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How do we achieve the state of steady returns with lesser volatility?
First Global’s Investment strategy is based on our unique, proprietary Human + Machine Model, as opposed to the traditional human only module of fund management of other fund houses.

In our fund management model, machine learning systems typically select between 80-100 stocks from an overall Universe of around 600 +700 socks.

From this list of the best possible combination of factors that go into making a list of strongly outperforming stocks, we select between 40 and 70 stocks.

Based on extensive data analysis conducted over decades of data in India and globally, this unique model of investing results in a well- chosen basket of largely un-correlated picks.

The result of this is that we get a basket that outperforms strongly over a period of time, yet with low volatility.

By having several uncorrelated streams of returns we are able to build portfolios that generate alpha without the typical beta of concentrated portfolios. That is the beauty of our model.

Almost everybody else follows the exact opposite strategy of very concentrated bags which results in very highly volatile results with massive drawdown periods as was witnessed in March 2020.

Moreover, it is only through holding securities that have very low correlations across them, that true diversification is achieved. And that results in higher than market returns, with lower than market volatility and that is what is truly valuable.

What’s the role of artificial intelligence, machine learning and deep data in our unique investment approach?

Our approach to Investing is a unique combinatorial Human+ Machine Model as against the traditional Human only model and this sets us apart from the others in the Asset management industry.

At First Global, we have married extreme Big Data Science, Artificial Intelligence with our 30+ years of analyzing global wealth making processes.

With vast computing power, we comb mountains of financial data, annual reports, quarterly and annual numbers across decades, ratios, conference call transcripts, press coverage, social media chatter, macroeconomic data, quantitative sentiment indicators, etc.

There are more than 280 factors that are used in our Artificial Intelligence and Machine Learning Model. These include Natural Language Processing factors like Analyst calls, annual reports commentary, and several other aspects.

Hundreds of ratios and variations of ratios are tested continuously to find the best combination of Return, valuation, margin, growth acceleration, and several others for each particular market.

Further factors are added as our data science lab constantly tests new factors.

All these factors are then combined into a Machine Learning Model which throws up a list of stocks and assets every quarter. The use of AI+ML give us edge in analyzing a large universe of 21,000 exchange traded securities that meet our minimum market cap and liquidity criteria.

Hence, much of the heavy lifting work is done by our AI+ML model, to which there is a human overlay led by our Investment Strategy Team cherry picking the best of best available choices in any Market.

Does First Global offer any customized plans and how?

We do offer customized plans for our Segregated managed accounts where the minimum investment amount is $1 mn. These plans or portfolios are again designed using FG ExoTech, our proprietary Human + Machine driven quantitative investment model that analyses and selects from a universe of 21,000 exchange traded securities that meet minimum market cap and liquidity criteria.

What can be the risks in investing in a Pure Equity Scheme?

All research on investments shows that 85 to 90% of the returns of a portfolio come from Asset Allocation. The key to successful investing is to have a presence in every Asset Class – because at any point in time, some Asset Class is going to be in a Bull Market (for example, Technology in 1998, Emerging Markets in 2004-07, Commodities in 2003-08, US equities – Tech 2010 onwards, Japan in 2013-15, Global Fixed Income in 2009 onwards), and some will be in a Bear Market.

Most Investors in India suffer from poor Asset Allocation decisions because there is no single product that gives investors dynamic Asset Allocation: somebody sells them Equity, somebody sells Debt, some recommend Gold – these choices are bewildering and, more often than not, the wrong choices get made by Investors.

If you invest only in Indian (or your home country) equities,  SCCARs (Single Country, Single Currency, Single Asset Risks) is the risk you are taking and various crises during the world history have shown that this can deal a mortal blow to your portfolio. For example during the Asian crisis of the late 90s Asian market crashed 50 to 90% and investors who were exposed only to home markets faced complete disaster.

All Indian investors face this massive risk of SCCARs (Single Country, Single Currency, Single Asset Risks). Consequently, Indian Investors with no diversification over Global Multi-Asset Allocation Products.  suffer poor, suboptimal returns, as the tables below show:

Compound Annual Return Last 10 years
Sensex Index (USD) 8.5%
MSCI WORLD 18.8%
S&P 500 25.3%
NASDAQ Composite 22.9%
NASDAQ 23.1%

And this is after a massive run up from the March 2020 lows. In the decade prior to that, the Indian market gave only 1-2% annualized USD returns!

Through First Global’s top-down Global Asset Allocation Single Window-All Weather (SWAW) Investment Products, an Investor gains exposure across all major asset classes across the world, and the weighting of each Asset Class is changed to suit the view on that Asset class.

A Multi Asset Class, Single Window approach ensures that an investor always has exposure to one Bull Market or another irrespective of where (and in which asset class) they happen in the world. This is because Asset Classes move in an uncorrelated manner: having dynamic exposure across all Asset Classes ensures an investor can gain far better risk-adjusted returns.

Moreover, for Indian investors, who are still comfortable only with India, we have an Indian Multi-Asset Allocation PMS, which has diversified investments across various Indian asset classes: Equity, Fixed income, Commodities, Precious metals etc. This Multi-Asset portfolio ensures steady, consistent, strong, low volatile returns. The volatility of our Multi-Asset PMS is just 10% compared to 25% for the market. Hence, through a Multi-Asset portfolio one gets, steady, strong risk-adjusted returns, which is very essential in the prevailing volatile market conditions.

How do we do Diversification of funds in the First Global India Super 50 Portfolio?

Our portfolio is highly diversified across sectors and stocks because lack of diversification in one’s investment portfolio can truly leave one SCCARd. For an investment portfolio to be able to withstand any kind of market conditions, it is important to avoid SCCARs: Single Country, Single Currency, Single Asset Risks.

When we look at diversification, we do not consider just the number of holdings, but also the correlation across the different holdings.

A portfolio with 30 stocks might have very little diversification if all the holdings are from similar sectors, as is the case with many PMS schemes on offer. If all the holdings are from 1 or 2 sectors, in reality such a portfolio has just 1-2 large bets and is not diversified at all.

We ensure that we have true diversification in our portfolio. Correlations across our various holdings are very closely monitored. We have very strict limits on stock level as well as sector level weightages in our portfolio.

Also, we do not rely on the traditional method of measuring sectoral risk where each stock is exclusively categorized into a particular sector or industry. Stocks can have non-zero sensitivities to multiple sectors. Our unsupervised clustering algorithms identify such sensitivities and give us a truer picture of actual sectoral allocation.

Thus, our models help us in creating multiple uncorrelated streams of returns, such that something reduces risk, and something always gives you returns. Therefore, one can actually decrease risk and increase return, with diversification, as long as one constructs the portfolio properly.

The idea that diversification sacrifices performance is a myth peddled by fund managers who do not have the capability of providing dynamic and tactical diversification, across geographies and asset classes. Or even within a single market (e.g., market).

Also, data shows that in any Market period spanning one year or more, anything between 40 to 60% of the Securities in a market beat the market.

For example, if you take India Nifty 500, and analyze the data over 10 15 20 years, every year anything between 250 to 350 stocks beats the market.

On a global basis exactly the same percentages play out.

What this tells you is something extremely important: That as long as one has built systems to choose properly from the outperforming part of the market, and can easily beat the market without sacrificing any returns and in fact, one can beat the market with far lower volatility.

Therefore if you take the example of the entire world, out of 20,000 securities that we analyze, roughly 8 to 11,000 will beat the market every year. From that we pick a very small fraction: between 0.5 to 1%!

It is actually a very carefully crafted selection of the best of the best available choices in any Market. That is not a very wide selection by any standards! Hence, Diversification does not mean lower returns, rather diversification leads to a far higher quality of returns, i.e., returns with lower volatility.

And the results are there for all to see. Our risk-adjusted returns on any parameter, Returns/ Volatility, Gain to Pain etc are the best in class – roughly double the value of the next best.

In case you need further information or clarification at all, just email us back on this email ID and we will respond real quick.

We look forward to building substantial long term wealth for you and your esteemed clients by being partners in your wealth creation journey.

(A version of this article first appeared in AIF & PMS Experts India Pvt. Ltd.)

From the desk of Devina Mehra

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