Our aim: to capture the perfect shape
We generate alpha by selecting right skewed return distributions with minimal left tail risk.
The aim of our process
Value strategies in Asia can be highly profitable. Returns are greatly skewed to the right with fat right tails. However, plain vanilla value investing in Asia comes with significant drawdowns. Macro events occur on a regular basis with liquidity and currency dislocation causing substantial draw downs. The defining characteristics of our value philosophy therefore focus on understanding risk and actively managing the left tail to ensure a comprehensive perspective and the full realization of the opportunity set.
Building these distributions in three steps
We target asymmetric pay off structures and select the very best value opportunities by understanding intrinsic value under different scenarios. The risk-reward ratio determines position size taking concentration risk into account. Beyond incorporating downside risk in our fundamental stock picking process we combine our core value book with systematic reversal overlays and quantitatively customized hedges. Once risk capital is allocated we have feedback loops in place to monitor the left tails on a daily basis and adjust were necessary.
Our process in three steps:
1 - Single stock selection
Limited universe – Is the business model understandable?
We have identified a distinct circle of competence and only expose risk capital to what we deem understandable. We shy away from pharma, regulated industries such as telecom and utilities and dislike short cycle business models such as technology and consumer electronics. We spent most of our time on fundamental bottom-up analysis in industrials, materials and consumer related business with high tangible assets.Systematic idea generation – Where is the dislocation?
We have developed a proprietary quant model to help identify dislocation and systematically search for stocks with asymmetric payoff structures. Value is the starting point of our thinking. In our opinion, this leads us to the best risk-reward propositions for further analysis.Investment thesis – What is in the price?
We evaluate the business model and dissect financial statements in order to arrive at the intrinsic value considering various risk scenarios. Having exposure to a business model means having exposure to various likely future outcomes. Only one reality will occur and the closer we come to understanding future outcomes and the extend to which they are reflected in the share price, the greater our degree of success.
2 - Portfolio construction
Position sizes – What is the perceived versus expected risk?
In our opinion, risk is not volatility. Our bottom-up understanding of the business models enables us to understand the risk of permanent capital loss. Cheap stocks tend to carry less risk than perceived and investors in expensive stocks tend to be too negligent. We actively manage position sizes and impose maximum limits on single stocks.Construct – How does the collection of single stock pay offs fit together?
Our portfolio is a collection of bottom-up stock picks with target prices and stop losses; a collection of single stock distributions. We measure concentration risk and dissect variance contribution accordingly. We want to minimize unintended bets and, taking correlation into account, optimize intended bets.Systematic overlay – How we improve our core value approach?
Value based strategies work extremely well in the long run and patience is required. We observe extended period during which momentum themes cause dislocation thereby creating mis-pricing opportunities for us. Based on our quant models, we have designed custom-hedges and baskets to enhance market exposure and style exposure risk management.
3 - Risk monitor & feedback loops
Daily monitoring – Is our style in or out of favour?
Every trade has a stop loss and target price. Theses levels are determined using technical analysis as well as a fundamentally assigned intrinsic value. With our daily profit & loss analysis we run detailed style attribution in order to understand systematic trends in the market place. We assess stock specific moves and monitor our stop losses and target prices.Macro Model – a widely underestimated risk factor
We systematically monitor macro factors to distinguish noise from signal and improve net exposure and sector allocation, as well as risk budgeting.Smart hedges – an efficient manner of fine tune beta exposure
We deploy customized hedges to fit our investment universe, helping to avoid idiosyncratic exposure and to enhance our style bias.222 warning bell
A simple and quantifiable approach to manage portfolio risk. We target 10% volatility and our 222 rule is designed to remain with the limits.