© 2016 by Logica

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Focused Equities Strategy

Objective

  • Seeks significant capital appreciation through a concentrated, high conviction, high Active Share portfolio of S&P 500 stocks.

Process

  • Systematically evaluate stock prices and volumes across many time frames

  • S&P 500 stocks are ranked 1-500 based on behavioral/mathematical indicators

  • Portfolio consists of 10 equally weighted positions

  • Rotated and rebalanced monthly, annual turnover ~300%

  • Benchmarks: S&P 500 index; S&P 500 equal-weight index

Pros

  • Long Equity Exposure

  • Concentrated, high conviction. High active share

  • Seeks highest performing stocks - not benchmark dependent

Cons

  • Can under perform during sudden regime changes

  • Can exhibit high tracking error

  • Idiosyncratic risks can come into play

Instruments

  • The portfolio trades US Equities in the S&P 500 Index.

Why Concentrade/High Conviction? Why Behavioral Indicators?

We believe behavioral indicators and supply/demand metrics offer the most consistent, long-term outperformance. Behavioral finance represents the wisdom of the crowd. Whether one fundamentally agrees, or disagrees, with the crowd’s opinion, is less relevant. What is relevant is that crowd behavior moves stocks as stock prices are set by the daily battle between buyers and sellers. LFF utilizes mathematics to measure the behavioral eagerness. This generates a predictive signal with which LFF ranks all S+P 500 stocks to form a portfolio of the top 10 rated stocks displaying the highest probability of outperforming the market over the near term.

We express our views in the form of highly concentrated, high conviction trades. We do not believe in diluting our portfolio just for the sake of diluting, lowering variance, lowering beta, etc…We seek to outperform our benchmark by way of 3 metrics:

  1. Annualized Return

    • Straightforward. We seek to make more money than a passive investor would in an index over the course of time

  2. Beta of 1 vs. benchmark

    • We seek to achieve #1 above while keeping a beta of ~1 vs. our benchmark

  3. Max Drawdown / Annualized Volatility

    • We seek to achieve both objectives above while keeping draw downs in line with portfolio realized, and expected, volatility.

 

Over long periods of stock market history, only the top 4-5% of all stocks account for all of the wealth created in the S+P 500. LFF’s process seeks to identify these high performing stocks while avoiding the worst stocks in the index—2 ways of outperforming. Since a large % of funds have not beaten their benchmarks, LFF is an option for investors that seek a premium return over passive investing or are seeking a High Alpha supplement to their existing public equity allocation.

Hedrik Bessembinder recently authored a research report on why funds underperform; his thesis is that the stock market’s return is driven by only a few high performing stocks that produce the S+P’s returns. The median stock tends to drastically underperform the index which is reflected in the preceding fact why 90%+ funds underperform their benchmarks. The implications from this study are profound:

"The results of my study imply that the returns to active stock selection can be very large, if the investor is either fortunate or skilled enough to select a concentrated portfolio containing stocks that go on to earn extreme positive returns. Of course, the key question of whether an investor can reliably identify in advance such 'home run' stocks, or can identify a manager with the skill to do so, remains," the paper concluded. ~ Hedrik Bessembinder 2018

 

For Performance/Fact Sheet and presentation material, please contact us.