Our Investing Approach Deviates Heavily From The Benchmark
As Terry Smith, probably the most successful fund manager of Europe, rightfully said: investing in excellent companies will always yield far better returns than owning bad ones. Good companies generate sound returns on capital employed and therefore create shareholder wealth. Quality should be preferred over valuation. Since the MSCI World Index consists of bad, average and good companies, our investing approach will deviate heavily from the benchmark. As such, our active share is significant, without taking our quant-based options strategy methodology into account.
Industry-Leading Return On Capital Employed + FCF/Share Growth = Long-Term Investment Success
Return On Capital Employed (ROCE) measures a company's efficiency, while reinvested profits should result in incrementally growing free cash flows per share (effectiveness). The combination of these two metrics and upside potential from a conservative Discounted Cash Flow perspective will dictate which stocks belong to our investable universe.
If a stock exceeds our predetermined fair value (i.e. multiple expansion when total return is greater than free cash flow per share growth), our intention is not to sell our entire stake but rather reduce exposure to a normal weight. If ROCE and FCF/share growth are among the best of our portfolio holdings and continue to exceed our expectations, we will not consider trimming our position.
You make money when you get things right by persisting with them. Make money with old friends.
Analyzing Correlation, Volatility and Drawdown Graphs
Options strategies allow for strategic investing, but one should be very careful with very volatile stocks that lack consistency. Stocks that exhibit above-average volatility generally yield poor risk-adjusted and absolute returns. Robeco, led by quantitive analysts van Vliet and Blitz, has published many research papers about the low-volatility anomaly. Quality stocks with lower-than average volatility in a non-correlated portfolio will create superior shareholder wealth. Adding options strategies to the equation can boost risk-adjusted returns by more than 30%, while mitigating downside risks and allowing for appealing profits in a zigzagging market environment.