Focus on attractive risk-adjusted excess returns, an efficient combination of two well-documented investment strategies, a disciplined investment process and teamwork are the key words behind our Favourite Equities strategy.
Investment philosophy behind Favourite Equities
The basis of our investment philosophy is the recognition that the financial markets are characterised by anomalies that through active investment management make it possible to create an attractive risk-adjusted excess return over time. Two of the strongest anomalies are value and momentum in the equity market. Our approach to investment in global equity markets is the systematic combination of value and momentum. Simultaneous use of the two strategies has historically generated a higher risk-adjusted return than pure value or momentum strategies. According to the Favourite Equities strategy we invest in equities with the most attractive value and the strongest positive momentum.
Value and momentum
Value is an expression that a given share has a relatively low valuation in terms of fundamentals. The strategy behind value investment is to invest systematically in equities which are valued lower by the market than indicated by fundamental company research in expectation of a positive price correction.
Momentum is based on expectations that an established trend in the price development of a share will continue i.e. the relative return of the previous period will be reflected in the return of the coming period, and investment should be made accordingly.
A strong combination
Both value and momentum have shown their worth in the financial markets. Especially strategies combining several value criteria or several momentum criteria are the sources of higher excess return. Offhand, the two investment styles may seem as advocates, and they often attract different investor types. For instance the precondition of a successful value investment is patience. In comparison, the nature of momentum investment is more short term with focus on news flow and price fluctuations.
Often the strategies do not work simultaneously, but this is the very reason why the right combination may be profitable. In the Favourite Equities strategy value and momentum complement each other, offering exposure against strong investment strategies adjusted to the business cycle. The purpose is to generate a significant improvement of the long-term risk-adjusted return. The combination involves dynamic selection of equities which are selected on the basis of mutually supplementary and diversified criteria.
Investment process – the basis of the portfolio construction
We practise active portfolio management based on consistent and systematic investment processes. The combination of quantitative modelling and qualitative assessment in a disciplined bottom-up process is the basis for the selection of the equities in our portfolios. Teamwork ensures that the competencies of our specialists are fully utilised and that our investment decisions are always well-founded.
Our investment process has been structured in three general work phases with quantitative and qualitative elements – ideas generation, analysis and portfolio construction.
The basis of screening and ideas generation is our own-developed factor model based on an equal weighting of value and momentum. The model has generated a positive excess return in 22 out of the recent 25 years. The modelling is supplemented in the ideas generation phase by our team of experienced portfolio managers.
The analysis of the output of the models is based on a number of explicitly defined criteria relating to the operations of a company, key figures, products, markets and correlation with other companies in the portfolio. In addition, risk analysis is an important aspect in our evaluation of a company's attractiveness.
The portfolio construction is based on our multifactor risk model. Our approach is bottom-up stock picking focusing on the most attractive companies with the lowest possible correlation. We invest on a global scale without geographical or sector-based restrictions. Ongoing supervision ensures that the investment case is always intact and that the portfolio construction has been adjusted to the market development.
If you want more information about Favourite Equities or our other investment strategies, please contact us.