Emperor Asset Management - Pretoria Seminar 26 June 2013
•
1 like•486 views
This is an introduction to Emperor Asset Management.
Recommended
More Related Content
What's hot
What's hot (20)
Similar to Emperor Asset Management - Pretoria Seminar 26 June 2013
Similar to Emperor Asset Management - Pretoria Seminar 26 June 2013 (20)
Recently uploaded
Recently uploaded (20)
Emperor Asset Management - Pretoria Seminar 26 June 2013
- 1. An introduction to Emperor Asset Management
- 2. Background Vega Capital acquired by Tom De Lange in 2004 Rebranded Joined forces Joined forces with GT247 in 2010 Rebranded to Emperor Asset Management in 2011 1 • Intellectual capital • FSB License • 30 years Investment Experience • Management Expertise • IT & Admin Support • World class platforms • Extensive marketing arm • JSE Listing (Purple Capital) AUM R240 Million Expansion Partnered with IJG Securities in 2011 • Premier brokerage house in Namibia
- 3. Page 3 Our philosophy is that the right investment solution is a marriage of science, skill and discipline, coupled with a deep and trusting client understanding. Our quantitative strategy creates long term sustainable wealth, underpinned by a high degree of effective risk management. Robert Falcon Scott Fund Investment Philosophy Proprietary quantitative decision making framework Real time access to portfolio holdings Segregated client portfolios Tailored gearing to meet individual risk return requirements Stock exclusion capacity to meet specific investor preferences (e.g. Sharia compliance) Operationally scaled to meet retail and institutional demands Robust track record of market leading returns Benchmark - FTSE / JSE Top 40
- 4. Page 4 Best & worst performers to 31 December 2012 Client Performance 21 122Current NAV 35.96%Return 1 year 114.0%Gearing Worst performance 31 298Current NAV 56.32%Return 1year 163.0%Gearing Best performance 2 486 161Current NAV 38.52%Return 1 year 116.0%Gearing Worst performance 3 457 668Current NAV 62.24%Return 1 year 180.0%Gearing Best performance Smallest clients by NAV Largest clients by NAV
- 5. Page 5 Fund overview – at 31 May 2013 Robert Falcon Scott Inception Fund size Number of investors Benchmark Average gearing Portfolio turnover Redemptions Management fee Performance fee Administrator Auditor 1 October 2004 R240 million 1006 FTSE / JSE Top 40 1.12 times – Since inception (1.48 times last 3 years) Historic = 0.7 times per annum 95% = T + 1 (5% = month end) 1.2% 20% above the benchmark First World Trader trading as GT247.COM BDO South Africa Inc. Manager Tom de Lange FSB license categorisation Category 2 (Category 2A pending) FSB license number - 22588
- 6. Page 6 Strategy Tom de Lange Chief Investment Officer
- 7. 7 Front Momentum Shares Back Value Shares High DY,EY Blue Chips 50%20%30% Investment Strategy Walking on the Edge of the parade Increased Returns Decreased Risk Resilience Stability
- 8. Momentum Strategy 8 Portfolio JSE Total Return 25.8% 11.0% Alpha (% per month) 1.19% 0.00% Beta 0.90 1.00 Upside Capture 105% 100% Downside Capture 68% 100% Volatility Risk 128% 100%
- 9. Value Strategy Earnings Yield 9 Portfolio JSE Total Return 25.3% 11.0% Alpha (% per month) 1.34% 0.00% Beta 0.60 1.00 Upside Capture 84% 100% Downside Capture 47% 100% Volatility Risk 73% 100%
- 10. Value Strategy Dividend Yield 1 Portfolio JSE Total Return 26.2% 11.0% Alpha (% per month) 1.44% 0.00% Beta 0.53 1.00 Upside Capture 76% 100% Downside Capture 34% 100% Volatility Risk 70% 100%
- 11. Composite Strategy Edge of the Parade 11 Portfolio JSE Total Return 27.8% 11.0% Alpha (% per month) 1.34% 0.00% Beta 0.80 1.00 Upside Capture 105% 100% Downside Capture 57% 100% Volatility Risk 100% 100%
- 12. Investment Strategy Resultant upside & downside capture vs. benchmark Downside Capture 57% Upside Capture 105% Quant Strategy (No Gearing) Share selection: momentum shares1 Market timing2 Small & Mid cap companies3 Share selection: value shares & blue chips1 Market timing2 Equal weighting3 Our investment strategy has resulted in higher upside and lower downside capture, consistently since inception Last 12 m Quant Strategy (148% Gearing) Last 18 m Upside Downside 176% 74% 167% 77% Last 2 yrs Last 3 yrs 169% 92% 151% 84% Last 4 yrs 118% 68% Last 5 yrs Since inception 126% 82% 118% 90% 12 Balanced sector weights4
- 13. Risk vs Return An attractive risk-return profile Ratios Robert Falcon Scott Alpha (% pm) 0.73% Beta 0.93 Downside Capture 90.7% Upside Capture 118.3% PerformanceRatios Ratios Robert Falcon Scott FTSE/ JSE Top 40 Annualised Std Deviation* 21.1% 17.9% Annual Downside Std Deviation** 10.1% 9.5% Downside Volatility Risk 106.5% 100.0% Relative Volatility Risk 117.9% 100.0% RiskRatios *Standard Deviation: Measures the volatility of investment return. The higher the standard deviation, the more volatile the fund’s returns. **Downside Standard Deviation: Measures the volatility of downside (negative) investment returns. The higher the downside standard deviation, the more susceptible the fund will be to negative returns. Average since inception = 112% Average last 3 years = 148% NetPortfolioGearing 13
- 14. Page 14 Downside Protection “The future is here. It’s not widely distributed yet” William Gibson (1948) Bubble Indictor1 Market timing2 CFD Put Options3
- 15. Net Portfolio Gearing Although we did reduce gearing during 2008, we made mistakes… NetPortfolioGearing 15
- 16. Bubble Indicator A leading market turbulence indicator Bubble 16 2,000 4,000 8,000 16,000 32,000 64,000 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5
- 17. Market Timing Market Strength Index & Market Valuation 17
- 18. Market Valuation Rule 18 : PE + CPI/2 18
- 19. Market Sentiment Monthly and Weekly Market Strength (MSX) 19
- 20. Valuation Quarter 13 14 15 16 17 18 19 20 21 22 23 Avg 90% 100% 100% 97% 87% 80% 75% 70% 65% 61% 57% 52% 77% 80% 100% 100% 100% 91% 84% 79% 74% 69% 65% 60% 56% 80% 70% 100% 100% 100% 95% 88% 83% 78% 73% 69% 64% 60% 83% 60% 100% 100% 100% 98% 91% 86% 81% 77% 72% 68% 63% 85% 50% 100% 100% 100% 100% 93% 88% 83% 78% 74% 69% 65% 86% 40% 100% 100% 100% 95% 88% 83% 78% 74% 69% 65% 60% 83% 35% 100% 100% 98% 88% 81% 76% 71% 66% 62% 57% 53% 77% 30% 100% 100% 86% 76% 70% 64% 59% 55% 50% 46% 42% 68% 25% 100% 89% 74% 64% 57% 51% 47% 42% 38% 33% 29% 57% 20% 98% 78% 63% 53% 46% 41% 36% 31% 27% 23% 18% 47% 10% 89% 69% 54% 44% 37% 31% 27% 22% 18% 13% 9% 37% Avg 99% 94% 88% 81% 74% 69% 64% 59% 55% 50% 46% 70.9% Year 13 14 15 16 17 18 19 20 21 22 23 Avg 90% 100% 100% 100% 100% 100% 100% 89% 73% 69% 66% 63% 87% 80% 100% 100% 100% 100% 100% 100% 95% 79% 75% 72% 69% 90% 70% 100% 100% 100% 100% 100% 100% 100% 85% 81% 78% 75% 93% 60% 100% 100% 100% 100% 100% 100% 100% 91% 87% 84% 81% 95% 50% 100% 100% 100% 100% 100% 100% 100% 97% 92% 89% 87% 97% 40% 100% 100% 100% 100% 100% 100% 100% 92% 88% 85% 82% 95% 35% 100% 100% 100% 100% 100% 100% 87% 71% 67% 64% 61% 86% 30% 100% 100% 100% 100% 100% 90% 53% 37% 33% 30% 27% 70% 25% 99% 96% 93% 90% 86% 71% 34% 18% 14% 11% 8% 56% 20% 95% 92% 89% 86% 82% 68% 30% 14% 10% 7% 4% 53% 10% 99% 96% 93% 90% 86% 71% 34% 18% 14% 11% 8% 56% Avg 99% 99% 98% 97% 96% 91% 75% 61% 57% 54% 52% 79.9% S e n t i m e n t S e n t i m e n t Risk Matrix Probability of Positive Return Valuation = 18.5 Market Sentiment = 60% Confidence (Qtr) = 85% Confidence (Yr) = 100%
- 21. Weekly MSX Analysis Bull Markets, 14 observances in 28 years Date Hi JSE High MSXW @ High MSXM @ High JSE Level MSXM Level JSE Trough Date Low MSXW Trough MSXM Trough DD Total DD Level 23/08/89 2,842 86 88 2,338 73 2,338 16/10/89 15.5 61 -18% 0% 14/08/90 3,232 61 47 2,717 43 2,547 15/11/90 17.0 26 -21% -6% 17/11/94 5,942 74 80 5,163 67 5,054 31/01/95 16.3 40 -15% -2% 22/04/96 7,070 69 78 6,421 36 6,421 21/08/96 19.3 29 -9% 0% 15/10/96 7,073 64 45 6,615 46 6,384 17/12/96 10.8 34 -10% -3% 22/10/97 7,420 62 54 6,007 47 5,597 12/01/98 6.6 25 -25% -7% 21/05/01 9,565 77 66 7,381 68 7,381 21/09/01 18.9 61 -23% 0% 22/05/02 11,653 82 67 8,871 54 8,871 05/08/02 13.5 51 -24% 0% 03/03/04 11,179 81 93 9,748 84 9,748 18/05/04 18.9 57 -13% 0% 11/05/06 22,094 89 96 18,415 94 18,380 13/06/06 2.6 51 -17% 0% 13/07/07 29,962 66 93 26,904 82 25,985 17/08/07 9.8 60 -13% -3% 21/02/11 32,807 60 81 30,194 75 30,194 15/03/11 14.7 69 -8% 0% 13/07/11 32,310 55 42 28,391 33 28,391 08/08/11 6.8 30 -12% 0% 31/05/13 42,016 57 65 38,075 60 38,075 24/06/13 20.4 60 -9% 0% 21
- 22. Market Correction History Bull markets, MSX(W)<20% -30% -25% -20% -15% -10% -5% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% DD Total DD Level 22
- 23. 18,000 20,000 22,000 24,000 26,000 28,000 30,000 32,000 34,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Dec-07 Jan-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 DEC08P JSE CFD Put Options on Alsi40 Up to 8x protection 23
- 24. 0 1,000 2,000 3,000 4,000 5,000 6,000 Dec-03 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 RF Scott JSE Top40 STeFI Fund Performance 31 May 2013 248% 24 Total Return +552% JSE +248% Annualised Return +24.1% per annum JSE +15.5% per annum STeFI 7.7% per annum Beta 0.94 Alpha +0.74% per month Upside capture 119% Downside capture 90% Sharpe Ratio 0.78 Risk 106% (JSE 100%) 552%
- 25. Total Returns Robert Falcon Scott * FTSE / JSE Top 40 ** This month 14.4% 10.4% Last 12 months 50.3% 28.8% Last 3 years 138.3% 55.6% Last 5 years 102.5% 25.6% Since inception 551.5% 248.8% Last 2 years 85.1% 28.4% Annualised Returns Robert Falcon Scott FTSE/ JSE Top 40 Last 12 months 50.3% 28.8% Last 2 years 36.0% 13.3% Last 5 years 15.2% 4.7% Since inception 24.1% 15.5% Last 3 years 33.6% 15.9% Fund Performance Ranking Table - Return Vs. Benchmark – May 2013 Source: Bloomberg *EAM return net of fees **Nominal return Share % Weight % Move 6m CML 8.6% 67% Remgro 6.2% 32% Kumba 5.7% (5)% Naspers 5.5% 36% EOH 5.4% 44% Top Five Holdings Portfolio Sector Weighting Resources 19.5% Food & Health 19.2% Telecom/ Media/ Technology 17.8% Industrial 11.5% Consumer 23.1% Financial 7.6% Gold & Platinum 1.3% 25
- 26. Fund Manager’s Performance CIO performance to 31 December 2012 2 694 441Current NAV 90.6%Return 1yr 52.0%Return per annum Andromeda Portfolio - Inception 01/02/09 212%Average Gearing 429.0%Cumulative return 193%Upside capture 147%Downside capture 1.54%Alpha pm 1.47Beta Tom de LangePerformance Ratios Total Invested NAV = R6 221 000 26
- 27. CIO Performance Record 31 Years: 1981-2012 27 -8% 29% -2% -3% -7% 21% -1% 10% 10% 5% 15% 1% 19% 13% 74% 4% 51% -14% 101% 29% 49% 35% 9% 57% 30% 34% 47% -25% 38% 57% 16% 63% -40% -20% 0% 20% 40% 60% 80% 100% 120% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 A n n u a l R e t u r n
- 28. “The more I practice the luckier I get” Gary Player
Editor's Notes
- TheFund Started back in 2004 by Founding member Tom De Lange.Tom developed a strategy that outperformed any other asset manager that he had invested in - he decided to concentrate solely on Fund Management – EAM Asset Management. He grew the fund from R220,000 – R15 Million in 6 Years purely through word of mouth friends and family. Tomheld his trading accounts with Global Trader, his performance history drew our attention so it was decided to get in contact with Tom to gain insight into how he was delivering consistently exceptional returns.Tom has been an active investor on the JSE since 1981. Over the last 25 years he has averaged a compound annual return of 26% and 31% over the last 15 years. He has extensive experience in various instruments, including shares, warrants, futures, spread trading and CFD's.Over the years Tom has developed several quantitative models and indicators that form the core of his investment strategy and combined with his vast computer programming experience and risk simulation knowledge he has developed a truly unique investment system. The fund followed an algorithm based quantitative strategy utilising CFD’s that enabled it to outperformed most asset managers and the FTSE/ JSE 2011 the portfolio (datecontract was signed), strategy and manager was acquired by GT and renamed Emperor Asset Management.During late 2010 Global Trader joined forces with Tom and acquired the CFD portfolios from EAM Capital, the name was later changed to Emperor Asset Management.Tom Comments:2013/01/25I did not found EAM Capital. It was a dormant company with a FSB license owned by a futures trader and his wife. During the second half of 2004 Tom & his partner Victor Hugo took over the company for an effective R30,000. In January 2006 Francois du Plessis was invited to become a director and later third partner after he had left PSG Consulting. In May 2007 Vitor Hugo's share was bought out by Francois and Tom, each becoming a 50% shareholder in EAM Capital.EAM Capital was not acquired, but the CFD portfolios were. Tom sold his 50% interest to partner Francois du Plessis including all client portfolios EXCEPT those CFD portfolios held with Global Trader, which was acquired by GT and which became Emperor.
- Unique Characteristics:TransparencyBuilding a trusted relationship requires total transparency. At Emperor:You receive daily transactions reports and monthly performance reviewsYour portfolio holdings are always only one click awayYou can track your investment performance from day to dayOur fund managers are always availableLow-cost infrastructure and execution costs DisciplineEffective risk managementFocus on high liquidity sharesAligned incentivesAdjust equity exposure (up or down) in response to market conditionsInnovationUnique Decision Making Framework (Market Timing) focusing on high liquidity sharesLeveraged market accessSegregation of client funds via segregated portfoliosBespokeBespoke investment solutions to meet risk and return requirements via segregated client accounts (not pooled) Accessibility and management of cash component of investment Above-market returnsAbility to exclude specific stock (e.g. Sharia compliance)
- The overall turn in the portfolio is around 0.7 times per year (comparatively lower than other funds).With low trading volumes resulting in lower brokerage costs and a lower total expense ratio. (Average of 0.9 trades per month) – [refer to benchmark portfolio since inception Aug 2011Tom Comments 2013/01/25 Average gearing since inception = 1.12x Average gearing since Sep 2009 = 1.42x
- The algorithmic quantitative strategy achieves a higher upside capture and lower downside capture by virtue of its stock picking/ ranking methodology.During times of financial stress/ uncertainty the top ranked 10 to 15 stocks making up the majority index are heavily owned by foreign investors who flight to perceived higher quality local investments or other lower risk asset classes, this in turn results in the top Blue Chip companies being oversold. The quant strategy applies a different weighting to these shares by not focusing on market capitalisation but rather momentum and value strategies giving a higher weighting to the top 40 to 100 shares.The higher upside and lower downside captures achieved allows the fund to take on increased gearing levels but still maintain an attractive lower risk to higher return profile compared to the benchmark.UPSIDE MARKET CAPTURE An investment manager who has an upside capture greater than 100% has outperformed the benchmark index during the upside moves of the market. For example, an upside capture ratio of 120% indicates that the manager has outperformed the benchmark by 20% during the specified period. Some analysts use this simple calculation in their broader assessments of individual investment managers. From a retail perspective, this measure is easier to explain to clients than alpha & beta.DOWNSIDE MARKET CAPTURE An investment manager who has a down-market ratio less than 100% has outperformed the benchmark index during the downside moves of the market. For example, a downside capture of 80% indicates that the manager’s portfolio declined only 80% as much as the index during the period in question. Some analysts use this simple calculation in their broader assessments of individual investment managers. NB: This is not the complete universe of performance measures, Emperor Asset Management can supply other performance measures if required.
- VOLATILITY RISK FACTOR Volatility refers to the amount of uncertainty or risk measured by the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values (positive and negative). This means that the value of the fund can change dramatically over a short time period in either direction. A lower volatility means that a fund’s value does not fluctuate dramatically, however changes in value at a steady pace over a period of time. Relative Volatility measures the volatility of the fund against the benchmark (FTSE/ JSE Top 40). DOWNSIDE VOLATILITY RISK FACTOR The relative volatility risk factor takes into account both positive and negative returns. Volatility can sharply increase as a result of a high positive return, which we view not as a risk but as a “bonus”. The downside volatility risk factor adjusts for this anomaly by taking into account only negative returns. Positive returns are set to zero before calculating the net result. It offers a better alignment between volatility as a definition of risk (i.e. capital loss). ALPHA OUTPERFORMANCE A positive alpha of 1.0% means the fund has outperformed its benchmark index by 1% per month. Correspondingly, a similar negative alpha would indicate an under performance of 1% per month. Alpha is the residual performance after taking systematic risk (beta) into account. If a CAPM* analysis estimates that a portfolio should earn 10% based on the beta risk of the portfolio, but the portfolio actually earns 15%, the portfolio’s alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. Alpha can be measured in % per annum or % per month. We use the monthly measure.*The Capital Asset Pricing Model (CAPM) is an economic model that calculates the expected return on an asset as a function of both the time value of money and the asset’s risk relative to the overall market. The model implies that risks unique to individual assets can be eliminated through diversification, the only risk that investors need to concern themselves with is overall market risk.BETA RISK FACTOR A Beta of 1.5 means that the expected return of the fund is 1.5 times higher than that of the market. For example, if the market has a return of 20% in a particular period, a fund that has a Beta of 1.5 means that it should generate a profitability of 30% (20% x1,5) in the same period. Beta is both a performance and risk measure as it predicts both upside and downside moves against the selected benchmark. The higher the Beta, the greater is the risk of a fund relative to the market when the market moves downwards, but the higher the reward when the market moves upwards. The Beta levels of individual portfolios within the fund are designed to be between 1.0 and 1.8, depending on the client’s risk preferences. Furthermore, if a net gearing level of 1.5x is maintained, the beta of the portfolio should result in a beta level of 1.50 if position weights equals the composition of the market index (Top40). The fact that all our portfolios demonstrate far lower beta levels than what the average gearing level would suggest is indicative of the alpha generation ability of the integrated quantitative strategy followed.UPSIDE MARKET CAPTURE An investment manager who has an upside capture greater than 100% has outperformed the benchmark index during the upside moves of the market. For example, an upside capture ratio of 120% indicates that the manager has outperformed the benchmark by 20% during the specified period. Some analysts use this simple calculation in their broader assessments of individual investment managers. From a retail perspective, this measure is easier to explain to clients than alpha & beta.DOWNSIDE MARKET CAPTURE An investment manager who has a down-market ratio less than 100% has outperformed the benchmark index during the downside moves of the market. For example, a downside capture of 80% indicates that the manager’s portfolio declined only 80% as much as the index during the period in question. Some analysts use this simple calculation in their broader assessments of individual investment managers. NB: This is not the complete universe of performance measures, Emperor Asset Management can supply other performance measures if required.
- VOLATILITY RISK FACTOR Volatility refers to the amount of uncertainty or risk measured by the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values (positive and negative). This means that the value of the fund can change dramatically over a short time period in either direction. A lower volatility means that a fund’s value does not fluctuate dramatically, however changes in value at a steady pace over a period of time. Relative Volatility measures the volatility of the fund against the benchmark (FTSE/ JSE Top 40). DOWNSIDE VOLATILITY RISK FACTOR The relative volatility risk factor takes into account both positive and negative returns. Volatility can sharply increase as a result of a high positive return, which we view not as a risk but as a “bonus”. The downside volatility risk factor adjusts for this anomaly by taking into account only negative returns. Positive returns are set to zero before calculating the net result. It offers a better alignment between volatility as a definition of risk (i.e. capital loss). ALPHA OUTPERFORMANCE A positive alpha of 1.0% means the fund has outperformed its benchmark index by 1% per month. Correspondingly, a similar negative alpha would indicate an under performance of 1% per month. Alpha is the residual performance after taking systematic risk (beta) into account. If a CAPM* analysis estimates that a portfolio should earn 10% based on the beta risk of the portfolio, but the portfolio actually earns 15%, the portfolio’s alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. Alpha can be measured in % per annum or % per month. We use the monthly measure.*The Capital Asset Pricing Model (CAPM) is an economic model that calculates the expected return on an asset as a function of both the time value of money and the asset’s risk relative to the overall market. The model implies that risks unique to individual assets can be eliminated through diversification, the only risk that investors need to concern themselves with is overall market risk.BETA RISK FACTOR A Beta of 1.5 means that the expected return of the fund is 1.5 times higher than that of the market. For example, if the market has a return of 20% in a particular period, a fund that has a Beta of 1.5 means that it should generate a profitability of 30% (20% x1,5) in the same period. Beta is both a performance and risk measure as it predicts both upside and downside moves against the selected benchmark. The higher the Beta, the greater is the risk of a fund relative to the market when the market moves downwards, but the higher the reward when the market moves upwards. The Beta levels of individual portfolios within the fund are designed to be between 1.0 and 1.8, depending on the client’s risk preferences. Furthermore, if a net gearing level of 1.5x is maintained, the beta of the portfolio should result in a beta level of 1.50 if position weights equals the composition of the market index (Top40). The fact that all our portfolios demonstrate far lower beta levels than what the average gearing level would suggest is indicative of the alpha generation ability of the integrated quantitative strategy followed.UPSIDE MARKET CAPTURE An investment manager who has an upside capture greater than 100% has outperformed the benchmark index during the upside moves of the market. For example, an upside capture ratio of 120% indicates that the manager has outperformed the benchmark by 20% during the specified period. Some analysts use this simple calculation in their broader assessments of individual investment managers. From a retail perspective, this measure is easier to explain to clients than alpha & beta.DOWNSIDE MARKET CAPTURE An investment manager who has a down-market ratio less than 100% has outperformed the benchmark index during the downside moves of the market. For example, a downside capture of 80% indicates that the manager’s portfolio declined only 80% as much as the index during the period in question. Some analysts use this simple calculation in their broader assessments of individual investment managers. NB: This is not the complete universe of performance measures, Emperor Asset Management can supply other performance measures if required.
- VOLATILITY RISK FACTOR Volatility refers to the amount of uncertainty or risk measured by the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values (positive and negative). This means that the value of the fund can change dramatically over a short time period in either direction. A lower volatility means that a fund’s value does not fluctuate dramatically, however changes in value at a steady pace over a period of time. Relative Volatility measures the volatility of the fund against the benchmark (FTSE/ JSE Top 40). DOWNSIDE VOLATILITY RISK FACTOR The relative volatility risk factor takes into account both positive and negative returns. Volatility can sharply increase as a result of a high positive return, which we view not as a risk but as a “bonus”. The downside volatility risk factor adjusts for this anomaly by taking into account only negative returns. Positive returns are set to zero before calculating the net result. It offers a better alignment between volatility as a definition of risk (i.e. capital loss). ALPHA OUTPERFORMANCE A positive alpha of 1.0% means the fund has outperformed its benchmark index by 1% per month. Correspondingly, a similar negative alpha would indicate an under performance of 1% per month. Alpha is the residual performance after taking systematic risk (beta) into account. If a CAPM* analysis estimates that a portfolio should earn 10% based on the beta risk of the portfolio, but the portfolio actually earns 15%, the portfolio’s alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. Alpha can be measured in % per annum or % per month. We use the monthly measure.*The Capital Asset Pricing Model (CAPM) is an economic model that calculates the expected return on an asset as a function of both the time value of money and the asset’s risk relative to the overall market. The model implies that risks unique to individual assets can be eliminated through diversification, the only risk that investors need to concern themselves with is overall market risk.BETA RISK FACTOR A Beta of 1.5 means that the expected return of the fund is 1.5 times higher than that of the market. For example, if the market has a return of 20% in a particular period, a fund that has a Beta of 1.5 means that it should generate a profitability of 30% (20% x1,5) in the same period. Beta is both a performance and risk measure as it predicts both upside and downside moves against the selected benchmark. The higher the Beta, the greater is the risk of a fund relative to the market when the market moves downwards, but the higher the reward when the market moves upwards. The Beta levels of individual portfolios within the fund are designed to be between 1.0 and 1.8, depending on the client’s risk preferences. Furthermore, if a net gearing level of 1.5x is maintained, the beta of the portfolio should result in a beta level of 1.50 if position weights equals the composition of the market index (Top40). The fact that all our portfolios demonstrate far lower beta levels than what the average gearing level would suggest is indicative of the alpha generation ability of the integrated quantitative strategy followed.UPSIDE MARKET CAPTURE An investment manager who has an upside capture greater than 100% has outperformed the benchmark index during the upside moves of the market. For example, an upside capture ratio of 120% indicates that the manager has outperformed the benchmark by 20% during the specified period. Some analysts use this simple calculation in their broader assessments of individual investment managers. From a retail perspective, this measure is easier to explain to clients than alpha & beta.DOWNSIDE MARKET CAPTURE An investment manager who has a down-market ratio less than 100% has outperformed the benchmark index during the downside moves of the market. For example, a downside capture of 80% indicates that the manager’s portfolio declined only 80% as much as the index during the period in question. Some analysts use this simple calculation in their broader assessments of individual investment managers. NB: This is not the complete universe of performance measures, Emperor Asset Management can supply other performance measures if required.
- We believe the market is driven by 2 main forces, sentiment and valuation.Turning points are caused by market valuation and continuation of trends by sentiment.Sentiment is measured by the Market Strength Index (MSX), a modified version of the popular MACD indicator. An MSX of 90% means 90% of the top 100 shares are in a rising (bullish) mode. The average MSX level is around 60%, but every now and then retracements occur, investors panic and a rush for the exit occurs, causing prices to drop quickly, driving the MSX down. Monthly MSX is used to position the portfolio on a long term view, while a Weekly MSX provides short term buying signals during bull markets.An inflation adjusted market valuation model – JSE Price Earnings Ratio (PE) + Inflation Rate/ 2 (Rule of 18)> 18 Expensive Market/Overvalued< 18 Inexpensive Market/UndervaluedThe market valuation and sentiment indicators are integrated into a single market timing model using sigmoid curves which results into a variable response rate towards final gearing levels, from -50% to 125% of standard gearing levels (which in turn is determined by the client’s risk profile).Market timing model is applicable to all strategies, not only the momentum strategy, i.e. DOS, Large, medium, Small and Shariah. However, a large client may elect not to opt for market timing at his/her own RISK!Tom Comments 2013/01/25Market timing model is applicable to all strategies, not only the momentum strategy, i.e. DOS, Large, medium, Small and Shariah.
- VOLATILITY RISK FACTOR Volatility refers to the amount of uncertainty or risk measured by the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values (positive and negative). This means that the value of the fund can change dramatically over a short time period in either direction. A lower volatility means that a fund’s value does not fluctuate dramatically, however changes in value at a steady pace over a period of time. Relative Volatility measures the volatility of the fund against the benchmark (FTSE/ JSE Top 40). DOWNSIDE VOLATILITY RISK FACTOR The relative volatility risk factor takes into account both positive and negative returns. Volatility can sharply increase as a result of a high positive return, which we view not as a risk but as a “bonus”. The downside volatility risk factor adjusts for this anomaly by taking into account only negative returns. Positive returns are set to zero before calculating the net result. It offers a better alignment between volatility as a definition of risk (i.e. capital loss). ALPHA OUTPERFORMANCE A positive alpha of 1.0% means the fund has outperformed its benchmark index by 1% per month. Correspondingly, a similar negative alpha would indicate an under performance of 1% per month. Alpha is the residual performance after taking systematic risk (beta) into account. If a CAPM* analysis estimates that a portfolio should earn 10% based on the beta risk of the portfolio, but the portfolio actually earns 15%, the portfolio’s alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. Alpha can be measured in % per annum or % per month. We use the monthly measure.*The Capital Asset Pricing Model (CAPM) is an economic model that calculates the expected return on an asset as a function of both the time value of money and the asset’s risk relative to the overall market. The model implies that risks unique to individual assets can be eliminated through diversification, the only risk that investors need to concern themselves with is overall market risk.BETA RISK FACTOR A Beta of 1.5 means that the expected return of the fund is 1.5 times higher than that of the market. For example, if the market has a return of 20% in a particular period, a fund that has a Beta of 1.5 means that it should generate a profitability of 30% (20% x1,5) in the same period. Beta is both a performance and risk measure as it predicts both upside and downside moves against the selected benchmark. The higher the Beta, the greater is the risk of a fund relative to the market when the market moves downwards, but the higher the reward when the market moves upwards. The Beta levels of individual portfolios within the fund are designed to be between 1.0 and 1.8, depending on the client’s risk preferences. Furthermore, if a net gearing level of 1.5x is maintained, the beta of the portfolio should result in a beta level of 1.50 if position weights equals the composition of the market index (Top40). The fact that all our portfolios demonstrate far lower beta levels than what the average gearing level would suggest is indicative of the alpha generation ability of the integrated quantitative strategy followed.UPSIDE MARKET CAPTURE An investment manager who has an upside capture greater than 100% has outperformed the benchmark index during the upside moves of the market. For example, an upside capture ratio of 120% indicates that the manager has outperformed the benchmark by 20% during the specified period. Some analysts use this simple calculation in their broader assessments of individual investment managers. From a retail perspective, this measure is easier to explain to clients than alpha & beta.DOWNSIDE MARKET CAPTURE An investment manager who has a down-market ratio less than 100% has outperformed the benchmark index during the downside moves of the market. For example, a downside capture of 80% indicates that the manager’s portfolio declined only 80% as much as the index during the period in question. Some analysts use this simple calculation in their broader assessments of individual investment managers. NB: This is not the complete universe of performance measures, Emperor Asset Management can supply other performance measures if required.
- The evolution of the investment strategy can be divided into 5 distinctive phases as follows:Phase 1: (Sep 2004 to July 2005): Volatile gross and net gearing levels, with both long and short holdings based on momentum only. Gross gearing levels ranging between 50% and 300%. Net gearing levels ranging between 200% and -30%. Tom did the stock selection and partner Victor Hugo was responsible for gearing levels, who followed a “micro” market timing approach, which clearly led to underperformance during the first half of 2005. Fund known as the EAM Centauri fund.Phase 2: August 2005 to Oct 2008: Introduced the EAM Genesis Fund and the EAM Sedna Fund (a higher risk version), still following a pure momentum long-short strategy but far less emphasis on micro timing, eventually phasing it out completely after Victor Hugo left the company. Mostly long positions with the occasional short position. Eventually some short positions were exchanged for shorting the Alsi40 index (Satrix40). The Centauri Fund was closed in June 2007 and the Genesis and Sedna funds in Sep 2007 upon which the segregated portfolio model was adopted. First segregated portfolio was started in June 2006 following the new Genesis strategy).Phase 3: Nov 2008 to Dec 2010: Introduction of Value strategy (Dividend Yield and Earnings Yield) together with momentum strategy, with no short positions. Gradual increase in average net gearing levels from 75% to 150%.Phase 4: Jan 2011 to May 2012: Adding Growth strategy and Handicap system to accommodate blue chip companies in order to increase stability and consistency of performance, lower risk levels and to reduce trading costs.Phase 5: May 2012 to present: Tweaking the strategy towards a more balanced sector approach with overweight positions in high momentum sectors and underweight (instead of zero weight) in underperforming sectors (Resources, May 2012). While the existing strategy (i.e. unbalanced) and the sector balanced approach deliver the same performance over the long haul, sector balancing reduces risk by around 10%, all other aspects being equal.Notes about market timing model:During phase 1 the fund followed a micro timing approach which led to severe underperformance after wrong calls during early 2005. Eventually partner Victor Hugo’s shares were bought out by Tom & Francois du Plessis upon which a no-market-timing strategy was adopted, leaving Tom with mostly judgement calls as to market direction (influencing net gearing levels). A significant judgement error was made in Aug 2008 when gearing levels were increased from 77% to 128% only to see market crashing during Sep and Oct 2008. Gearing levels were reduced to 81% during September 2008 and to 51% during Oct 2008 but eventually led to a drawdown of 38% (peak to trough). This led to a comprehensive research effort during 2009/2010 to find a quantitative market timing model that would remove judgemental factors completely. Such a model was developed and adopted during 2010 and so far has been tested 3 times (with 100% accuracy) during July 2010, August 2011 and August 2012.
- Data from Bloomberg* EAM return net of fees – The returns achieved to date are after the deduction of performance and management fees** Capital return calculation – This represents the returns without the re-investment of dividends*** Total return calculation – The total return assumes all dividends and distributions re-invested resulting n higher return numbers