Our Investment Approach: Equities
Genevieve Signoret
(Hay una versión en español de este artículo aquí.)
This article is the first in a series of three in which we explain our overall investment approach.
Long positions only
Our client portfolio positions are long only and composed primarily of exchange-traded funds (ETFs), mostly index funds.
What are “overweights”?
Because our core allocation is the entire global stock market, every time we buy exposure to any narrower equity asset subclass, we are overweighting that subclass. Asset subclasses we overweight are called overweights.
How we decide what to overweight
Our core equity holding is an ETF representative of the entire world stock market. We choose overweights using a computerized quantitative model (a “robot”) that runs through a catalog that currently has 650 950 ETFs that meet our standards and produces, for each, a judgment—buy, sell, or hold—and a level of conviction—weak, moderate, or strong.
The model first narrows the universe of potential ETFs to those that meet our criteria for history, size, investment restrictions, liquidity, and (depending on where our client pays taxes) tax efficiency. Today that first filter selects about 650 950 ETFs.
In the next step, the model analyzes each fund and produces a decision and conviction level based on an algorithm that combines value and momentum criteria: we buy those funds that our model qualifies as “cheap” and “exhibiting strong upward momentum”, and we sell those that our model considers “expensive” and “have probably peaked in value”.
The secret ingredient in our algorithm is how it decides that something is “cheap”, “expensive”, or “exhibits strong upward momentum” or “has probably peaked”.
In certain situations, the portfolio strategist (Genevieve Signoret) has the freedom to override a strong buy signal coming from our model. Suppose our model tells her, with strong conviction, to buy ETF ABC. In what circumstances do our policies allow her to ignore that instruction? When any of the following three conditions are met:
- Our macro view is that the ABC would expose the client to what Genevieve sees as excessive risk. Risks are often related to politics, regulation, or conflict.
- ABC is highly correlated with something else the client holds, so that to add it would increase the volatility of the portfolio to an unacceptable degree.
- The client’s portfolio has reached our limit of about five equity overweights.
Read Part 2 here.
Updated on 13 May 2024. The number of ETFs in our catalogue has grown from 650 to 950 since publication.