Methodical Investment Management
- 1. Methodical Investment Management INTENDED FOR PROFESSIONAL INVESTORS ONLY – MAY 2018
- 2. CONFIDENTIAL – FOR PROFFESIONAL USE ONLY This document is confidential and is being made available to a limited number of persons for informational purposes only and for their exclusive use subject to the provisions below. This document is not intended to form the basis of any investment decision and should not be considered as a recommendation by Methodical Investment Management (Pty) Limited (the “Company”) or any other person in relation to the Company. This document is not being provided to or intended for persons located in the United States, Canada or Japan. Any person reading this document should first satisfy themselves that they are not subject to any local requirements that prohibit or restrict such access and must not contact the Company with an intention to invest unless authorised, eligible and lawful to do so. None of the information contained in this document has been verified by the Company. The Company makes no representations or warranties, express or implied, as to the adequacy, completeness or accuracy of any statement or other information contained herein or in any other oral or written information furnished or made available, nor as to the reasonableness of any assumption contained herein or therein and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. Nothing contained herein or therein is, or shall be relied upon as, a promise or representation, whether as to the past or the future. No party shall have any right of action against the Company or any other person (including, for the avoidance of doubt, their respective employees, directors, officers, contractors, advisors, members, affiliates, successors and agents) in relation to the accuracy or completeness of the information contained in this document or any other written or oral information made available to it in connection with the Company or its business. This document may contain forward-looking statements, opinions and/or projections concerning funds managed by the Company prepared by the Company’s management which involve significant elements of subjective judgement and analysis which may or may not be correct. Such forward-looking statements, opinions and projections are not guarantees of future performance and involve known and unknown risks and uncertainties. Other important factors could cause actual results to differ from the statements, opinions and projections contained herein. Forward-looking statements, opinions and projections are based on historical and/or current information that relate to future operations, strategies, financial results or other developments. The recipient agrees to keep confidential any information contained herein and any other written or oral information otherwise made available in connection with the Company or in connection with any further investigation. Any recipient hereof should conduct its own independent analysis of the Company, its managed funds and the data contained or referred to herein or therein. In furnishing this document the Company does not undertake any obligation to provide the recipient with access to any additional information or to update this document or additional information or to correct any inaccuracies therein which may become apparent. This document must not be copied, reproduced, distributed or passed to others at any time. This document does not constitute investment advice and the Company undertakes no obligation with respect to the recipient hereof. Any investment in financial products or funds carries substantial risk and may involve special risks that could lead to a loss of all or of a substantial amount of such investment. The Company strongly recommends that any persons reading this information document consult with financial advisors.
- 3. Methodical Investment Management – Highlights Owner-managed independent investment manager Invests only in equities Capital raised ensures business is fully financed for five years South African ZAR equity fund Long-only Low correlation to other leading funds Global USD equity fund Long-only Fundamental investment principles applied using systematic processes Alpha creation through the cycle Managed Accounts Segregated Mandates
- 4. What we’ve done in just 2 years… Creation of a real business with long-term, sustainable prospects • Established a permanent office and a recognisable brand • Grown the company size from 3 to 10 team members • Successfully partnered with professional third-party firms for Compliance, Fund Administration, Legal and Accounting. • Launched 3 long-only Unit Trusts (June 2016, July 2016, Feb 2017) and an institutional segregated account • AUM now approaching ZAR 450 million • Launched and promoted the Methodical brand: TV segments Monthly newsletter (the Methodical Insider) and articles Participation in conferences and international symposiums and recently appointed to the advisory board of the Systematic Investment Symposium Placed on Euroclear with growing investor interest • Moved the algorithm base from Excel to an R-program platform • Reduced trading costs and time significantly through tailored systems with Ducat and Pictet • Social responsibility: sponsoring the Children of the Dawn charity – currently 4 children
- 6. Methodical believes in the wisdom of the crowd ..but uses technology to mitigate left-hand tail risks – an adaptive, modernised strategy Source: Bloomberg (USD), Methodical
- 7. Traditional strategies earn alpha in cycles, not consistently Which style to choose? Over time, investors at risk from manager selection AND from market risk Source: Bloomberg (USD), Methodical, Jan 2000 – March 2018 (reverse attribution prior to June 2016) Alpha Over Time: 12-month rolling outperformance of MSCI Value and MSCI Growth style indices compared to the MSCI World index (baseline) Value Value ValueGrowth Growth Growth GrowthGrowth
- 8. Momentum: Perception vs Reality Amplitude of returns ranked on a monthly basis Source: MSCI, Bloomberg
- 9. Methodical presents AlphaGeneration™ An adaptive trend-following equity strategy that creates sustainable long-term alpha Implement robust investment systems 3 Refrain from interference Avoid sentiment 2 Invest on facts, not feelings Emphasise alpha, not beta factors 1 Invest with conviction Invest in the best opportunities 4 Be open-minded & style agnostic Extend the investment horizon 5 Invest through the cycle Adapt continuously 6 Always be ready to adjust holdings • AlphaGeneration™ creates long-term alpha with market-level risk¹. • The process keeps investors above the benchmark an expected 7 years out of 10¹. • Methodical’s process results in low correlation to other leading global equity funds. • Including Methodical within a portfolio increases diversification, reduces volatility and enhances returns². 1. Methodical’s retroactive attribution 1999-2016 demonstrates viability of model at MSCI average-level downside risk. 2. Methodical has run several composite portfolios to test inclusion impact. These are available upon request. AlphaGeneration™ integrates several cardinal investment rules:
- 10. AlphaGeneration™: active, systematic investment process Technology enables resolution of historic limitations and reduces risk Source: Methodical The global investment universe is flooded with information. Traditional analysts struggle to reliably process all potential positions. Traditional investment can suffer from impulsive and irrational decision-making. Bias and emotion cloud human judgement, especially in times of stress. Result: inconsistent, impulsive & irrational decision-making. Limited time and attention mean that decision-making is prone to shortcuts and mistakes. S C O P E B I A S E R R O R Traditional strategies have always been compromised
- 11. Systematic investing is already well-established Globally, almost $3 trillion is managed using systematic methods 10 Largest Quant Fund Managers Region AUM (USD) AQR USA $225bn Bridgewater USA $160bn QMα USA $138bn Acadian Asset Management USA $ 87bn Renaissance Technologies USA $ 84bn MAN Group (quant strategies) UK $ 57bn Two Sigma USA $ 51bn JPM Asset Management (quant strategies) USA $ 45bn DE Shaw & Co USA $ 45bn Millennium Management USA $ 35bn $927bn Data crunching Smart Beta Quant Statistical Arbitrage Systematic Pairs Trading Risk Arbitrage Directional Trading Relative Value Convertible Arbitrage Managed Volatility High-Frequency Trading Hedging Quantitative strategies come in a variety of forms. All focus on data processing and a rules- based environment. Methodical uses systematic investment to avoid emotional interference. It is an active management style markedly different from both passive trackers and traditional discretionary funds. Source: Methodical, individual public company websites, Financial Times, Bloomberg, 2017 – Q1 2018 data
- 13. AlphaGeneration™ employs systematic implementation It’s all about process, process, process Methodical analyses a universe of 1500+ eligible global stocks Strong international reach: all listed liquid equities on major, developed-market exchanges Objective, data-driven investment decisions Stocks chosen without emotional attachment, without individual bias & filters market noise In-house proprietary algorithms calculate over 13.3 million data points daily Consistent, coherent analysis of each eligible stock in the investment universe A buy list is constructed comprising the best available stocks As market conditions change, the portfolio is regularly adjusted Portfolio managers oversee, interrogate and test system integrity New investment theses are examined rigorously and fed back into the investment model
- 14. Data sourcing Financial analysis Asset identification Sorting Ranking Valuation analysis Allocation & weightings Portfolio construction Tilt to/from equities into cash Risk management Implementation delivered through proprietary algorithms Portfolio managers encode guidelines into two principal modules Objective, ruthless stock selection Reliable, continuous and error-free Source: Methodical
- 15. PROPEL Earnings drive price – price drives performance Liquidity Earnings Consistency Relative Valuation Relative Earnings Change Price Momentum Earnings Price Sensitivity Apart from short-term technical fluctuations, the only long-term driver of share price is company earnings. PROPEL searches the markets for stocks that meet Methodical’s eligibility criteria and investment parameters. The optimal portfolio is dominated by the following six factors. Over 13.3m discreet data points are calculated before every trade date. Source: Methodical
- 16. Greater Upside Lower Upside Each tier has an initial weight for new investments. Weighting of each stock initially determined by its tiering. Before investment, the relative weighting of stocks is adjusted by NAVIGATE. PROPEL NAVIGATE PROPEL & NAVIGATE PROPEL ranks selected shares into tiers – NAVIGATE adjusts share allocations Source: Methodical Tier 1 Tier 3 Tier 2
- 17. Stocks with less clear signals enter the portfolio in the bottom tier. A stock is sold if the initial signal to buy was false. Stocks may be given a higher initial weight in the portfolio if valuation signals are clear. As a stock becomes expensive (relative to itself), NAVIGATE reduces stock weighting and harvests alpha. As a stocks show more upside, NAVIGATE assigns a higher weight and the stock moves into next tier. At the point when the stock is sold, exposure within the portfolio is low. NAVIGATE Continuously monitors the portfolio and manages exposure to individual stocks Source: Methodical
- 18. Vito Algorithms The Strategy currently employs 3 1) Earnings Test 2) The MAT Test 3) The Bubble Test
- 19. In trending periods, Methodical does very well relative to peers Sub-optimal performance in trendless periods Performance expectations Long-term alpha generation – through the cycle Trendless Sharp reversal LESS FAVOURABLE FAVOURABLE
- 20. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% Outperformance Methodical Global Equity MSCI World Jan 2000 – April 2018 Performance expectations Methodical Equity Prescient Fund compared to the JSE ALSI
- 22. Global Fund: ongoing performance Methodical Global Equity Fund Source: Morningstar, Methodical, as at 31 March 2018. Inception date 01 August 2016; launch date 01 June 2016. Fund return since inception: 20.04% Fund Performance Methodical Global Equity Fund MSCI World Index % of Peers Beaten by Methodical Running 3-month 1.85% -1.74% 97% Running 6-month 7.86% 3.31% 94% Running 9-month 15.93% 7.85% 97% Running 12-month 15.83% 11.50% 75%
- 23. Global Fund: low correlation An outlier compared to other SA global equity funds Source: Morningstar, Methodical
- 24. Global Fund: clear portfolio benefits Combining Methodical with Orbis creates an ideal sample alpha strategy Source: Morningstar, Bloomberg (USD), 01 Jan 2002 – 31 March 2018 Alpha Over Time: 12-month rolling outperformance of MSCI Value and Growth styles compared to the MSCI World index (baseline)
- 25. Each re-balancing date offers upside Actual performance does not deviate significantly from the outer “best possible” performance boundary Source: Morningstar, Bloomberg (USD), 01 Jan 2002 – 31 March 2018 The outline of actual performance does not deviate significantly from the outer “best possible” envelope
- 26. Top 10 holdings Source: Bloomberg, Morningstar, Methodical, as at 30 April 2018 Stocks selected for alpha generation potential – not to manage a benchmark Company Sector Size % NETFLIX Communications 4.26% Adobe Systems Inc Technology 4.13% Red Hat Inc Technology 4.07% MICRON TECHNOLOGY Technology 4.02% WW Grainger Inc Consumer, Cyclical 3.72% Nektar Therapeutics Consumer, Non-cyclical 3.16% Macy's Inc Consumer, Cyclical 2.78% INTEL CORP Technology 2.66% Siltronic AG Technology 2.56% AUTODESK Technology 2.55% Total 33.91%
- 27. A2 Milk Company Stock Example Ticker A2M AT (Bloomberg) Industry Sector Consumer Non-Cyclical Country of Operations New Zealand Current Share Price 12 AUD$ 52 week High/Low 3 – 13 AUD$ Market Capitalisation 8.7 bn AUD$ ($6.52 bn USD) Date entered portfolio 04 July 2017 Min/Max Exposure 0.94% - 2.22% Exposure Momentum Negative Source: Bloomberg, Methodical. Geographic Distribution (%) Portfolio Date: 31 March 2017 Product Distribution (%) Portfolio Date: 31 March 2018 Company Summary The A2 Milk Company produces cow’s milk which is free of a protein called beta casein A1. The Company offers its products in Australia and New Zealand. Interesting facts A2 milk is a strain that naturally lacks a form of β-casein proteins called A1 and instead has mostly the A2 form. Such milk is more easily digested by humans with dairy intolerances. Since launch in NZ, the company now also sells Australia, New Zealand, China, United States and the UK. The company has begun branching into associated products such as infant formula. Investment Rationale • Increasing buy recommendations • Stable price momentum • Moderate earnings growth • Constant valuations PROPEL Ranking NAVIGATE Vector Position Size Holding Period HPR 1.05% 11m 211.35%# 40 Milk Sales
- 28. Kering Stock Example Ticker KER FP (Bloomberg) Industry Sector Consumer Cylical Country of Operations France Current Share Price € 493 52 week High/Low € 285 – 493 Market Capitalisation € 61.95 billion ($74.2 bn USD) Date entered portfolio 01 September 2017 Min/Max Exposure 0.44% - 1.77% Exposure Momentum Positive Source: Bloomberg, Methodical. Geographic Distribution (%) Portfolio Date: 31 March 2018 Product Distribution (%) Portfolio Date: 31 March 2018 Company Summary Kering designs, manufactures and markets fashion and leather goods globally. The Company specializes in ready-to-wear products, sports goods, shoes, jewelry, and watches. Interesting facts Kering’s luxury portfolio includes Gucci, Bottega Veneta, Saint Laurent, Alexander McQueen, Balenciaga, Brioni, Christopher Kane, McQ, Stella McCartney, Tomas Maier, Sergio Rossi, Boucheron, Dodo, Girard-Perregaux, JeanRichard, Pomellato, Qeelin, and Ulysse Nardin. The Sports and Lifestyle brings iconic brands including Puma, Volcom, Cobra, Electric, and Tretorn. The company was founded in 1881 and is headquartered in Paris, France. Previous names include PPR and Pinault-Printemps-Redoute; it is ranked in the Top 300 Global Best Employers (Forbes). Investment Rationale • Increasing buy recommendations • Strong price momentum • Moderate earnings growth • Moderate valuations PROPEL Ranking NAVIGATE Vector Position Size Holding Period HPR # 27 1.33% 11m 52.64%
- 29. - ZAR denominated - Pricing negotiated in line with mandate - Available on: Direct Retail IMS Glacier - USD denominated - ZAR Feeder Fund launched Feb 2017 - Pricing negotiated in line with mandate - Available on: Direct Retail Euroclear Glacier International Nedgroup Private Wealth Feeder Fund: IMS & Glacier Fund availability
- 30. © 2018. All rights reserved. The processes and ideas provided herein - the intellectual property of Methodical Investment Management (Pty) Ltd - are of a confidential nature and shall not be made available to any third party. This document contains privileged material and is intended solely for use by the intended recipient and approved associates. Any review, dissemination, or other use of, or taking of any action in reliance upon the information contained in this document by persons or entities other than the intended recipient is prohibited. This presentation is meant for professional investors only. Methodical Investment Management (Pty) Ltd is an authorised financial services provider FSP 44480. Registered address: 58 Main Street, Newlands, 7700, Cape Town, South Africa. www.methodical.co.za Contact details: alpha@methodical.co.za Sales & Distribution: Andrew Cormack +27 62 807 3879 andrew@methodical.co.za