Universal-Investment: Stocks are a sensible investment alternative in today’s zero interest rate environment. According to which criteria do you select individual stocks for the global portfolio?
Guba: Our selection process for equities consists of three integrated research methods: fundamental, technical and statistical analysis. The first two review individual stocks independently of each other, leading in each case to a positive or negative outcome. We have found that expected returns are much more positive if we only allow stocks to our statistical analysis that have obtained positive scores in both the fundamental and the technical analysis. This subsection is then submitted to the last step of our research process that uses statistical calculations and risk management methods to determine whether a stock will make a positive contribution to the overall portfolio. We only decide to buy if the overall picture is promising. That way, we can find compelling stocks even in overbought markets.
Universal-Investment: What sets your multi-asset fund apart from your competitors?
We only buy stocks that trade at a discount of more than 20 percentGerd Guba ,
Portfolio Manager, Belvoir Capital
Guba: Our approach gives equal weight to the technical and fundamental analysis of all stocks. I believe that is not the case in other investment approaches. The methods we use have stood the test of time and we optimise them continually. From a fundamental perspective, eligible stocks must trade at a discount of more than 20 percent and have a positive economic value added (EVA), i.e. generate economic excess return. We also don‘t have a house view that portfolio managers must adhere to. If we believe that the risks outweigh the opportunities in the short term as is currently the case on the fixed income side, we have the ability to stay out of an asset class altogether. We make full use of our tactical ranges and use almost exclusively stocks, bonds, precious metals and derivatives.
Universal-Investment: How long do you hold positions on average?
Guba: We hold each position for as long as we are convinced of its merits and see additional upside. We will therefore only keep securities in the portfolio that we would buy again today at current levels and from an unbiased point of view. Some positions have been in the portfolio for years, others only remain in the fund for some weeks if we reach our price target faster than anticipated or if our views have changed. The UK homebuilder Bellway, which lost up to 40 percent in value directly after the Brexit vote, is one of our most successful holdings. Even though we already considered the stock very cheap from a fundamental perspective at the time, we waited for the technical buy signal and included Bellway into the fund after it had passed the statistical analysis. The stock has already been up more than 90 percent since the Brexit vote. And we see additional upside.
Universal-Investment: How important is risk management?
Guba: Very important: we tend to use index futures as hedges in the face of short-term problems since their characteristics come closest to our equity portfolio. When volatility is very low as has been the case for months in the equity markets, we see this as an opportunity to increase our purchases of put options – particularly if we hold high-conviction stocks but still want to protect the portfolio against significant short-term losses. Put options are particularly advantageous because the symmetric risk profile benefits our fund: the maximum loss is clearly defined at the outset while the upside is much higher. Even more so when share prices fall and volatility spikes.
Author: Gerd Guba, Belvoir Capital
Date of issue: 11/3/2017
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