Hybrid strategy of value investing in shares
Combination of absolute and relative return
Forms of implementation of the strategy
12–13%*
target return of portfolio over
the long-term horizon
the long-term horizon
16-25
stocks in
the portfolio
the portfolio
3–5 years
investment
horizon
horizon
20+ years
the manager’s
market experience
market experience
*the target return rate is not a guarantee and cannot be used as a guide for making investment decisions
8 Primary Principles of the Strategy
01
Fundamental approach to investing
Value Investing
02
Instruments
Shares and options
03
Selection of market geographies
Primarily developed markets
04
Methodologies of evaluation of specific securities
Quantitative and Qualitative
05
Attitude to timing
Careful application; automatic adherence to the principles of the strategy
06
Approach to selection of individual investments
Excellent companies at good prices and good companies at low prices or short put positions on such companies
07
Investment horizon
Long-term (buy&hold) - over three years
08
Attitude to Diversification
Measured application - even 16 securities are sufficient for the creation of a diversified portfolio
Reliability and effectiveness of the strategy
Professional Management
The strategy was developed and is used in the management of the fund by a specialist in value-investing; the manager has more than 20 years of experience in large international investment organisations (Rothschild, Deloitte, Troika Dialog).
Alignment of the interests of clients and managers
The fund managers share with their investors both the risks and the benefits of the strategy. The managers were the fund’s original investors. The outside investors were allowed to join the fund only after the managers had confirmed the reliability of the strategy, with absolute confidence. Approximately ¼ of the assets under management is personal capital of the fund managers.
Added value for investor
The goal of the strategy is to perform better than the S&P 500 so that the choice in favor of our hybrid strategy is justified by the additional profitability.
Confidence in the product’s infrastructure
The fund managers aim to minimize risks and costs for the investors; for this reason, the managers use only service-providers with an impeccable reputation. The fund’s performance is certified by an independent international auditor (Deloitte&Touche).
On value approach to investing
The term "value investing" means that the investor understands the value of the assets in which he invests; the investor estimates their long-term potential on the basis of the current value of the assets and not on a forecast of short-term market dynamics.
Two main approaches to value-investing:
- acquiring shares of acceptable quality at low prices;
- acquiring shares of high quality at acceptable prices.
In both cases, the market price - the price of acquisition - is lower than the fair value; in effect, the asset is acquired with the so-called margin of safety.
Why was value investing chosen as the fundamental approach
- Best historical results among different types of investment strategies in the equity asset class
- Low risks of investment becoming illiquid, of suspension of operations, of adverse impacts through changes in trading regulations and local legislation
- High level of transparency of the fund’s operations; no risk of violation of declarations; no risk of manipulation that harms investors; no risk of concealed errors
- Focusing on delivering the result over the medium- to long-term which allows us to concentrate on the deep study of investment opportunities as opposed to short-term market fluctuations
- The best method to use elements of market timing and automatically enter the market at the right time
- Synergy with the management of fixed-income portfolios, based on credit-analysis
- A well-developed investment method that gives a market advantage to managers who have a detailed understanding of the macroeconomic situation, the condition and activities of the issuers and who can evaluate the prospects of businesses
- No need to participate in high-frequency trading and to undertake substantial risks related to the trading infrastructure
Strategic positioning of the fund
The fund’s portfolio mainly contains long positions and short puts (short positions in put options). The choice of the share of each instrument depends on the assessment of the market level and market volatility:
- When the shares are cheap, the expected return on the long positions is higher than that on the short positions in options; besides, the partial protection against falling share prices, accomplished through the sale of put options, is less needed.
- Conversely, when stocks are expensive and a correction is expected, long positions can incur losses, while short positions in options can bring limited but profitable gains.
- The relative return on the short put position is higher when the market is more volatile, as the options are more expensive.
When the market is overheated and volatility is high, the proportion of the short positions in puts in the portfolio is increased. Initiation of put positions, in these circumstances:
- Reduces the volatility of the fund’s portfolio.
- Allows avoiding losses during small market or individual share price declines.
- Reduces the likelihood and the size of losses in a serious crisis.
- Considerably reduces the recovery time of the portfolio value in case of a significant market decline.
- Does not lead to a decrease in the fund's profitability, in conditions of high volatility.
Types of instruments and positions
In accordance with its objective, GEIST is positioned as a hybrid between an absolute return fund and a relative return fund.
Fund portfolio. Types of instruments and positions
Position
The type of Income
Conditions
Long position in stocks, baskets or indices
Relative return
The market price of a share (basket, index) is below fair value.
Selling put options on stocks with strikes below market prices
Absolute return
The stock is seen as acceptable by the manager, but the stock’s price is higher or somewhat lower than the fair price; the premium on a put option with a strike significantly lower than the fair price delivers a reasonable return (of more than 6-7% annualised).
Relative return
In the case of the execution of the put and the resulting delivery of the stock, the stock enters the portfolio at a price lower than the fair value.
Selling call options on stocks with strikes at above-market prices, if the stocks are available in the portfolio (so-called covered call)
Absolute return
The premium on a call option with a strike price equal to or higher than the fair price (the level at which the managers would close the position in the stock) delivers a sensible return (of more than 6-7% annualised).
Relative return
In the case of the execution of the call (delivery of the shares), the profit on a stock that has reached its fair value is realised.
Position
Long position in stocks, baskets or indices
The type of Income and conditions
Relative return
The market price of a share (basket, index) is below fair value.
Position
Selling put options on stocks with strikes below market prices
The type of Income and conditions
Relative return
In the case of the execution of the put and the resulting delivery of the stock, the stock enters the portfolio at a price lower than the fair value.
Absolute return
The stock is seen as acceptable by the manager, but the stock’s price is higher or somewhat lower than the fair price; the premium on a put option with a strike significantly lower than the fair price delivers a reasonable return (of more than 6-7% annualised).
Position
Selling call options on stocks with strikes at above-market prices, if the stocks are available in the portfolio (so-called covered call)
The type of Income and conditions
Relative return
In the case of the execution of the call (delivery of the shares), the profit on a stock that has reached its fair value is realised.
Absolute return
The premium on a call option with a strike price equal to or higher than the fair price (the level at which the managers would close the position in the stock) delivers a sensible return (of more than 6-7% annualised).
In rare cases, the managers may also take short positions in uncovered or naked call options and long positions in puts.
Position
The type of Income
Conditions
The sale of stock call options with strike prices higher than the market prices when the stocks are not held in the portfolio (uncovered/naked call)
Absolute return
The probability of the share price reaching the strike is low; nevertheless, the option premium delivers significantly more than 6-7% in annualised return.
Relative return
If the stock does rise above the strike price, the portfolio incurs a loss, equal to the difference between the strike price and the market price, which needs to be paid to acquire the share to deliver it (for the execution of the option). For this reason, such transactions are possible only in exceptional circumstances and on the basis of a very small allocation of resources.
Acquisitions of put options on shares, baskets or indices
Absolute return
The stock (basket, index) is traded at a level lower than the fair price; however, there are triggers (e. g. a possibility of an event) that may lead to sharp falls; the option premium is relatively cheap. As a rule, the managers would not hold such a share in the portfolio; such situations are extraordinarily rare.
Relative return
In case the trigger is activated and the share falls to a level lower than the strike price, the portfolio reduces the loss incurred from such a fall.
Position
The sale of stock call options with strike prices higher than the market prices when the stocks are not held in the portfolio (uncovered/naked call)
The type of Income and conditions
Relative return
If the stock does rise above the strike price, the portfolio incurs a loss, equal to the difference between the strike price and the market price, which needs to be paid to acquire the share to deliver it (for the execution of the option). For this reason, such transactions are possible only in exceptional circumstances and on the basis of a very small allocation of resources.
Absolute return
The probability of the share price reaching the strike is low; nevertheless, the option premium delivers significantly more than 6-7% in annualised return.
Position
Acquisitions of put options on shares, baskets or indices
The type of Income and conditions
Relative return
In case the trigger is activated and the share falls to a level lower than the strike price, the portfolio reduces the loss incurred from such a fall.
Absolute return
The stock (basket, index) is traded at a level lower than the fair price; however, there are triggers (e. g. a possibility of an event) that may lead to sharp falls; the option premium is relatively cheap. As a rule, the managers would not hold such a share in the portfolio; such situations are extraordinarily rare.
Portfolio manager
Elena Chirkova
28 years of experience in capital markets and corporate finance; has worked in asset management, investment banking and financial consulting; specifically, as head of capital fundraising department at the Bank of Moscow, financial advisor at the Rothschild Bank, head of corporate management department at Deloitte, vice-president of investment banking at Troika Dialog; adjunct faculty at Harvard University (USA); professor of Finance at the Higher School of Economics in Moscow. Author of numerous articles and books on economics and finance, including «The Warren Buffett Philosophy of Investment», published by McGraw-Hill Education in the US, and «How to evaluate a business by analogy”, on how to evaluate a stock on the basis of economic ratios. Read Economics at the Moscow State University; Masters in Economics from The Claremont Graduate School in California; extensive training in corporate finance and capital markets at Amsterdam Institute of Finance.
