Investment Committee – October 2021
The Investment Committee’s latest meeting discussed market activity for September, and conferred on the best route to navigate markets towards year-end. These are the main points that were brought up:
Current state of the markets
KM Cube advocates that today’s markets are driven by central bank policies. Governments and central banks are to remain accommodative to the markets, essentially functioning as volatility absorbers for prices and creating an artificially high plateau for mainstream assets and low interest rates.
Inflation is the largest risk to this set-up; our hedging activity going forward is targeted to mitigate such a situation, although for the time being extreme inflation is not our main scenario.
September was a negative month for most asset classes. Both stocks and bonds dropped concurrently, creating an extremely strenuous environment to invest. Government bonds, corporate bonds, and precious metals failed to provide any hedge to equities’ drawdown. Despite the inflation expectations keep spiking, both gold and silver are down for the year, as are US and EU government bonds.
Over the last 30 years every single time equities suffered a drawdown, bonds have rallied significantly to offset those losses. Today, it’s hard to argue that the returns on fixed income are going to be anywhere near close to the returns over the last three decades. Bonds can no longer serve their role neither of income generator, nor risk diversifier.
Portfolio positioning
We are happy to record only minor drawbacks in our clients’ portfolios for the month and we consider September an overall flat month for our customers. We attribute our overperformance to the substantial percentage of cash in our customers’ portfolios, plus our expertise in systematic investing that kept us out of specific asset classes at the right time.
We are inclined towards minimizing our allocation to government bonds and seek alternatives to hedge for any upcoming market nervousness. The Committee proposes two pillars of investments alternative to holding fixed-income:
First, Reverse Convertible Notes deliver some stream of income that yields a positive carry, and at the same time offer the potential to invest in equities at significantly more attractive levels. You can visit our interactive tools site with all the latest reverse convertible notes issued.
Second, our proficiency in derivative products can provide relatively cheap ideas to invest to the downside, with minimal cost to clients’ portfolios and compelling risk/reward ratios.
Both solutions can be customized for each customer’s risk tolerance and time-horizon. These ideas can provide real alpha in client portfolios for the remaining of 2021, so please do not hesitate to ask your relationship manager for specific propositions.
We note that cryptocurrencies’ September performance was overall positive (for example, Bitcoin traded above $50,000 again) despite the overall risk appetite being subdued. This was the first time cryptocurrencies performed positively while risk assets suffered some price drawdown. Although too early to make a point out of this, we notice how the potential for cryptocurrencies is to surprise to the upside. KM Cube does not offer direct access to cryptocurrency exchanges, but clients with derivative documentation in place can obtain such risk via exchange-listed cryptocurrency future contracts. We feel we need to stress the extreme price volatility and margin requirements for dealing in such currencies, that are not suited for every client profile.
Extracting value from the markets is hit during times of irrational investors’ activity because it usually invests in logically placed bets that assume some reversion to a fair value. The market rally following the coronavirus crisis has led to a series of extreme valuations that our Investment Committee is not inclined to follow with.
Our analysis has resulted to a list of value-oriented stocks filtered for a series of attractive fundamentals that can offer upside opportunity in times of market stress. The list is updated on a monthly basis and can often provide rare occasion where investors can literally buy equity in a company for less than its intrinsic value. You can visit our interactive tools to view the value stock selection for the October.
Our offering
Unicorn Systematic Strategies
In systematic investments we manage your portfolio based on a set of several well-known trading strategies that offer a sound academic and scientific background. Throughout the years we have implemented and applied these strategies ourselves.
The benefits of systematic strategies are well-known as they eliminate the behavioural bias, reduce costs and increase the probability of profit in a longer investment horizon .
Global Navigator
The flagship of our product offerings is the Incometric Athos Global Navigator Fund. The Fund is a Luxembourg-based UCITS that aims to perform absolute returns in every environment.
Incometric Athos Global Navigator focuses on capital preservation and attempts to minimize correlation to stock and bond prices. Its strategy holds a core portfolio of fixed-income securities plus some high-conviction stocks for the long-term, topped-up with an overlay strategy of financial derivatives to weather the downturns.
Value Stock Selection
One of the most effective ways to identify value stocks is the Piotroski f-score. We employ this metric along with some additional value criteria to limit the universe of more than hundred thousand companies to a few canditates. A ranking methodology then is applied to identify a managble set of companies that we can then deploy in our portfolios. Such a portfolio has the potential to withstand inflationary pressures and benefit from the rotation towards value sectors.
Structured Note Ideas
Structured notes offer indirect access to alternative risk premia (particularly correlation and
volatility) something that can be explored in your portfolio allocations. Visit out interactive tools site to see our most recent ideas.
Model portfolio allocations
Indicative allocation (Core)
| Asset Class | Low | Medium | High |
| Cash | 68.3 | 34.0 | 16.7 |
| Fixed-Income | 30.0 | 24.3 | 11.7 |
| Equities | 0.0 | 23.3 | 41.7 |
| Commodities | 0.0 | 8.3 | 18.3 |
| Alternative Investments | 1.7 | 10.0 | 11.7 |
| 100.0 | 100.0 | 100.0 |
Tactical (1m horizon)
| Asset Class | Low | Medium | High |
| Cash | 72.3 | 39.7 | 20.0 |
| Fixed-Income | 26.0 | 17.0 | 11.7 |
| Equities | 0.0 | 21.7 | 38.3 |
| Commodities | 0.0 | 10.0 | 18.3 |
| Alternative Investments | 1.7 | 11.7 | 11.7 |
| 100.0 | 100.0 | 100.0 |