The implementation of technology to further remove investor emotions and biases is improving the ability to systematically select stocks, argues Jean Keller, CEO of Argos Investment Managers, the value house that has implemented a tool developed by Equity GPS for its Argos European Systematic Long/Short fund.
Renaud Froissart, manager of the Ucits IV portfolio, uses the tool to rank over 1,300 European stocks daily on the basis of computers crunching some 200 million financial and economic data points.
“Providing you are using the correct tool, taking away emotions, taking away biases is important in the investment world,” Keller said.
However, he added that this is not a case of implementing a so called ‘black box’. He characterised it as a ‘white box’, which uses eight well known value criteria, such as price to book, as well as a set of market criteria, to find the stocks that rank well and may be viewed by the manager as opportunities.
Keller noted the concerns that are prevalent when discussing tools used for systematic strategies, such as “if you put garbage in, you get garbage out”.
“You need confidence in what is put in. That’s why we wanted to be transparent.”
The ability to analyse 200 million data points daily means that in this case the manager can obtain an exhaustive view of the market, find and rank stocks according to value and market criteria, and pick out 50 based on best scores.
The strategy is not based on high frequency trading, Keller added.
“We are not trying to compete via computer strength per se. What is important around the number of calculations being done is that it offers a way to extract information that is incredibly reliable.”
Charging 2 and 20, the Luxembourg domiciled fund has returned 13.02% versus 2.87% for the HFRX Equity Hedge EUR index since the start of 2015, and since inception is up 14.58% versus 3.19% for the index, according to data from the manager.
Access to Equity GPS came about because of a comment from an institutional investor in Switzerland, which suggested they should meet. This ultimately resulted in the agreement to use what the tool provider calls a “cognitive technology process”.
The fund can go down to €500m market cap, but is designed to remain liquid and have the ability to cut exposure fast. For this reason, Keller says, the capacity for this type of strategy is probably up to €3bn, but the manager will probably cut access around the €1bn mark.
The reason for the cutoff is because Argos does not want to hold more than a certain percentage of stock being traded. The fund needs to be able to trade on trading dates and “we don’t want to pollute the model with liquidity issues”.
Keller added that having already closed a fund as a boutique Argos was “walking the talk” on closing strategies.