New York (HedgeCo.net) Two new fund manager models have been added to the HedgeCoVest platform—the Ferro Systematic Market Neutral model and the JAB Fundamental Value model. Ferro is a market neutral model and JAB is a long-only model.
Ferro Systematic Market Neutral:
The strategy manages capital through a disciplined and systematic-based approach to achieve consistent investment returns through all market cycles. US stocks are evaluated on key characteristics of financial measures, capital efficiency, valuation, momentum, sentiment, and risk factors that lead to positive or negative performance relative to peers. Selected stocks are used to construct a market and sector neutral portfolio.
The model has identified a diverse series of key second derivative stock factors that lead to positive performance and absence of these characteristics lead to under performance relative to peers. The proprietary selection process utilizes individual factor scores to create an overall ranking of stocks based on unique scoring combinations of the factors. By including a diverse set of stock characteristics into the systematic market neutral portfolio construction, investment returns are intended to be uncorrelated with individual sectors and the overall market.
The model is a computer-driven model and that creates a fairly active model. On average the model has 200-250 positions open at any given time. Due to the level of activity, the minimum allocation to the Ferro Systematic Market Neutral model is $50,000 and the recommended minimum is $150,000.
Highly-concentrated long-only contrarian value manager with low turnover that seeks businesses that generate durably high returns on capital and buys them when they are out of favor and trade at high free cash flow yields. JAB develops a list of companies that meet their criteria, i.e. high returns on capital, low debt, as little technological or disintermediation risk as possible, then they follow them, get to know them, and then buy them when they fall out of favor. Most of the purchases are made close to the then-current 52 week low of the stock. JAB makes their money through a combination of positive mean reversion of business performance, upward mean reversion of the stocks’ valuation multiple, and steady compounding of the intrinsic value of the businesses through their high returns on capital and free cash flow generation.
Risk management is done on an individual security-by-security basis. The goal is to avoid large permanent impairments of capital in any individual investment. They don’t look at volatility, beta, correlation, or any other portfolio wide measures of risk. They look for individual businesses that they can understand and reasonably foresee what the business will look like 5-10 years into the future, that have a large valuation margin of safety, have little debt, clean accounting, and face as little technological or disintermediation risk as possible.
The portfolio is constructed on a security-by-security, “bottoms up” manner. There is no macro overlay or examination of correlations within or across the portfolio. We look for good individual businesses that fit into our strategy that we can understand, but that are for some reason misunderstood by the broader market. We buy as many or as few of those as we can find. If we can’t find places to invest we hold cash and patiently wait until better opportunities present themselves.
With the model being a long-only, highly concentrated model, the average number of positions open at any one time is 13 to 14. Being that it is a less active model, the minimum allocation is $10,000 and the recommended minimum is $30,000.
Rick Pendergraft
Research Analyst
HedgeCoVest
