Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
We are aiming to deliver a Cash +3% return based on a long term volatility target of 5%. Since inception in 2012, we have not only significantly out-performed this return objective, we have also never delivered a negative return over any 3 or 5 year period. We aim to deliver this return profile by selecting just five risk-premia that are both liquid and strong portfolio diversifiers. Our approach is rooted in financial markets theory - we believe that economically justified risk-premia are the only sustainable sources of return. Since valuations vary over time, we actively and dynamically manage our allocations to 12 sub-strategies to ensure that we are as attractively positioned as possible at all times. Our approach is purely model-driven which ensures a systematic investment process and also avoids behavioural bias. Full transparency on investment decisions and rigorous risk management are at the core of this approach - an important differentiator compared to many other multi-asset strategies. The use of liquid financial instruments within a simple and dynamic portfolio also ensures we can provide extremely cost-efficient implementation of our strategies. This well balanced approach also has the advantage of providing greater downside protection during difficult market environments as demonstrated during 2020. In summary, we provide:
1. An evidence-based approach, overcoming behavioural biases to deliver the optimal asset allocation
2. A simple, dynamic portfolio
3. The use of derivative instruments enabling cost efficient implementation and daily liquidity
4. Transparency, enabling clients to understand our portfolio positioning at any time
5. Proven experience, with over 20 years' delivering performance in-line with our client's risk/return targets
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
Over the course of 2020 the stabilizing factor of broad diversification across many different risk premiums and sub-strategies was crucial. It is important to note that the ‘alternative' risk premia (Currencies, Commodity, Volatility) made a vital and positive contribution to overall performance. Equities also made a strong positive contribution. Conversely, Fixed Income was the only negative performance contributor and suffered in particular at the end of the year. Overall, the fund delivered 6.7% net GBP performance.
Despite this positive outcome, we always seek to improve our process. COVID-19 was an extreme realization of idiosyncratic risk and therefore challenged many quantitative risk management systems enormously. Compared to other events with a similar impact, the drawdown as well as the recovery happened extremely fast. Our portfolio took a defensive position in H2 2020 because the risk management system naturally restricted the allocation to maintain the long-term risk target. To overcome this short-term dilemma, we have introduced a new "State dependent risk measurement" (SDRM) tool. The model is an intelligent blend between the current volatility and forward-looking volatilities of similar periods in the past. We believe that this will improve our response to future drawdowns and recoveries, at whatever pace they may occur.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Vescore's investment philosophy builds on the tactical management of risk premia. Global equities have currently a 44% weight whereas duration is just 2.6 years. In the fixed factor premia strategy, we currently have a higher weight in USD, CAD and GBP government bonds. Finally, alternative risk premia are kept almost at the maximum. This might change quickly depending on the market situation.
Why we believe our strategy will deliver on its promise even in challenging market environments:
- Firstly, we invest only in asset classes or risk premia with positive long term excess returns.
- Secondly, the most important feature to achieve the stable long-term returns is a broad diversification across asset classes (12 sub-strategies).
- Thirdly, the tactical allocation provides additional value added over the long term. In recent months, the tactical optimization reduced directional allocations. Market neutral factor strategies in commodities, currencies and bonds have played a more pronounced role in recent months and seem to do so in upcoming months.
We believe that the wide tactical ranges of our model and the selection from a broad investment universe will allow the strategy to generate the targeted return of Cash + 3% and maintain reasonable correlation to equity markets and modest volatility in the future.