Investment Approach

What is our strategy?

Our approach is based on empirical academic research that has uncovered a number of financial and accounting factors that predict stock returns. Some of these factors such as momentum and value are fairly well-known within the investing community have been implemented under active “smart beta” or “factor” investment strategies.

Historically, factor strategy returns have been highly volatile and sensitive to macroeconomic and market forces.  For example, the momentum factor had periods of significant drawdowns, most notably in the Spring of 2009.

Factor strategies have also underperformed the overall market for long periods of time.  Value factor which has a historical record of outperforming the market had dismal returns over the past decade, underperforming growth stocks by 5% a year.

However, not all factors have the same underlying structural drivers and have low correlations with each other.  Multi-factor strategies can therefore produce large premiums over the long run with milder fluctuations.

Our proprietary strategy diversifies across many factors to reduce risk and dynamically changes factors used in stock selection to enhance returns in changing market conditions.  We have a systematic approach that assigns factor scores to all publicly traded U.S. Stocks based on many pre-determined factors.  We then combine all factors to derive an overall score for each stock.  We then rank and invest in the top twenty stocks with highest overall factor score.

We apply liquidity filters based on price and market capitalization to make sure that stocks that we invest can be traded without incurring significant transaction costs.  We also make sure that no one industry accounts for a significant portion of the portfolio.  As we cater to retail investors, we are long only fund and we do not take short positions.Our goal is to deliver returns above the benchmark of an equally weighted broad market index, with roughly the same volatility as the benchmark.

The table shows the performance of our strategy for a High Risk investor (WIA-H) since inception. Performance of S&P 500, Wilshire 5000 and Nasdaq Comp  indices are included for comparison.  The WIA-H performance is gross of fees.  It is important to note that past returns are not necessarily indicative of future returns.

What are the risks?

There are various risks associated with our strategy.  As we have a long only strategy that is fully invested, we are exposed to market risk.  Although the Beta of our strategy, which measures the correlation with the market, is less than one, our returns will fluctuate with the overall market.

There is also stock-level risk that we take on when we invest in the top twenty ranked companies.  To produce higher returns, we need to be different than the market.  In our allocations, we strive for sufficient but not excessive diversification.  Too much diversification will generate the returns similar to the market and will dilute premiums we expect to collect through our approach.  There is therefore risk that is unique to the factors that we invest in.

There is also liquidity risk.  This is the risk that we are able enter and exit positions without incurring high transaction costs.  We invest in stocks that are have price and market priced above $4 and with market capitalization greater than $100 million to reduce potential liquidity risk.   We also actively asses portfolio turnover and trade when the expected returns are high to minimize trading costs.

Ultimately, we believe that risk can be reduced and transformed but cannot be eliminated.  Markets are noisy and observation periods are often short by academic standards.  We believe that long-term investment success comes from making consistent diversified investments in stocks where we expect higher returns.  While every investment strategy will have its ups and downs we believe that sticking with an informed, empirically tested strategy will allow investors reap superior gains in the long run.