SHARES

What do we know for sure about a listed company?

The thinking behind life insurance can be utilised in the building of share portfolios.

To answer this question, we need to consider how an actuary assesses an applicant for a life insurance policy.

Think of when you were applying for life insurance, what did the application form ask in the medical condition questions, the questions are worded very carefully. The questions asked are not, “Are you going to stop smoking?” but rather “Do you smoke?”. The actuary is asking a question that provides the reality as it is today not a forecast for the future. From the answers to these types of questions, the actuary can determine the risk of placing this applicant in the pool of insured persons.

So, what does this have to do with investing in shares?

The thinking behind life insurance can be utilised in the building of share portfolios.

Therefore, like the actuary, needing to know the current truth about the life insurance applicant, we need to determine what we actually know about a listed company?

Speaking to the quantitative analysts at New Age Alpha, an asset management company in New York, they tell me that we only know two things for sure about a listed company. That is, the current share price and the profitability of the company declared in their published financial statements.

Using this data and a discounted cash flow model, New Age Alpha is able to generate the probability of a company not being able to deliver on the promise built into their share price. This is similar to the life insurance actuary being able to calculate the probability of the applicant claiming on their policy and thereby putting the pool of insured persons at risk.

If we think about it, in a share portfolio we would like to include those shares which have the highest probability of delivering the results promised by the current share price. So those companies who have a low probability of NOT delivering the growth implied in the current share price are those that we would like to include in a portfolio.

However, we now need to add that like in a life insurance pool of insured persons, in any given year there will be some claims on policies, we cannot expect that every share included in the portfolio using the probability-based investment I have been alluding to will provide a good capital return, the idea is that by utilising this probability approach to portfolio management, 60% of the shares in such a portfolio managed in this manner should provide a return.

The quantitative approach used by New Age Alpha is referred to as “Avoiding the Human Factor” as H-Factor for short. The general approach is like that of life insurance – to avoid forecasting performance but basically only to use information that is known for sure. New Age Alpha’s approach is to consider any listed company analysis where an analyst is forecasting the future performance of the share based on a projection of future earnings is flawed in much the same way as the actuary asking the life insurance applicant to forecast at which point the applicant will stop smoking in the future. It is simply an unknown variable that may or may not occur.

If you would like to know more about using the H-Factor strategy to manage share portfolios, please contact us at Global & Local Asset Management.

Disclosures

Global & Local Investment Advisors (Pty) Ltd is a registered financial services provider in terms of the Financial Advisors and Intermediary Services Act (FAIS). Global & Local Investment Advisors (Pty) Ltd holds FSP license number 43286.

Global & Local Asset Management (Pty) Ltd. Reg. Number: 2018/580284/07

Global & Local Asset Management is an authorised juristic representative of Global & Local Investment Advisors (PTY) Ltd FSCA License Number: 43286

Any investment performance figures quoted herein are for illustrative purposes only and should not be construed as investment advice.

Investment advice can be provided by Global & local Investment Advisors (Pty) Ltd but only after an analysis has been conducted of the investor’s current financial circumstances and investment portfolio, only then will a recommendation be provided based on that investor’s own circumstances by Global & Local Investment Advisors (Pty) Ltd.

New Age Alpha refers to the New Age Alpha separate but affiliated entities, generally, rather than to one particular entity. These entities are New Age Alpha LLC, New Age Alpha Advisors, LLC (“New Age Alpha Advisors”) and New Age Tau, LLC.

Investment advice is offered through New Age Alpha Advisors, LLC a wholly owned subsidiary of New Age Alpha LLC.

New Age Alpha Advisors is an investment advisor registered with the U.S. Securities and Exchange Commission. New Age Alpha Advisors, located in the State of New York, only transacts business in those states in which it is properly registered or qualifies for an applicable exemption or exclusion from such state’s registration requirements.

Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or purchased by New Age Alpha), or an Index, product, or strategy made reference to directly or indirectly in this firm overview, will be profitable or equal to corresponding indicated performance levels. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. Returns for one year or less are not annualised but calculated as cumulative returns.

No client or prospective client should assume that any information presented in this firm overview serves as the receipt of, or a substitute for, personalized individual advice from New Age Alpha or any other investment professional. Any charts, graphs or tables used in this firm overview are for illustrative purposes only and should not be construed as providing investment advice. Information contained herein does not reflect the actual performance of New Age Alpha’s products or portfolios. All research and data is simulated and should not be considered indicative of the skill of New Age Alpha. The research data presented has been calculated by applying each Index strategy backwards in time and is not a contemporaneous record of actual assets managed by New Age Alpha.

All New Age Alpha trademarks are owned by New Age Alpha LLC. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (SPFS). All other company or product names mentioned herein, including S&P®, are the property of their respective owners and should not be deemed to be an endorsement of any New Age Alpha product or strategy. This firm overview is limited to providing general information about New Age Alpha and its investment advisory services. It is for informational purposes only and should not be construed by a client or a prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice. New Age Alpha’s specific advice is given only within the context of its contractual agreements with each client. Investment advice may only be rendered after the delivery of Form ADV Part 2 (an investment advisor’s disclosure document) and the execution of an investment agreement by the client and New Age Alpha. New Age Alpha’s Form ADV Part 2 and descriptions and summary annual reports or its composites are available upon request.

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Mauro Forlin

Global & Local Asset Management

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