Quantitative Investment Overview

cx

A quantitative investment process is a methodology employing a strict and rigorously tested strategy which consists of clear, set rules.

To remove human emotion R&I defines all investment rules mathematically to avoid ambiguity. These investment rules are then tested via the use of technology across economic cycles, a variety of markets and market conditions to demonstrate whether they enhance or detract from a strategies performance.

This allows the investor to execute the strategy within a systematic framework with a focus on decreasing the negative effects that emotional and behavioural biases have on the investor’s decision making process.

The rules and strategy must add value across different time frames and markets. R&I is then able to select its investments based on these definitive rules and mathematical filters. This methodology ensures R&I’s investment choices are made only after the established set of proprietary criteria is met. Utilising a systematic process has the added benefit of there being no psychological, behavioral or conflicts of interest at play. Investors receive truly independent and objective stock recommendations.

R&I’s  utilities momentum to identify top-performing stocks in anticipation of continued out performance.


Momentum Overview

cxcx

Momentum is the property or tendency of a moving object to continue moving.  In finance, there is extensive evidence (over 100 years) that momentum exists in financial markets. Research shows that stocks which have outperformed in the recent past tend to continue to perform strongly in the months or years ahead. Market sentiment, not just fundamentals, plays a large part in such performance.

Three reasons why a systematic momentum strategy delivers enhanced diversification benefits:

1

Momentum works in contrast to fundamental “value” approaches. Where value looks to buy stocks that are cheap (low) momentum sits on the sidelines waiting for demand to increase along with the stock price. Additionally, as value looks to sell stocks that are “fully priced”, momentum waits for meaningful supply to meet the market before exiting. We’ve all seen it before – we sell out of a stock because its fully priced, only to see it go on and double or even triple in value after we sold. Momentum stays with these trades and as long as momentum is positive and will stay in the trade to capture excessive positive sentiment.

3

We increase cash levels when market risk is elevated and by doing so protect capital from major market downturns. Due to this we seek to have a low correlation to major market indices and index based ETFs.

2

The diversity of having a systematic manager in a portfolio is substantial because many times we see systematic strategies making very different decisions to what would drive a human to make those investments. Therefore, the diversity that you get from having both a fundamental discretionary process and a systematic process in a portfolio is significant.

Why Add Momentum
to Your Portfolio?

 

Outperformance: Simulated returns* over 20 years have confirmed that R&I’s momentum strategy has outperformed benchmark indices over a long term timeframe.

Diversification: We have found that by using momentum in their portfolio, the DIY investor can enhance their diversification due to the strategies low correlation to market indices, traditional fundamental fund managers and the DIY investor’s own investment process.

Risk Management: Our model portfolios move to cash or reduce exposure to equities when risk is heightened with the aim of preserving capital drawdowns like seen in the GFC or European debt crisis.

Saving Time & Work: Some DIY investors use our models as an initial screen to do further research – saving vast amounts of time.

Faq

Do I have to follow the model portfolio recommendations?

It is recommended to follow the portfolio as it it published. However our research can be used in a number of ways. We have clients that use our research both to build a portfolio of momentum stocks and follow our recommendations to the letter. Others use it as an initial screen to go and do further work.

How much capital should I allocate to momentum?

This is up to you and your financial advisor to figure out. Momentum works well in a well diversified portfolio and our strategies focus on growth rather than income. Momentum returns can be volatile month to month and a focus on the long term is recommended.

How does R&I stock selection/management work?

Each month we rank all stocks within their respective index based on a momentum score. Our model portfolio is based on the top 10 ranked stocks, but we provide the top 20 to help those using momentum as a broad identifier. Our model portfolio provides position size (expressed as a %), position entries & exits. We also alert you when your portfolio should be moving out of the market and into cash. In addition to this we send you weekly and monthly insights and updates on markets, sectors and stocks. We alert you to opportunities and threats that you need to be aware of to assist you in managing your portfolio.

Why is the number of subscribers limited?

To preserve the profitability of each strategy.

Why has the simulated results been performing better than the actual?

This is primarily to do with the market conditions. The simulated results period captured the bull market of 2003-2007 and the recovery from 2009 till 2013. Since inception markets have been negative or range bound with no extended periods of positive momentum like seen in 2003-2007. Momentum, like other strategies, don’t produce outperformance 100% of the time. This is why it’s important to have a medium to long term investment timeline.