Moby's Flagship Offshore Fund

Today we’re introducing our third automated portfolio – The Moby Offshore Opportunities Strategy.

Similar to the strategies we've released to date (see them here & here) this strategy also uses machine learning and algorithms to select the stocks within the portfolio. 

The goal of this strategy is to find the world’s best growth businesses in the emerging markets. These markets include China, Brazil, Colombia, South Korea, Taiwan and more!

Not only is it good to diversify your portfolio in times of volatility but with the emergence of other growth markets, many times the best investment opportunities are often all across the world. Think about it like this.

The Case for Emerging Markets:

A ton of analysts and investors follow Apple. Everyone gets the same information, and as soon as news is released it gets priced in immediately. As an investor, it is nearly impossible to actually have an advantage over others when investing in such widely followed stocks like Apple.

But how about a stock like KB Financial Group? We're assuming you've likely never even heard of it.

With companies like this, information is not efficient and having more insight into their growth can be advantageous for investors.

This is a huge allure of emerging markets. This is because if you know what you're doing, you can often find extremely rewarding opportunities that you cannot find elsewhere!

So with that context, here is the portfolio:

How This Portfolio Was Made:

While we gave you the PG version in the first two portfolio's we released, this explanation is going straight to the deep end. In this explanation, we will give you some of (not all) the parameters for how we created our investable universe.

By the way -- Investable universe is just a fancy way of saying, the stocks we COULD put into the portfolio, not the stocks that ultimately were SELECTED to go into the portfolio. 

These are most of the steps in how the portfolio was created. Please note that we = the algorithm.

1. We take all publicly traded companies in Emerging Market Countries, with a market cap over 2B USD.
2. Growth Metrics
   1. We gathered the trailing 5 years of net income and revenue growth per share. From there we got the trailing 5 year\ average internal growth rate.
   2. Up next, we calculated the winsorized Z-Score for each of those. A Z-score gives you an idea of how far from the mean a data point is. We did this because we needed to find out what the median growth metrics were so we could figure out who was above average and who was below average. Winsorized also means to strip out the outlier data points. This is because if we have a set of numbers ranging from 0-1000 but most of those numbers are near 50, then the ones near 1000 will skew what the average should be.
3. Valuation Metrics: Get the TTM value metrics. TTM stands for trailing twelve months for the metrics below.
   1. Book value per share to price. This valuation metrics is the ratio of equity available to common shareholders divided by the number of outstanding shares. 
   2. Sales per share to price. This metric is calculated by taking a company's market cap divided by the company's total sales or revenue over the past 12 months. From there we can see how cheap or expensive investors are valuing their revenue streams.
   3. Cash flow per share to price. Similar to the last metric, we can use this valuation metric to find out how investors are valuing their cash flow instead of revenue.
   4. Dividend yield. We talk about this often, but this is just a sense of if a company is paying out a dividend or not.
   5. Calculate the winsorized Z Scores for each metric. Instead of calculating the Z-Scores on growth metrics (like we did above), we're doing it here on valuation metrics to figure out how "expensive" a stock should be.
4. Composite Scores
   1. Take the average across the growth and valuation metric Z-Scores, respectively, to get composite growth and valuation scores. From there we drop companies missing 2/3 growth metrics and/or 3/4 valuation metrics. This quickly weeds out companies from our investable universe.
   2. Rank each composite, so now you have two ranks for each company. The higher the growth rank, the more of a growth stock it is; the higher the valuation score, the more of a valuation stock it is.
   3. Take the top third names by growth, then sort by valuation rank.
   4. Get the ratio of Growth to Value Rank - this lets us see how pure of a signal we are seeing. A higher ratio means more growth than value. A ratio of 1.0 would mean the company is balanced in terms of growth and valuation.

So now that we have the high growth stocks, we can pick the ones with the most attractive valuations!

 

Additional Qualifications:

On top of the qualifiers we made above, we also wanted to add in another layer of security in order to make sure the portfolio is well-balanced. We:

1. Took the top 5 stocks, each from a different country for diversification.
2. We also looked at technical signals to further help select stocks.
3. We took the log (fancy statistics term) of the Market Cap for each company, and weighted the positions proportionally.

 

How To Use It:

You can immediately invest in these companies with the given weights. When we update the strategy holdings (monthly), you can change your own positioning along with us.

Alternatively, if you like trading in and out of positions, you can use this strategy as the basis of your active trading: buying positions when they become more attractive, and selling when you feel they have become overvalued.

You can also use this strategy for idea generation. If we recommend a Korean financial company, there may be other Korean financial sector buying opportunities. This would give you a fairly direct set of companies to then investigate, that you may not have otherwise considered.

 

Why invest in Emerging Markets:

Investing in Emerging Markets opens up an entirely new opportunity set for investment while providing diversification from US large cap.

On its own, Emerging Markets are much more volatile relative to US large cap, but when you combine the two strategies, you can reduce the overall volatility of your portfolio without sacrificing potential returns.

You can gain exposure to EM in a number of ways, by buying your favorite EM stock, buying a US company that does business in Emerging Markets, or buying an ETF that covers EM countries.

Our Emerging Opportunities strategy balances those options by giving a concentrated, yet geographically diversified portfolio of stable growth companies based in Emerging Markets.

 

What's A Quant Strategy:

While we do give you a lot of individual recommendations on stocks and cryptocurrencies that are primarily based on fundamental research, this strategy (and many strategies to come) are based on algorithms that we’ve built!

Don’t know what an algorithm is? In a nutshell, algorithms are a set of computer-based rules built by engineers & computer scientists. In this instance, our in-house team analyzes large data sets and makes their investments (aka rules) based on a ton of technical indicators that are constantly changing.

So rather than the humans making the decisions, the computers are the ones doing it. This is a much newer investing style that the top hedge funds and banks in the world use everyday. This is one of the few ways that the best investors in the world consistently beat the market.