“Guru” strategy: back to basics with a quantitative equity strategy

THEAM, specialist in Index, Active systematic and Alternative portfolio management

THEAM offers investment solutions across a broad spectrum of underlying assets (equities, bonds, commodities, volatility, currencies...) through an extensive range of investment styles, from pure Beta to Alpha.

Read article

The approach involves an extremely strict selection of stocks based on criteria that should make obvious economic sense, while moving away from complicated models and conventional indices. Moreover, its purely systematic nature means this active method of equity selection can be applied uniformly. Stocks can be selected globally, by geographic region or by level of economic growth (developed, emerging regions, etc.).

To really understand the selection criteria used, we need to return to the basics of equity investment. To draw a parallel, an investor does not buy an apartment simply for its size, but rather for what kind of rent it will generate (will it be profitable?), the popularity of its location and the quality of the building (what are its prospects?) and its price per square metre (does it offer good value?).

In the same way, the size of the company’s market capitalisation should not be the only criterion when investing in a stock.

The aim is to select companies that answer favourably to three additional and decisive questions in order to maximize the return on investment :

• Is the company profitable?
• Does it have a promising future?
• Is it correctly valued in the market and attractively priced?

To weigh up these factors as accurately as possible, “Guru” strategies draw, among other things, on financial analyst data aggregated into consensus indicators. Upward revisions of earnings forecasts by the consensus, for example, are interpreted as a promising sign for a company. All told, the database gathers the opinions of more than 13 000 analysts from over 900 analyst firms and covers more than 22 000 active companies in 80 countries. No discretionary manager could process so much data.

The three factors used in a “Guru” strategy are combined using a scoring method. It is a stock-picking strategy that uses a quantitative process but is based on fundamental criteria. The investment universe covers the world’s largest regions: US, Europe and emerging countries.

All of these strategies exist in the form of indices published since 2008 and back-tested over more than 10 years, even if the first funds were only registered in May 2009.

For a similar level of risk to that of market capitalisation benchmarks, “Guru” strategies deliver a much more interesting performance over the long term (not just in terms of success rate, but also in terms of returns).

While the process is obviously less effective when the markets drift away from a focus on the basics, the advantage of using systematic selection criteria lies in the fact that the grounds for selection are clear and justifiable.