CIO views: sharpening an information edge

Sandro Croce CIO, Fixed Income

Anando Maitra, Head of Systematic Research and Portfolio Manager

 

We have always prioritised grounding our portfolio construction and alpha generation in robust, bottom-up fundamental issuer analysis, alongside thoroughly researched systematic or quantitative techniques. These two facets go hand in hand in our ‘quantamental’ approach that cuts through the plethora of information available and focuses on maximising alpha potential. Rather than seeing new ideas or alternative data as replacements for more traditional data sources, we believe that many synergies exist between them.

Credit markets heavily rely on balance sheet data, with decision making ultimately boiling down to the capacity of an institution to repay its debts. As such, traditional credit analysis of fundamental data will always remain at the core of decision making. However, with extensive universes covering thousands of bonds, pinpointing potential risks and opportunities is easier said than done. Plus, the publication of fundamental data is infrequent (quarterly), making it difficult to profit from. To combat such issues, less traditional inputs such as using equity information, which we have studied and written on extensively, can be used to filter the universe to focus on the corporates with the highest alpha potential and uncover signals that may lead ahead of slower moving fundamentals.

Our methodology for investing in fallen angels adopts this quantamental approach. After a bond has been downgraded to high yield, we aim to generate alpha through both fundamental credit analysis and systematic techniques to overweight those names that undergo the largest price overreaction, and hence the highest recovery potential. We also underweight those names most likely to not recover and therefore become falling knives. Again, this provides a way of focusing on the credits that can best help us generate outperformance potential.

 

Summer rethink

‘When Genius Failed: The Rise and Fall of Long-Term Capital Management’ by Roger Lowenstein

A renowned account of the infamous Long-Term Capital Management hedge fund that was founded 30 years ago. The lessons of its downfall remain salient and true today – and are particularly relevant to the topic of understanding an information edge. This core message should always remain at the forefront of any investor’s mind: be humble or markets will humble you. Failing to acknowledge this can be the downfall of even the most genius investors, regardless of how innovative they may believe they are.

Dhiraj Bajaj CIO, Asia Fixed Income and Equities

 

An avalanche of information faces investors. Yet in the pursuit of better returns, we often try to seek even more information. The history of investing, however, teaches us that it can be more beneficial to seize the opportunities from what is visible and stands in plain sight.

Globally, three significant prospects are openly apparent to us and present strong potential for Asian markets.

• India’s secular economic growth
• Asia’s rising dominance in the global technology supply chain
• Technology platform winners from Asia that are expanding and could become global champions

Understanding these trends can potentially lead to significant compounding returns over multiple decades, as well as help investors avoid low-growth areas, and possibly outdated incumbents and markets.

The growth of India is firmly established and the economy is expected to again double in size from USD 3.5 trillion to more than USD 7 trn by 2034¹. India’s infrastructure spending is increasing at a CAGR of ~15%², while the country’s middle class is set to become the largest globally.

The technology leap from generative AI will completely transform the global tech supply chain from servers to edge applications. Asian foundries, semiconductor, memory and tech hardware producers are leading the way as upstream product providers: many of these building blocks cannot be replaced going forward, leading to a potentially superior position.

Lastly, in sectors using technology platforms, from e-commerce to electric vehicles, we foresee Asian companies pursuing global expansion based on high product and value quotients.

As investors, we believe it’s best to capitalise on what is hiding in plain sight.

 

Summer rethink

‘Situational Awareness: The Decade Ahead’ by Leopold Aschenbrenner

A staggering and thought-provoking paper that all investors and students of the future should read. Written by a former OpenAI staff member who is now a founder of an investment firm focused on artificial general intelligence, this provocative essay looks at how the future could be starkly different for individuals, our jobs and the economy.

 

Sources:

Yannik Zufferey CIO, Core

Nicolas Mieszkalski Portfolio Manager

Alexey Medvedev Portfolio Manager

 

To select companies that are expected to decarbonise faster than their peers, we carefully assess multiple data points on company actions and commitments to lowering their greenhouse gas emissions. Data and verification are at the heart of this assessment as regulatory pressures drive greater carbon disclosure and transparency. Simultaneously, there has been an exponential increase in companies setting decarbonisation targets – some convincing, others less so. 

In today's data-driven world, distinguishing valuable information from noise is paramount to identifying climate leaders for our TargetNetZero equity strategy to ensure it is aligned to the sub-2˚C scenario set out by the Paris Agreement. We implement data-reliability checks at different stages of the investment process to ensure the information being provided is dependable. At the model level, we analyse the emission targets set by companies based on the source of the data as well as the credibility of the companies.

To refine our assessment, we engage directly with transitioning companies in high-carbon sectors to clarify their decarbonisation plans and leverage our analysts' in-depth reviews. At the portfolio construction level, we explicitly integrate an uncertainty factor into our analysis of companies’ ambitions: this helps to avoid the ‘error maximisation’ trap, or the risk that small input errors can lead to a large portfolio misallocation, preventing true climate alignment.

We believe that leveraging diverse data sources within a state-of-the-art systematic model can deliver significant value for investors. Yet, the key to forming strong convictions lies in understanding the quality and nuances of this data. Our comprehensive approach ensures that our portfolios are robust, informed and positioned to capitalise on the evolving landscape of decarbonisation.

 

Summer rethink

‘Pachinko’ by Min Jin Lee

Summer is often a time for holidays and travel, and this novel will take you (without the carbon emissions from flying) on a journey with a Korean family living in Japan over four generations in the 20th century. It's highly recommended for anyone interested in history, Korean and Japanese cultures, and stories of resilience and identity.

Christophe Khaw CIO, 1798 Platform

Laurent Joué Head of Systematic Alternatives

 

Developing an information edge for an earnings-focused investment strategy requires a multi-pronged approach that uncovers insights ahead of the broader market. It is essential to cultivate critical-thinking skills – to actively question sources, analyse arguments and evaluate results, rather than passively consume information. Relying solely on widely available information already absorbed by the market can limit perspectives. It is crucial to diversify beyond mainstream financial data.

Seeking out new, less-accessible sources such as alternative datasets (web traffic, credit card transactions and consumer application data) can provide leading signals about a company's business that the market has not yet priced in. Leveraging alternative data for ‘nowcasting’ can help boost accuracy in forecasting key performance indicators (KPIs) and predicting earnings surprises.

While it can be tempting to conform to collective wisdom, the most valuable informational edges often lie in identifying divergences between company fundamentals and investor expectations. Developing the discipline to challenge consensus views is key. Both readily available data and lesser known information have their uses in forecasting returns, so employing a combination can be an efficient approach.

It is also important to account for the obsolescence of information over time. Based on three years of experience in managing our DataEdge market-neutral strategy, we believe investors can develop a true information edge by using alternative data to forecast KPIs, combined with financial expertise, a flexible mindset and willingness to diverge from the consensus. This edge makes it possible to consistently identify and capitalise on underpriced earnings potential before the broader market recognises it.

Summer rethink

`The Missing Billionaires: A Guide to Better Financial Decisions’, by Victor Haghani and James White

This important financial resource argues that successful investing is not about what you buy, but rather how much. The authors offer a simple framework for thoughtful financial decision-making, using plenty of case studies and anecdotes, and drawing on their own experiences – including Haghani’s as a founding partner of Long-Term Capital Management, which collapsed spectacularly in 1998.

Aurèle Storno CIO, Multi Asset

 

As quantitative investors, we believe in the power of data. And as rules-based investors we are also mindful of the dangers of conscious or unconscious biases, including confirmation bias – the tendency to mainly focus on the data that confirms our intuition. Due to these biases, we believe in looking at more (rather than less) data.

Thus data and its use are very important ingredients in our investment process. For instance, we integrate long-term data in our strategic allocation, and we consider market and macro data for our tactical asset allocation decisions.

The key to extracting value from data is to process the information in various ways. For example, we use several models to estimate asset volatility rather than a single model, because some models might be more reactive while others include forward-looking elements. On the macro front, we use hundreds of data points to form our view on the current state of the economy in terms of growth, inflation and monetary policy. Finally we have recently implemented a cross-asset valuation overlay in our portfolios – it is purely data-driven, almost by definition.

Beyond these examples, we take considerable care to make sure that the way we interpret the data is best able to transform it (and this is the crux of it) into an edge rather than a source of noise.

 

Summer rethink

‘Chaos Kings’ by Scott Patterson

This book delves into the world of elite investors who use complex mathematical models (and tons of data) to predict and profit from financial market chaos.

 

‘Condorcet’ by Elizabeth and Robert Badinter

The authors explore the life, philosophy and political contributions of the Enlightenment thinker and revolutionary, Marquis de Condorcet. We believe society today is in dire need of more people like him and the Badinters.

Arnaud Gernath CIO, Convertible Bonds

 

Today’s data-saturated environment makes it crucial to distinguish useful information from noise in asset management. Over the years, we have developed a holistic approach – combining technology, expert insights and rigorous analysis – to achieve and maintain an information edge in our convertible bond strategies.

Data quality is paramount. The value of insights is only as good as the data used. We continually assess the credibility and reliability of sources, from market data to fundamental research.

Favouring quality over quantity. We prioritise collecting data that is directly relevant to our investment hypotheses, focusing on what is current and pertinent to the decision-making processes.

Tailored expertise. As an asset class, convertible bonds require capabilities in equity, credit, rates and volatility. We use advanced analytical tools across these areas, and include sentiment indicators and statistical and fundamental analysis to gauge potential market moves.

Human insight remains central. Our investment process relies on team members to provide context and qualitative insights that pure quantitative approaches might miss. Collaborating as a team and leveraging diverse skills help to challenge assumptions and gain different perspectives.

Continuous learning and adaptation. Maintaining our information edge depends on establishing feedback loops, learning from past decisions and refining future strategies. We will incorporate big-data tools and machine learning to identify patterns, trends and anomalies that human analysis might overlook.

From capturing the most relevant data points to applying cross-asset expertise, our investment process aims to capture and exploit the power of information for investors.

 

Summer rethink

‘The New China Playbook’ by Keyu Jin

Offering great insights into contemporary China, this is a must-read book for anyone interested in understanding and learning about China’s current economic development and its implications for the global economy and humanity.

 

‘A Brave New World’ by Aldous Huxley

It’s always worth re-reading this dystopian novel from 1932 about a futuristic world state, if only to be reminded of the importance of keeping humans centre stage.