How ‘Following the Machine’ can enhance your equity investing outcomes
Many people want to access Equity markets but often lack time to be able to actively research and rebalance their investments directly. By Following the Machine, you can gain access to a diversified basket of equities that has been selected by the Machine and is automatically rebalanced. This gives you the benefit of active management with less of the stress and effort. In this article, we highlight why you should Follow the Machine and how you can access these diversified strategies.
Why Follow the Machine?
Since the Global Financial Crisis in 2008/2009, equity markets have seen sustained expansion, with most global indices hitting all-time highs. In this environment, many investors found that passively following the market (e.g., S&P 500 or Nifty 50) could deliver significant returns. Throughout this period, passive funds often outperformed actively managed approaches. Since the end of 2021 however, there has been significant changes in the wider economic environment that has seen drawdowns across the market and present opportunities for actively managed approaches. Volatility across markets has increased significantly, driven by geopolitical uncertainty (e.g., Russia/Ukraine), higher than expected inflation, and rising commodity prices, e.g., crude-oil. The macro-environment has also reduced foreign investment in Indian Equities. These factors present opportunities for active approaches with a strong stock selection process to outperform the wider market.
For the individual investor, finding the time to complete the necessary analysis to actively manage their equity investment portfolio is difficult. Others recognise the value of equity investing but don’t know where to begin with so much data and information available.
InvestorAi’s Follow the Machine (“FtM”) smallcases solve both challenges. The smallcases are built using cutting-edge AI techniques to select stocks and create baskets of equities that are well diversified and automatically rebalanced. This gives you access to actively managed strategies, aligned to a theme of your choice, that are regularly rebalanced to ensure opportunities for outperformance are maximised. The Machine takes care of the active monitoring, saving you time, and utilises all the data available in the market to analyse the right opportunities. All you need to do is select which smallcase to subscribe too!
Why Follow the Machine over a human?
Given the increased volatility of the current period, it is crucial to remain calm and unemotional in making investment decisions to avoid making mistakes. Indeed, missing 20 days of investing over 15 years could see you miss out on 74% growth. It’s easy as humans to get caught up in the emotions of volatile markets and periods of drawdown but that’s where the Machine has an advantage. The Machine sticks to the process it’s been trained to follow and doesn’t have any emotional biases that could lead to costly mistakes.
Furthermore, the Machine uses AI to sift through the vast and ever-increasing amounts of data to identify patterns in stocks that can deliver positive returns. The Machine can be far more efficient and can complete many more calculations (millions in a day!) than a purely human-led approach.
The FtM Approach
All our Follow the Machine (“FtM”) portfolios follow a consistent process that combines bottom-up stock selection with top-down constraints to ensure balanced and diversified portfolios. The outcome is portfolios that are designed to have a high active share, some downside protection, and strong risk-adjusted returns.
The starting point for our smallcases is the insights generated from the InvestorAi Equity models. These models utilise a combination of technical, fundamental, and sentiment factors to generate insights daily. While we look to combine and allocate the strongest signals into our smallcases we also run additional validation and constrain the portfolio with several rules. Typical constraints we consider are the percentage of cyclicals vs. defensive sectors, market cap percentages, and sector concentration. This enables us to construct model portfolios that deliver positive returns, while being sensitive to other key metrics.
The portfolios we choose to implement are validated against, amongst other factors, Information Ratio, Overall Beta, Max Drawdown, total volatility, and return during stress periods.
There are currently two smallcases available, aligned to Momentum and Value investing styles.
FtM — Momentum India
The underlying algorithm is designed to identify stocks that show positive price momentum and may deliver at least 3% absolute return within the next 30 days. The algorithm aims to capitalise on existing positive upward trends in the market. Given this, the smallcase is likely to outperform on the upside and in periods of drawdown it may lag the index. The smallcase is constructed with a balance of cyclical and defensive stocks with sector diversification to deliver a basket of 12 stocks with strong risk-adjusted returns.
The smallcase was launched on 20th April 2021 and has delivered a 56.7% return on a one-year basis, which is 33.5% above the benchmark for the same period.
FtM — Value India
This is one of our style portfolios focused on identifying equities that are high quality and temporarily undervalued but with a high probability of reverting toward their historical price.
The portfolio is designed with a balance of cyclical and defensive stocks with sector diversification. The algorithm shortlists stocks which score well on factors such as capital structure, forward P/E, 60 day relative return, 2 year beta and 1 year standard deviation.
All curated stocks are run through a Monte Carlo simulation calculating over a thousand possible combinations in order to deliver a 10 stock portfolio with strong risk-adjusted returns. We expect to lag in expansionary markets but more opportunities for outperformance in downturns.
1 year performance since launch has delivered 31.9%, which is 8.7% above the Equity Multicap Index.
How to access FtM smallcases
Our smallcases our easily accessible from the smallcase homepage or from https://investorai.smallcase.com. There you can see our latest thinking, more information on our performance, and any special offers. We also will be launching new smallcases in 2022, so keep an eye out for those.
It’s important to remember that equity investments can go down in value as well as up, so using our smallcases should be part of a wider diversified asset allocation approach.
By Following the Machine, we believe that subscribers can enhance their equity investing by accessing high-quality, active management by only paying a subscription fee. We have three subscription plans for each smallcase, giving you even more flexibility on how you Follow the Machine!
InvestorAi FtM portfolios are made available to you by Bridgeweave NG LLP (“Bridgeweave”). Bridgeweave is a SEBI registered Research Analyst under the SEBI (Research Analyst) Regulations, 2014. Bridgeweave’s registered address is IndiQube-Octagon, Fourth Floor, Site №643, 80 Feet Road, 4th Block, Koramangala, Bangalore, Karnataka 560034, India.
Bridgeweave is not engaged in the business of investment advice, merchant banking, investment banking or any brokerage service.
Research material prepared by Bridgeweave does not:
- consider the financial situation, risk appetite, objectives or needs of individual investors
- constitute a recommendation or solicitation of an investment or investment strategy
Investors are solely responsible for their investment decisions and must validate all the information used to make their investment decisions. Before making any investment decision, an investor should consider whether it is appropriate for their situation and seek professional advice.
The content and data available in the material prepared by Bridgeweave and on its website, including but not limited to index value, return numbers and rationale are for information and illustration purposes only. Charts and performance numbers might include back tested/simulated results calculated via a standard methodology and do not include the impact of transaction fee and other related costs. Data used for calculation of historical returns and other information is provided by third party data vendors and has neither been audited nor validated by Bridgeweave.
Back-testing is the application of a quantitative model to historical market data to generate hypothetical performance during a prior period. Use of back-tested data has inherent limitations including:
- the results do not reflect the results of actual trading or the effect of material economic and market conditions on the decision-making process, but were achieved by means of retrospective application, which may have been designed with the benefit of hindsight
- calculation of such back-tested performance data is based on assumptions integral to the model which may or may not be testable and are therefore subject to losses
- actual performance may differ significantly from back-tested performance
- back-tested results are not adjusted to reflect the reinvestment of dividends and other income and, except where otherwise indicated, do not include the effect of back-tested transaction costs
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Past performance does not guarantee future returns. Performance of the portfolios created by Bridgeweave are subject to market risk. Investments in the securities market are subject to market risks and investors should read all the related documents carefully before investing.
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About the Author: Ben Elvidge, Solutions Director at Bridgeweave, the company behind InvestorAi, a FinTech firm that creates AI powered next generation products to improve financial wellness and expand wealth enablement into the digital space.