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Discovery’s Human Factor Score increases significantly

Possible capital raise might be reducing Discovery’s ability to deliver the growth implied in its share price.

Today I came across announcements and articles on Discovery(DSY). Interestingly the second article I noticed was that Discovery has announced that all their employees are to be vaccinated by January but this is a discussion for another time.

What I did take note of was the article on Moneyweb which stated that DSY has “scrapped its annual dividend again” and went further to state that “it (DSY) may have to raise equity capital to cover costs linked to its investment in China’s Ping An”

DSY has not paid a dividend since the Covid-19 pandemic took hold in 2020, and the article also refers to the fact that DSY also stated that the uncertainty surrounding the impact of the pandemic meant that dividend payments would be withheld for now.

Further along, the article reports that DSY would require a further R1.5 billion more in capital to meet regulatory requirements when referencing DSY’s partnership with Ping An in China. Apparently, DSY CEO Adrian Gore stated that this capital would be sourced through capital raising rather than debt.

DSY was previously the JSE listed company with the best Human-Factor Score

As per the above screenshot taken on February 26 2021 of New Age Alpha’s online Human Factor Score tool (available for free by registering on www.newagealpha.com) we can see that the Human Factor Score for DSY was 6.2%.

The score of 6.2% in February 2021 reflects that DSY had (in February 2021) a 6.2% probability of NOT being able to deliver the growth implied in their share price.

Conversely, we can also state that in February 2021 the DSY Human Factor Score reflected a 93.8% probability that Discovery is unlikely to erode an investment portfolio’s returns by being able to deliver the growth to support the share price.

How things have changed! 

Since February 2021, we have seen a slow erosion in the probability of DSY being able to deliver the growth implied by their share price.

Currently, as at September 2 2021, our friends at New Age Alpha New York have provided us with a Human Factor Score of 59.5% , which indicates that Discovery has a 59.5% probability of NOT being able to deliver on the growth implied in its share price (or if we turn this probability around only a 40.5% chance of delivering the growth implied by the DSY share price).

If we consider that in the Moneyweb article wherein Gore is reported to have announced that DSY would require to raise a further R1.5 billion in capital, we can understand that the ability of DSY to deliver the growth implied in its share price might be reducing.

Avoiding the Human Factor

The Human Factor (H-Factor) is an actuarial based portfolio tool, developed by New York-based asset managers New Age Alpha, aimed at mitigating the risk of human behaviour in stock picking.

The H-Factor does not seek to generate returns by applying traditional methods such as the common smart beta and factor exposure funds we have all come to know. Instead, the H-Factor quantifies and avoids the risk of human biases in stock picking.

New Age Alpha’s Human Factor tool which is free to use scores over 6 000 shares globally including many JSE listed shares.

The probability used the only two things we know for sure about a listed company: the current share price and the profitability of a company as reported on the published financial results. From these two data inputs, we can calculate the probability of the company being able to produce the results implied in the share price based on whether the company has done this in the past 16 reporting periods.

Simply put, the lower the Human Factor Score a listed share has the lower the risk in holding that share. 

Using a probability-based approach to portfolio management  

Using a probability-based approach to stock selection, we identify and avoid the risks present when share investors interpret vague and ambiguous information inherent in share prices in a systematically incorrect way.

The Human Factor Score measures the probability of the listed company generating the growth implied in its current share price.

We at Global & Local Asset Management use the “Avoid the Human Factor” strategy to manage our Collective Investment Scheme portfolios. The strategy focuses on managing portfolios like an actuary and not a portfolio manager.

The strategy comprises developing probabilities which indicate the chance of a listed company NOT being able to achieve the growth implied by its current share price.

The approach taken by Global & Local Asset Management is not to manage portfolios like a portfolio manager but rather to adopt actuarial techniques to asset management.

If you would like to know more about how the Human-Factor score tool works and how we “Avoid the Losers”, then please contact us at Global & Local Asset Management.

ADVISOR PROFILE

Mauro Forlin

Global & Local Asset Management

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