren’t covered by an analyst.
Source: ”Analyzing the Analysts: A Survey of the State of Wall Street Equity Research 10 Years after the Global Settlement” (Timothy J. Keating, 2013)
Asset management to be proud of. TM
Minimal coverage
§ Theanalystcoverageofsmallcompaniesisminimal,whichmakesitpossibleforsmall-capstockstobetradingatadifferentlevelthanthecompanies’truevalues
§ Thismakesiteasierforinvestorstofindmoreundervaluedstocksamongsmall-capvaluestocks
§ Analyzingsmallcompanieswouldrequiremoreresources
§ Analyzingthemisn’tprofitableforanalysts,becausesmall-capstockscannotbeofferedtoasmanyinvestorsaslarge-capstocks
§ Thereforesmall-capstockswillremainlesscoveredinthefuture§ Thisalsoleadstoundervaluedsmall-capstocksreturningmorethanthe
marketinthefuture
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Asset management to be proud of. TM
What color are A and B squares?
35
The copyright holder of this work allows anyone to use it for any purpose including unrestricted redistribution, commercial use, and modification.
Asset management to be proud of. TM
Answer: They are both grey
36
The copyright holder of this work allows anyone to use it for any purpose including unrestricted redistribution, commercial use, and modification.
Asset management to be proud of. TM
Human decision-making process is flawed
§ Inthepreviousexample,ourbraintellsusthatsquareBiswhite=>theinformationisincorrect,eventhoughourbrainistellingustheopposite
§ Acomputerwouldhaveansweredthequestioncorrectly=>theRGBvaluesofbothofthesquaresarethesame
§ Thehumanabilitytoprocessinformationislimitedanddecision-makingprocessisimperfect
§ Intraditionaleconomicspeopleareassumedtheactrationally§ Inreality,peopleoftenbehaveirrationally
37
Asset management to be proud of. TM
Human decision-making process is flawed
§ Anexampleofacoinflippinggame:– Heads:youwin10euros– Tails:youlose10euros
§ Wouldyouplaythegame?§ Let’sassumethatyouhavejustwon100euros.Wouldyounowplaythe
game?
§ Whatifyouhadjustlost.Wouldthatchangethegame’sattractiveness?§ Majorityofpeoplearereadytoaltertheirbehaviourbasedonprevious
results§ Thisisdespitethefactthateachround’sexpectedvalueisthesame
§ Completelyrationalpersonwouldactthesamewayeverytime
38
Asset management to be proud of. TM
Human decision-making process is flawed
§ Inthepastfewyearsbehavioralfinancehasgainedpopularity§ Behavioralfinancestudiesunsystematicbehaviorininvesting§ Researchfindingsexplainwhyinvestorsdon’tactoptimally
– Alosshurtstwiceasmuchasanequalsizegain– Theholdingperiodofaprofitableinvestmentisshorterthanthe
holdingperiodofanunprofitable
– Anchoringtoapaidpriceofastock– Investorsareactiveinabullmarket(highrisk)andparalyzedinabear
market(lowrisk)– Etc.
§ Knowinginvestmentpsychologyisastepforward,butaloneitisnotenoughtochangeinvestorbehaviour=>causesofbehaviourarerooteddeeper
39
Asset management to be proud of. TM
Human decision-making process is flawed
§ Thesamereasonsexplainwhyitisdifficultforinvestorstotakeadvantageofprofitableinvestmentpractices
§ Themostprofitableinvestmentsareoften”ugly”and”doomed”companies
§ Itiseasiertoinvestinacompanywithagood”story”behinditasotherinvestorsareexcitedaboutthecompanyaswell
§ Duetoherdbehaviour,itisdifficulttoactagainstthegeneralview=>itiseasiertobewronginagroupratherthanalone
§ Statisticsshowthatthebrightfuturesofmanygrowthcompaniesareshattered=>investorsoverpayforfutureexpectations
40
Asset management to be proud of. TM
Human decision-making process is flawed
§ Ontheotherhand,thedistressedtimesof”ugly”companiesdon’tlastaslongasinvestorsexpect=>futureexpectationsareoverlypessimisticandthereforestockpricesaretoolow
§ Theideaofutilizingquantitativeinvestmentmethodsistoeliminatethehumanerrorfromtheinvestmentprocesspreventinggoodreturns
§ Analyzingtensofthousandsofsmall-capcompaniesisalsoimpossibleby
usingatraditionalwayofanalyzingeachcompanyseparately
41
Asset management to be proud of. TM
HCP Quant Fund Investment System
42
Whathasworkedinequityinvesting?Successful investment strategies
What causes undervaluation? Influencingfactors
How to improve investment returns? Utilizationofquantitativemethods
”It’s a bumpy road ahead” Nothingisperfect
Asset management to be proud of. TM
Quantitative methods
§ Aninvestorishisownworstenemy=>peopleareprisonersoftheirfeelings
§ Inseveralsituationsasimplecomputermodelworksmorereliablyandmoreaccuratelythanapersonwithasubjectiveview
§ Asanexample;thereisastandardizedtestcalledMMPI-test(MinnesotaMultiphasicPersonalityInventory)toidentifyneuroticismand
psychoticism§ Identifyingthemisimportantbecausetheyaretreateddifferently§ In1968LewisGoldbergwentthrough1,000patients’MMPItestresults
andformedamodelbasedonthedata,whichgaveacorrectdiagnosis70
%ofthetime§ Goldbergthenaskedpsychologiststodiagnosethesamepatients
43
Asset management to be proud of. TM
Quantitative methods
§ Themodelwasclearlymoreaccuratethaneventhebestpsychologist§ Next,Goldberggavethemodeltothepsychologistswhocouldusethe
modeltohelptheirowndiagnoses
44
Source: ”Painting by numbers: an ode to quant” (James Montier, 2006)
Asset management to be proud of. TM
Quantitative methods
§ Byusingthemodel,theaccuracyofdiagnosisincreasedsignificantly§ Still,theaccuracyofthediagnosesdonebypeoplewasworsethanthe
model’s§ Therearesimilarresultsforidentifyingbraininjuriesandprobabilityof
repeatingprobationviolationsetc.
45
Source: ”Painting by numbers: an ode to quant” (James Montier, 2006)
Asset management to be proud of. TM
Quantitative methods
§ Groveetal.wentthrough136differentstudies,whichdealtwithdecision-makingrangingfromheartattackdiagnosistoevaluatingjobcompatibility
§ Onlyineightofthestudiesthequantitativemethodlosttopeople§ Thesimililarityinalleightofthesestudieswasthatthequantitative
methodsdidn’thaveaccesstothesameinformationaspeopledid§ Ineverystudywherethequantitativemethodhadaccesstothesame
informationaspeople,quantitativemethodwasbetter
46
Sources: ”Clinical versus mechanical prediction: a meta-analysis (Grove, Zald, Lebow, Snitz & Nelson, 2000)” and ”Painting by numbers: an ode to quant” (James Montier, 2006)
Asset management to be proud of. TM
Quantitative methods
§ Quantitativemodelsareusefulandwidelyused:– Airplanepilots’checklistbeforetakeoff– Weatherforecasts– Carinsurance– Etc.
§ Simplyput,aquantitativemethodmeansusingacomputertoanalyzea
largeamountsofdata=>peoples’abilitytoprocesslargeamountsofdataisweak
§ Itispossibletoscreenthemostpotentialstocksoutoftensofthousandsofstocksusingquantitativemethods=>itisimpossibleforapersontogo
throughthesamenumberofstocksonebyonewheneveryquarterthere’snewinformationcomingout
47
Asset management to be proud of. TM
Quantitative value investing strategy
§ Quantitativemethodsworkthebestwhenusedtoanalysesmallandmediumsizecompanies,becauseoflackofanalystcoverage
§ Somanyprofessionalsanalyselargecompaniesthatquantitativemethodsdon’tgiveacompetitiveadvantagewhenanalysingthem
§ Quantitativevalueinvestingstrategycombinesvalueinvestingandefficientuseofnumericalinformation
§ Companies’annualandquarterlyreportsarenumericalinformation§ Traditionalratiosusedbyvalueinvestorsarewellsuitedforautomated
dataprocessing(P/E,P/B,dividendyield,etc.)§ Quantitativemethodsenablethecombiningofdifferentvalueinvesting
strategies
48
Asset management to be proud of. TM
Quantitative value investing strategy
§ Researchshowsthatthemulti-factormodelsproducebetterrisk-adjustedreturnsthanwhenonlyonefactorisused
§ Usingquantitativemethodscanprotectagainstfraudulentaccountingmethods:– DechowF-score– AltmanZ-score
– BeneishM-score§ ForexampleBeneishM-scoremeasuresacompany’srevenuegrowth,
grossprofit,accountsreceivablesanddebtlevel§ 76%ofcompanieswithanM-scorebelow-2.22usedfraudulent
accountingmethods§ Only17.5%ofcompanieswithfraudulentaccountingreceivedanM-score
above-2.2249
Source: ”The Detection of Earnings Manipulation” (Messod D. Beneish, 1999)
Asset management to be proud of. TM
Quantitative value investing strategy
§ Quantitativemethodscanbeusedtoefficientlyutilizedifferentvalueinvestingstrategiesbasedonfundamentalinformation:– F-score(Piotroski)– MagicFormula(Greenblatt)– ERP5(Vanstraceele&Allaeys)– NetCurrentAssetValue(BenjaminGraham)
– TinyTitans(O’Shaughnessy)– ValueCompositeOne(O’Shaughnessy)
§ Forexample,PiotroskiF-scoremeasuresacompany’sprofitability,leverageandoperationefficiencybyutilizingninedifferentfactors(e.g.
ROA,OCF,profitmargin,long-termdebtdevelopment)
50
Asset management to be proud of. TM
HCP Quant Fund Investment System
51
Whathasworkedinequityinvesting?Successful investment strategies
What causes undervaluation? Influencingfactors
How to improve investment returns? Utilizationofquantitativemethods
”It’s a bumpy road ahead” Nothingisperfect
Asset management to be proud of. TM
Nothing works all the time
§ Onemustkeepinmindthateventhoughagoodinvestmentstrategyworksmostofthetime,itdoesn’tmeanitwillworkallthetime
§ Eventhebestinvestmentmethodsencounterperiodsoflowerreturns,sometimescontinuingformanyyears
§ Thefactthataninvestmentstrategydoesn’talwaysworkmakesitpossiblethatitwillworkinthefuture
– Allinvestorswouldusethesamestrategyifonestrategywouldalwaysworkwithoutarisk
– Duringperiodsofpoorreturns,someinvestorsabandonthestrategy§ Oftenthisoccursrightbeforethestrategystartsproducingexcessreturnsagain
52
Asset management to be proud of. TM
Nothing works all the time
70%ofportfoliomanagerswhohavegeneratedexcessreturnsofover3%p.a.haveunderperformedthemarketsforthreeyearsorlonger*
53
* Figure 14.6 uses a constructed universe where all the fund managers have 3 % alpha and 6 % tracking error. I then let the make-believe managers run money for 50 years. The chart illustrates the frequency of years of back-to-back underperformance. Around 70 % of the make-believe fund managers displayed 3 or more years of underperformance! –James Montier
Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Nothing works all the time
GoyalandWahalstudiedin2005thehiringandfiringoffourthousandportfoliomanagersmanagingfundsforpensionfundsintheU.S.between1993and2003*
54
* More accurate information can be found in ”The Selection and Termination of Investment Management Firms by Plan Sponsors” (Amit Goyal & Sunil Waha, 2005)
Source: ”Value Investing: Tools and Techniques for Intelligent Investment” (James Montier, 2009)
Asset management to be proud of. TM
Nothing works all the time
§ Apensionfundtraditionallyhiredaportfoliomanagerwith14%excessreturnsinthelastthreeyears
§ Portfoliomanagerswhogotfiredduetopoorperformancegenerated5%excessreturnsinthreeyearsafterbeingfired
§ Thisindicateswellhowpainfulperiodsofunderperformanceare§ Aperiodofunderperformancehashistoricallyalwaysbeenfollowedby
outperformance,whichcompensatesforthepreviouspoorerreturns§ EvenHCPQuantfundcanbeexpectedtohaveperiodsof
underperformanceforseveralyears
55
Asset management to be proud of. TM
Nothing works all the time
§ ThebestperformingfundofthedecadeintheU.S.attheendof2009wasCGMFocusFund
§ Thefundreturnedonaverage18.2%p.a.overthedecade§ Atypicalfundinvestorlost-11%p.a.§ Thisisbecauseinvestorsinvestedinthefundafteragoodperiodandtook
theirmoneyoutduringapoorperiod
§ Timingisextremelydifficult,ifnotimpossible§ Accordingtodifferentstudies,investorswhotrytotimethemarkets
performworsethanothers§ Eventhebestfunddoesn’thelptheinvestor,iftheinvestorcannot
toleratepricefluctuations
56
Source: ”Best Stock Fund of the Decade: CGM Focus” (Eleanor Laise, The Wall Street Journal, 31.12.2009)
Asset management to be proud of. TM
Individual investor’s tax shield
§ HCPQuantfund’sinvestmentstrategy’sstockturnoverratioishigh§ Atypicalstockisheldintheportfoliofromsixmonthstoayear§ AnindividualinvestorpayingtaxesinFinlandhasacapitalgainstaxof
30/34%§ Thefundsreturnsaretax-free§ Inafund-basedinvestmentstrategycompoundingeffectisemphasized
becausetheinvestorpaystaxesonlywhenwithdrawingmoney§ Thesameinvestmentstrategyismoreprofitableforalongtermindividual
investorasafundthanifinvestedindividually
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Asset management to be proud of. TM
Summary of HCP Quant
§ Anon-UCITSfundinvestinginsmall-andmid-capstocks§ Investsinglobaldevelopedandemergingmarketstocks(Europe,USA,
Asia,Australia)§ Utilizesquantitativeinvestmentmethodsininvesting,withagoaltoavoid
humanlimitations§ Focusesinvestmentsinafewdozenstocksanalyzedtobethebestofclass
§ Doesn’tusethetypicalmarketweightedportfolioweighting§ Isbuiltonastrongscientificresearch;usesprovensuccessfulinvestment
strategies,whichcanbeassumedtoperformwellinthelongrun
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Asset management to be proud of. TM
Independent Risk Management
§ Investmentrisk– Portfoliomanagercontrolsriskinlinewithportfoliostrategy– HCPInvestmentcommitteewithtwopersonsindependentfromtheportfolio
managercontrollsriskwithself-standingmethodology§ Maximumtwoinvestmentwith20%weight,restwithmaximum10%weight§ Liquiditymanagementforquarterlyliquiditywithaonemonthnotice
§ Monitoringofcounterpartyrisk
§ Monitoringofvolatilityondifferenttimescales
§ Internaloperationalrisk– IndependentPrimeBroker(SEB,InteractiveBrokers)– Auditor given real time access to auditable transaction and portfolio data.
RegularchecksintoNAV,ataminimumeverytwomonths(EY).Annualaudit.– Custodiangivenreal timeaccess toauditable transactionandportfoliodata.
RegularchecksintoNAV,ataminimumoneoverallauditannually(SEB)
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Asset management to be proud of. TM
The Fund Management Team
PasiHavia–PortfolioManagerofQuantFund§ PasijoinedHelsinkiCapitalPartnersin2013wherehemanagesthequantitativestrategy
fund,HCPQuant.PreviouslyheholdseniorsoftwareengineeringrolesincompaniessuchasNokia,MyOrigoandInvestmentIntelligenceandstartedinvestingthroughself-builtquantitativeinvestmentmodelsin2010.
§ PasihasalsopublishedabookaboutpersonalwealthmanagementandwrotewidelyreadinvestmentbloginFinland.HestudiedInformationProcessingScienceandFinanceattheUniversityofOulu,Finland.
§ Hehas15yearsofinvestmentexperience.§ “IhadworkedoveradecadewithsoftwaredevelopmentbeforeIbecamepartoftheHCP
team.Joiningboththesoftwareandinvestingindustryhappenedbecauseofagenuineanddeepinterestinthesubjects.IfoundmywaytoHCPwhenIrealisedhowmyandthecompany’svaluesarealigned.IrespectHCP’swaytooperateopenlyandhonestly;thingsaresaidastheytrulyare.Iwanttobepartofbuildinganassetmanagementcompanythatputsthecustomers’needsfirst”.
Kaapelitehdas,Tallberginkatu1D5thfloor,00180Helsinki,FinlandTel+358968988481Fax+358968988475www.hcp.fi
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Asset management to be proud of. TM
Service Providers
§ Legalstructure AlternativeInvestmentFund(AIF)§ Domicile Finland§ FundManager HelsinkiCapitalPartnersFundManagementCompanyLtd§ Custodian SkandinaviskaEnskildaBanken(SEB),Finland§ Auditor Ernst&Young,Finland(EY)§ LegalAdvisor EY,Finland§ FundAdministrator RealTimeAccessbyEYandSEBintoauditabletransactionand
portfoliodataofHCPFundadministration.Regular,atminimum bi-monthly,checksintoNAVbyEY.Annualaudit(SEBandEY).
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Asset management to be proud of. TM
“Value investing is at its core the marriage of a contrarian streak and a calculator.”
Seth Klarman
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