Investment objectives

Sub-fund Alfa is a qualifying investor fund and it runs an absolute return investment strategy. Its investment objective is not to copy any index or benchmark in order to outperform it. The investment objective of the sub-fund Alfa is to grow capital under all economic conditions while minimizing drawdowns for investors. All dividends and interest are re-invested in the fund. The sub-fund does not primarily hedge against FX movements. However, that does not mean that in situations of a major appreciation of a foreign currency that the sub-fund is exposed, the sub-fund will not enter into an FX hedging transaction. The sub-fund can enter into a FX hedging transaction also for precautionary reasons.

The sub-fund is actively managed and uses stop limit orders, which allows the sub-fund to hold a highly concentrated portfolio. The sub-fund does not have to be fully invested, which means that in situations of economic instability or recession the value of the fund might be intact by market drawdowns. On the other hand, for its strategic asset allocation, the sub-fund benefits from market stress and price drawdowns to use stock-picking strategy to find stocks of fundamentally strong companies, whose prices went down due to short- or medium-term market stress. Another element of the sub-fund’s strategic asset allocation is selection of the stocks of fundamentally strong companies that possess a durable competitive advantage against their competitors in a given industry.

The sub-fund can also make use of short-term opportunities with respect to either (i) liquid stocks of fundamentally healthy companies, or (ii) using ETFs focused on main asset classes (e.g. major stock indices, sector indices, bond indices or gold), where the investment strategy of entering into the position is predominantly based on technical analysis, which is also reflected in short-term investment horizon.

 

Investment strategy

The investment process of the strategic asset allocation is systematic and disciplined. The whole investment process is based on a few layers, that are mutually supporting each other, and only if all layers add up to a coherent investment view there can be an investment decision within the tactical asset allocation. 

Watch dog

The sub-fund is monitoring the investment universe through the lens of its proprietary market indicators and parameters, i.e. by running its own watch dog that looks for market opportunities.

Fundamental analysis

For every security that the watch dog identifies, the sub-fund assesses its fundamental price. The fundamental price is a fair value but is inherently always based on a subjective assessment. Markets are not behaving efficiently and in the short run they can overshoot the price of some, or all, of the securities far from their fair values. For this reason, the market price and the fair value of a security can in the short term sometime be largely apart from each other. Hence, the sub-fund is aiming at strategically purchasing those securities, the market price of which is below their fair value. The picture below illustrates the inefficient behavior of markets and how it is used for the sub-fund’s investment strategy. As described in the investment objectives (see above), the aim is to take advantage of the market stress on a particular security with the expectation that in the longer term, the market price of a security will converge back to its fair value. 

Technical analysis

Technical analysis is the third element of the investment mosaic. It is also the last but a very important part of the whole investment process. Every investment strategy is as strong as its weakest part. In the world of increased robotization and high-frequency trading, the investment horizon is getting shorter, and hence the sub-fund needs to reflect these trends and support its investment process by the use of technical analysis.

The sub-fund uses a number of technical indicators, which enables to improve timing of the entry into individual positions. The sub-fund combines both short- and long-term indicators, and the combination of both leads to the eventual initiation of the technical buy or sell signal.

Summary

The whole investment process of the strategic asset allocation is based on the individual layers that need to add up together. All parts of the investment mosaic need to become one. The goal of the sub-fund is not to be invested at all times, but to wait for all parts of the investment mosaic to fall in place and act afterwards, including by active portfolio management (see risk management).

Next to its strategic asset allocation, the sub-fund also exploits short-term investment opportunities, which are based either on buying and selling liquid and fundamentally healthy securities that come from the strategic asset allocation, or on using ETFs for main asset classes (e.g. main stock market indices, sectoral indices, gold or bonds). In this case, the investment strategy is dependent on technical analysis, which is also reflected in the short investment horizon. This allocation is also making use of active portfolio management, including stop-loss orders (see the risk management).

 

Risk management

The investment objective of the sub-fund is to grow capital, therefore managing risk is a key component of the whole investment process. The first pillar of risk management is rooted in fundamental analysis, where the sub-fund targets securities with a discount of the fundamental price to the fair value, i.e. it looks for margin of safety, or it targets companies with wide and sustainable moat.

Since the sub-fund’s portfolio is concentrated, the portfolio manager has enough time and opportunity to devote to thorough examinations of every security from all angles. The fundamental bias of all positions is that they are all wrong. This approach leads to constant re-assessment of the validity of the investment thesis behind each position and whether a particular investment would deliver on its goal (i.e. to become profitable). It is very easy to “fall in love” with a position/security and stop being critical, which could lead to losses in the longer term.

The third pillar of risk management is the active use of stop-loss orders. The opportunity to buy low and sell high is not always present, hence stop-loss orders are part of the sub-fund’s investment process. Stop-loss orders are initiated also for positions with positive unrealized balance (profit), at least at the level of the purchase price, because even a positive short-term market development can be overcome. Therefore, an exit from a position with zero profit (i.e. on the level of the purchase price) thanks to the active stop-loss order can sometime be beneficial as it allows to return to the position later at a lower price.