Saemor Capital is a specialist in quantitative investment management, focused on absolute return generation. The company was founded in 2008 with the backing of insurance company AEGON as a cornerstone investor. The team consists of award-winning equity managers with vast experience in European equities. The majority of the investment team has worked together for over eight years. Managing approximately US$600 million, Saemor Capital is AIFMD-regulated and eligible to passport its distribution activities across Europe.
Saemor Capital runs a market-neutral, long/short European equities fund and uses quantitative strategies for stock selection and portfolio construction. Their dynamic alpha model uses a wide variety of predictive factors, divided into four distinct segments: Valuation, Momentum, Profitability & Growth and Quality, which are sub-divided into clusters that are composites of factor families. For example in the Valuation segment, Defensive Value (e.g. P/E, dividend yield), Cyclical Value (e.g. P/B, P/S) and Fair Value (e.g. intrinsic value) measures are looked at.
The Saemor Europe Alpha Fund is a consistent outperformer compared to relevant hedge fund benchmarks. The fund offers uncorrelated performance to equity markets and peers and has demonstrated consistent preservation of capital in down markets. During the last five years the fund returned 13% per annum with a volatility of 9%.
- Saemor Capital began its operations around 2H 2008, and despite a challenging start has come a long way in terms of delivering superior risk adjusted returns for its investors. Please tell us a bit about the funds history and your team at Saemor Capital?
Prior to founding Saemor Capital in 2008, I was Head of Equities at Aegon Asset Management, having originally joined the company in 2000. I had the opportunity to set up Saemor Capital, realising my dream of managing my own business, when Aegon decided to optimise its equity portfolio by splitting the alpha from the beta. Aegon is our cornerstone investor, seeding my team as we spun off to manage a long/short market-neutral fund investing in European equities. Many of the Saemor team members worked with me at Aegon, so we have a very stable team that has worked together for over eight years. In 2009 we also hired an investment professional with a strong quantitative background to complement the team. We have now grown to a strong team of 22 people, with six on the investment team.
We received the first tranche of our seed capital in June 2008. The final tranche of seed capital came in after the summer of 2009. As our start coincided with the global financial crisis, the investment environment in the first year was very challenging, with the performance of many popular stock selection strategies being extreme in a historical context. What we learned in this early period is that we wanted to make our process more quantitative and implemented changes that have been in place for the last six years. We believe that our process is robust and we have delivered five (almost six) consecutive years of positive performance to our investors which importantly is also uncorrelated to the market.
- As a market neutral European mandated fund with a quantitative overlay, how does the fund distinguish itself among its peers? In addition, what are some of the key tenets of your quantitative approach and to what extent does manager discretion come into play with regards to your overall investment decisions?
Our feedback from investors is that they do not know of many other managers like Saemor Capital. We are different from our peers as we implement a dynamic multi-factor model and there are only a few of us that are based in Europe. Many multi-factor quant managers are managing global portfolios whereas we currently focus on Europe. Firstly, we think that Europe is a sweet spot for our quant approach and we believe that we can continue to deliver strong alpha based returns for our investors by applying our model to European equities. Secondly, we aim to get the most out of well researched fundamental factors, rather than searching for more esoteric factors, fancier econometric models or high frequency trading. We also have a deeper understanding of when Value, Momentum or Quality works, in what market and macro environment and how to best tilt our models to adapt to changes. Thirdly, the DNA of our investors is that we are not physicists-turned-equity investors. We do have a firm understanding of stock markets & equity investing. Half of our investment team started as fundamental equity managers, but over the years we become convinced that quant investing yields the best results. One might say that we are fundamental equity managers who have become extremely systematic in our approach. This plays a role in the factors we have selected, which are based on solid economic principles, but also on sound fundamental intuition. Moreover unlike pure quant funds, our portfolio management team has a strong knowledge of the companies we invest in. This knowledge is used as a risk overlay. We exclude or limit stocks where other things can drive performance, like M&A or Greece after the GFC.
- The Saemor European Alpha fund appears to do extremely well under stressful market conditions where other hedge fund strategies struggle. For example, in 2011, the fund was up 17.85% while the average European hedge fund manager posted losses of 5.39%. Similarly, in 2014, the fund was up an impressive 27.28% while European funds in general were marginally positive. 2015 is also shaping up to be another good year for you. How does the fund do it? Could you share with our readers some of your key winning themes over these periods?
First of all, our multi factor model has worked well in most years. Companies with positive earnings momentum, attractive valuations and good profitability have outperformed and their mirror images have underperformed European equity markets. Selecting companies based on a combination of attractive characteristics have done better than separately holding baskets of value, momentum and quality companies. Diversifying across these factors thus offered superior returns for less risk. What especially has helped our returns in difficult equity years is our exposure to the Profitability & Growth and Quality factors. On a standalone basis in our backtest these factors do not perform as strongly as Value and Momentum, but they play a strong role as a stabiliser when you combine them. Over the years the adaptiveness of our model has also added to performance. In 2011 for example, we added weight to Profitability and Earnings Momentum at the expense of Cyclical Value metrics. This was a fruitful decision as the European economy dived into recession and investors flocked into stable, defensive stocks.
Risk management has also been important. We believe good, disciplined portfolio construction is just as important as your alpha model. Our tight pre-trade risk management process and portfolio optimisation process result in a portfolio that holds a diversified and very liquid portfolio of about 110 stocks on the long side, and 110 on the short side.
- Within Europe, which countries do you invest in, and on what basis do you diversify your fund’s portfolio across them? Do you have any predetermined diversification ratio in mind for your allocations? If not, do you have any cap on your allocation to each country?
We invest in the developed European countries and currently have positions in Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK. Portfolio diversification is a key objective for our portfolio which is why we have country limits in addition to volatility, beta, sector, stock and gross and net exposure limits, which are included in our portfolio optimisation process. We do have caps to our allocations to each country, depending upon the breadth and liquidity of market in that country. Generally speaking, the larger the country is in terms of number and size of its stock listings the more long and short positions we have in our books. The net position will be determined mostly by the alpha ranks. If for example companies in the UK are posting negative earnings momentum and trading on high valuations, we will be most likely net short.
- Saemor Capital’s quadrant model is a novel approach to equity analysis. What are the key indicators which you look out for when determining which models to adapt to which market environments?
The factor return payoffs for value, momentum and quality stocks are not constant through time but dependent on where we are in the economic cycle. The dynamic nature of the quadrant model manifests itself in the fact that factor weights may be changed during market and economic cycles. We base our decision on the outcome of our timing models. First of all, we determine in which part of the economic cycle the European economy is. We know that in a recession other stocks are more attractive than in an economic recovery. Secondly, we closely look at the current market and macro picture. We research which factors did well in similar environments in the past. Thirdly, seasonality and persistency are taken into account. Factor performance tends to show auto-correlation and persistence in the short term. And finally, we try to identify factors which are crowdedly traded.
- What is the usual holding period that you observe for stocks that you invest in? And, how often do you review your fund’s portfolio?
We have stocks in the portfolio that we have held for over a year and stocks that we have held for a few days or a week. On average, our holding period is around four months. We review the portfolio on a daily basis and trade on a daily basis. This enables our portfolio to closely resemble our model and to capture current trends in the market.
Expanding to multiple instruments allows us to reduce replicating cost. According to our research result, we can reduce the cost to replicate option-like asymmetric payoff by the same logic as the Markowitz portfolio diversification can maximise the return-to-risk ratio. GCI Systematic Macro Fund is just one example of the applications of this theory. GCI Asset Management, Inc. also provides risk hedging strategies such as FX risk hedge and equity downside risk hedge by utilising the same model. My career as a fund manager started with the FX hedging program, which is still provided to Japanese investors such as pension funds. By utilising the same theoretical framework, we launched GCI Systematic Macro Fund to deliver an absolute return opportunity to various investors.
- On average, how concentrated or diluted is your portfolio in terms of the sectors which you allocate to? Which sectors are you currently most bullish on and how has your sectoral allocation evolved over the year?
We invest in every sector, apart from Real Estate and Diversified Financials. These two sectors are difficult to model as the leverage used in the balance sheet varies too much and we miss reliable data to value the underlying real estate on a mark to market basis. Our investments are spread over the sectors based on the number of opportunities. Large sectors, like Industrials, make up a bigger chunk of our portfolio than sectors with a small number of companies such as Media.
We started the year with a fairly positive stance on equities, based on the January effect and accelerating economic growth in Europe. We tilted our multi-factor stock selection model more towards cyclical value at the expense of quality low risk and price momentum. This worked well for the first four months of the year as markets moved higher and investors slowly warmed up to higher risk names found within Southern Europe and the Financials sectors. UK Homebuilders and other domestic UK consumer names continued their strong run with very good Q1 numbers, which also benefitted the portfolio. Our shorts were mostly found in subsectors with negative earnings momentum and relatively high valuations, like energy and materials stocks. In May we took our pro-risk bias off and deployed a more neutral stance. With the macro cycle softening somewhat and issues in Greece and China growing, we felt it was no longer wise to continue with our pro-cyclical stance. This helped us to survive the difficult summer months.
- Our data shows that European mandated hedge funds have raised over US$100 billion in new capital from investors since the start of 2013. How do you see the capital raising environment in Europe? What is your fund’s current investor profile (e.g. family offices, pension funds, HNWI, etc) and which investor type has been the most active in terms of capital allocations?
We are quite positive about the capital raising environment in Europe. Our firm is AIFMD compliant which makes it easier for us to raise assets in Europe. UCITS funds are making a lot of traction in Europe and Saemor plans to start its own UCITS in the near future. The vast majority of our clients are institutional investors and include insurance company Aegon, banks, family offices and wealth managers. For us, the most active in terms of capital allocations have been family offices and wealth managers.
- What is your medium term market outlook for the European equity market? With a slow-down in China, a potential US Fed rate hike later this year and the ongoing ECB quantitative easing program in full force, can Europe emerge unscathed from the looming market turmoil?
With continued low rates in the US and accommodative monetary policy in Europe as well as positive effects from lower oil prices for consumers, we are mildly positive about the medium term. With the recent sell-off, valuation multiples have come down to more attractive levels. Towards the end of the year seasonal effects typically pick up as November and December have historically been seasonally strong equity months. For the moment however, we will stick to our neutral factor positioning and closely watch new macroeconomic data and track the earnings season. Since May, the Euro-area has been alternating between a slowdown and recovery. Recently economic activity has improved somewhat, but not enough to clearly bring back Europe in the recovery phase. We still run the risk of emerging market weakness spilling over. Our model continues to favour domestic cyclicals and healthcare where growth is positive. We would expect Q3 figures to underline the slowdown in emerging markets and the strength in the UK, northern Europe and the US.
- Lastly, with a number of hedge fund managers predicting a repeat of 2008, do you expect another big blow up or a major correction in the financial markets in the near future? How well is your fund equipped to dodge another 2008?
We do not expect a major correction. As long as interest rates and oil prices stay low, the economy is well supported. Given the market-neutral posture of our fund, we should be largely shielded against major market moves. During the past years we have improved our risk management techniques and policies, which should help us to guide through heightened market volatility.