Systematic Approach in Global and Regional Markets

Transcription

1 Systematic Approach in Global and Regional Markets NOMURA CONFERENCE JUNE 3rd LONDON RANI PIPUTRI, CFA, CAIA Portfolio Manager

2 Amidst the era of globalization and big data, where are the best places for systematic approach in stock selection? page 2

3 Backdrop The majority of equity investment worldwide has been in the US. Whereas the AuM of US and Japan has exceeded the pre-crisis level, Europe is still lagging. Source: Towers Watson, 2013 page 3

4 Backdrop In the US, home bias is still very much alive. page 4

5 Backdrop Despite increasing flows into index funds, the great majority of assets are still held in non-index funds. Percentage of Assets in Index versus Non-Index Funds by Region The case for international investing relies predominantly on the notion of diversification; there has been little emphasis on alpha opportunities. Does the availability of alpha opportunities justify this US-centric investing? Where to find alpha in global equity markets? page 5

6 Return drivers VALUE Cheap stocks have outperformed expensive stocks for nearly a century. Investors overpay for themes, high growth and underestimate stocks that are cheap now. Companies that are profitable now, pay out a lot of dividends and have a lot of assets relative to their share price will on average post better returns for investors as the world constantly changes. MOMENTUM Buying the winners over the last 9 to 12 months and selling the losers has proven to be a successful investment strategy within equities, though arguably, price momentum has become more volatile. Investors exhibit herding behavior as they all buy into the same trends and success stories. This is often the opposite of Value investing, which is why combining Value AND Momentum works well. QUALITY Investors pay too much for stocks with lottery type upside. As long only investors are unable to short (risky) stocks or borrow money to buy more market upside, higher Beta names will trade at a premium as they offer short term upside when markets go up. Other Quality type strategies such as profitability, debt reduction, share buybacks and accruals offer positive quantitative pay-offs. The approach is to utilize these return drivers in a systematic way to select stocks. page 6

7 Investable Universe Median daily volume in the last 6 months > 1 million EUR Free float adjusted market cap > 200 million EUR If free float data is unavailable, use market cap > 400 million EUR 12,000 10,000 8,000 6,000 4,000 2,000 Average Mcap (million EUR) 2,685 1,269 1,023 Number of Companies 1, ,000 2,500 2,000 1,500 1, Global Universe (percentage based on aggregate market cap) EM EMEA 4% EM AMERICA 2% DM EMEA 22% EM APAC 11% DM AMERICA 46% - DM AMERICA DM APAC DM EMEA EM AMERICA EM APAC EM EMEA - DM APAC 15% Investable Universe as of May Source: Saemor Research, Factset There are more stocks in the US than anywhere else, but the largest concentration of large and liquid stocks are in DM EMEA. EM APAC are a crowded place with many small companies. page 7

8 Developed versus Emerging Markets Applying systematic approach in emerging markets is challenging due to: Short history of data, limited data coverage and lower data quality Relatively high trading costs Limited possibility to sell short stocks page 8

9 Data Availability Reliable global dataset is only available after Data coverage in emerging markets is particularly scarce. Source: Saemor Research, Factset page 9

10 Trading Costs Investing in emerging markets incurs higher trading costs. page 10

11 Shorting Selling short stocks in emerging markets is expensive and often highly regulated. The availability of shortable stocks in these markets is limited. Although these have been improving in the recent years, the levels of lending fee in emerging markets are still well above those in developed markets. Source: Saemor Research, Markit. Data from Jan-2007 to Mar Left chart: Lower figures indicate the median, upper figures indicate the mean. Right chart: Percentage of stocks in the universe where there are available shares on loan. page 11

12 What Works? Monthly Rebalancing, Jan-2000 to April 2015, 15bp transaction costs. Source: Saemor Research page 12

13 Return drivers in regional markets Value factors work everywhere. Cyclical value factors, such as Book to Price, works best in Developed Asia Pacific, but they performs meagerly in Developed Europe. Momentum factors work in Developed Europe and US, but they are less effective in Developed Asia Pacific. Source: Saemor Research page 13

14 Return drivers in regional markets Some factors behave differently in different markets and in different times. Source: Saemor Research page 14

15 Model Construction In-sample data from Jan-1994 to Jun-2007, out-of-sample data from Jul-2007 to Apr Factors grouped into Value, Momentum and Quality clusters. A multifactor model is constructed for each (developed) region separately, and for the global universe. The model takes into account that some factors are inapplicable for Financials. The multifactor model is created by optimizing factors as to maximize its predictive power. Each cluster is constrained to carry a weight between 25% and 50%. page 15

16 Model Composition Source: Saemor Research page 16

17 Financials vs. Non Financials Source: Saemor Research page 17

18 Results Among the three regional models, the models for Europe and Asia Pacific delivered the best performance: higher (risk adjusted) return, higher Information Coefficient and higher Omega Ratio (average positive returns / average negative returns). The global model was applied in the global universe, as well as the global excluding emerging markets. In the latter case, the Information Ratio improved due to lower volatility. page 18

19 Results The return distribution of the regional models for Europe and US is quite similar, with Europe having a slightly taller and narrower distribution. Asia Pacific is less positively skewed and platykurtic. When the global model is applied to the global universe excluding emerging markets, its return distribution become less positively skewed and more peaked. page 19

20 What does it mean? One single global model for global equities does not seem to be optimal. Dedicated regional models work better for developed markets, except for US and Canada. DM America regional model has been optimized to work within US, but the alpha opportunities appear to be limited. This meagre alpha can be associated with highly efficient market in the US, due to: single language, single currency, uniform accounting standard, more timely reporting, single regulation framework and the proliferation of high frequency trading. In contrast, different countries in Europe and Asia Pacific have different export/import profile, dissimilar political environment and diverging local sentiments. Mispricings are also plentiful due to the fact that there are still many local brokers covering only local stocks. page 20

21 Reporting Frequency While most companies in the US reports their numbers quarterly, this is not the case for Europe and Asia. Source: Saemor Research page 21

22 Reporting Frequency Most notable improvements on country level are in Asia Pacific and EMEA. Source: Saemor Research page 22

23 Broker coverage: global versus local There are more local brokers in Europe and Asia Pacific that cover only their own homegrown stocks. Opportunity for alpha arises when local analysts, bound by their home country limitation, fail to include a proper sector/peer comparison of the stocks they cover. 129 brokers in Dev Asia Pacific 104 brokers in Dev Europe 75 brokers in North America 22 brokers in Emerging Markets Source: Starmine page 23

24 High Frequency Trading Growth of High Frequency Trading is also associated with shorter alpha decay in the US. Reliable numbers on the aggregate HFT activities in Asia Pacific are not available. Most activities are concentrated in Japan and Singapore, which start seeing strong growth in HFT. High Frequency Trading as a % of Equity Turnover by Volume, U.S. and by Value, Europe page 24

25 What next? We extend the research by creating a global model that recognized the local return drivers, by combining the three regional models. Asian stocks are scored based on factors that work in Asia, European stocks are scored based on European model, etc. After all the stocks are scored, we hold long the best 20% and short the worst 20% of the universe, regardless of the region. This composite approach does not improve the performance of the global model. It appears that, even using a smarter global model, the result is still dragged by the nearly 60% of the weight of US stocks in the investable universe. Source: Saemor Research page 25

26 Conclusion If one is to invest in the US, passive investing makes sense, because alpha is hard to come by. Developed Europe and Developed Asia still offer plenty of alpha, but one needs to be cognizant of local drivers. Developed Europe, in particular, presents superior risk adjusted return. Emerging market is a promising ground for systematic approach, but a lot of sauce will be required in the recipe. Global approach with sufficient tilt towards developed markets in Europe and Asia provides the best alpha opportunities. page 26

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