As every month, you can read our investment report, in which we offer you a macroeconomic analysis of the market, a presentation of the performance of our funds and their results.

You can also watch our video update on the Digital Funds range.

The month of October was dominated by a rise in sovereign yields on all maturities over 1 year in the Eurozone, and over 6 months in the US, due to a polling Momentum favourable to Donald Trump in his race for the White House. His commercially protectionist and fiscally accommodating economic program could refuel inflation, which in the US remains above the Fed’s target (+2.5% vs. +2.0%). Against a bond market backdrop rather adverse for equities (MSCI Europe NR -3.3%) and particularly for small and mid caps (MSCI Europe Small Cap NR -4.5%), it was logically the Value style (-2.0%) that held up best in October in Europe. Furthermore, the quarterly publications for Q3 began in a rather favourable light for our strategies.

Digital Stars Europe Acc posted a -2.8% decrease in October, outperforming by +0.4% the MSCI Europe NR (-3.3%). The fund is up +13.4% since the beginning of the year, outperforming its index by +5.4%.

The fund’s sector positioning was favourable: the overweight in industry and finance and the underweight in consumer sectors more than offset the overweight in the real estate sector. The fund was little affected by the underperformance of small and mid caps, thanks in particular to an encouraging start to the publication season for stocks such as Kongsberg Gruppen, BCP or Trainline. The portfolio reviews carried out in October were diversified, mainly increasing our positions in the real estate and IT sectors. Among the exits were mainly companies from the finance and materials (chemicals) sectors. Digital Stars Europe is significantly overweight industrials, as  well as financials and real estate. The fund is underweight healthcare, consumer discretionary and consumer staples. The UK has been reinforced and remains the fund’s top weight at 21.2%, ahead of Italy (first overweight) at 14.9% and Germany at 11.6%. With a 6.1% weight, France remains the largest country underweight.

Digital Stars Continental Europe Acc ended October at -2.8%, outperforming by +0.6% the MSCI Europe ex UK NR (-3.4%). The fund is up +12.7% since the beginning of the year, outperforming its index by +5.6%.

The fund’s sector exposure was favourable: the overweight in industry and finance and the underweight in IT and consumer sectors more than offset the overweight in real estate. The fund was little affected by the underperformance of small and mid caps, thanks in particular to an encouraging start to the publication season for stocks such as Kongsberg Gruppen, BCP, MTU Aero Engines and Sodexo. The portfolio reviews carried out in October were diversified, mainly increasing positions in communication services, IT and real estate. Among the exits were mainly stocks in the finance sector, as well as in consumer staples and energy sectors. Digital Stars Continental Europe is overweight in industrials, as well as in real estate, and underweight in healthcare, consumer discretionary, consumer staples and IT. Italy (first overweight) is still the fund’s top weight at 16.2%, ahead of Germany at 14.4% and Switzerland at 12.4%. With a 8.1% weight, France remains the largest country underweight.

Digital Stars Eurozone Acc achieved -3.0% in October, outperforming by +0.3% the MSCI EMU NR (-3.3%). The fund is up +13.7% since the beginning of the year, outperforming its index by +5.7%.

In October, the fund benefitted from its underweight positions in luxury goods and semi-conductors. The good performance of the financial sector made a particularly strong contribution to the fund’s outperformance, especially banks, which are well represented in the fund. Good publications from stocks such as Linea Directa Aseguradora and Erste Group Bank contrasted with other disappointing earnings announcements. The portfolio reviews out in October were marked by an increase in positions in the industry and IT sectors. Among the exits were mainly stocks from the consumer discretionary, telecommunications and media sectors. The finance sector becomes the fund’s main overweight, just ahead of real estate, media, consumer discretionary and industry. The fund is underweight in consumer staples, utilities, materials and energy. Germany represents the largest weight at 21.5%, followed by Italy at 19.4% and France at 19.2%. Italy remains the most overweight country and France the most underweight.

Digital Stars Europe Smaller Companies Acc ended October down -2.5%, outperforming by +2.1% the MSCI Europe Small Cap NR (-4.5%). The fund is up +14.8% since the beginning of the year, outperforming its index by +10.1%.

Against a backdrop of a sharp fall in small and mid caps during October, the strong performance of some of our holdings, such as Pharma Mar and BPER Banca, and our underweight in property, enabled the fund to finish +2.1% ahead of its benchmark. The portfolio reviews in September were marked by an increase in positions in the consumer staples and energy sectors. Among the exits were mainly materials and consumer discretionary stocks. The portfolio is now mainly overweight in finance, healthcare and industry, and underweight in consumer discretionary, real estate, materials and IT. The UK (the most underweight country) remains the portfolio’s largest weighting at 25.7%, ahead of Sweden at 13.9% and Switzerland at 12.2% (the most overweight countries).

Digital Stars US Equities Acc USD ended October up +0.8%, outperforming both the MSCI USA NR at -0.8% and the MSCI USA Small Cap NR at -0.8%. The fund is up +23.0% since the beginning of the year, vs. +20.4% for the MSCI USA NR and +9.8% for the MSCI USA Small Cap NR.

The overweighting of banks and the excellent performance of our technology stocks (AppLovin, Palantir Technologies, DocuSign, etc.) enabled the fund to end October on a strong note, outperforming its indices by 1.5%. The latest monthly portfolio review mainly strengthened positions in finance, IT and consumer discretionary sectors, and reduced positions in industry. The fund is significantly overweight in industry and finance. The most underweight sectors remain IT and media.

Is quantitative investment necessarily a « black box »?

Analysis by Charles Lacroix, CEO of Chahine Capital for H24 Finance.

Despite a history spanning several decades and a significant place in the portfolios of Anglo-Saxon institutional and retail investors, quantitative investment is still relatively marginal in the allocations of their European counterparts, even though it has been gaining ground in recent years.

Indeed, quantitative investment, with its systematic, disciplined approach based on pre-defined investment rules and limits, and its ability to exploit vast quantities of data, seems increasingly well suited to a world where, for many players, too much information now kills information…

And yet, when the teams at Chahine Capital, who have been implementing a systematic “Momentum” equity strategy for over 25 years, talk to investors, we often hear the term “black box” thrown around.

How can we explain this discrepancy between some investor’s perception of quantitative investment and what it actually is?

There are several possible explanations:

1) A multi-factorial approach sometimes difficult to grasp for the non-specialist

The added value of quantitative investing lies in the identification and exploitation of proven factors or risk premia whose persistence has been demonstrated both academically and empirically (“Growth”, “Value”, “Momentum”, “Quality”, “Low Volatility”, “Carry”, to name but a few).

To improve the robustness of their strategy, and given that no single factor works all the time, however attractive it may be over the long term (think of the “Value” factor between 2007 and 2021, i.e. for almost 14 years!), many quant investment managers will tend to diversify the risk of their overall portfolio by aggregating different factors or risk premia.

The disadvantage for the non-specialist investor is that, while he or she may be able to understand how each of these factors works in isolation, it will be very difficult to grasp their interactions and, above all, to anticipate how a multi-factor portfolio will behave in a given market scenario.

One of the strengths of the Momentum factor, which consists in identifying and exploiting the persistence of upward trends in certain stocks, is its adaptability to different market regimes: it simply goes where the market goes, without any structural sector or style bias. As such, it is probably one of the only factors that can be efficiently implemented on its own, making it easy to understand, even for investors who are not specialists in quantitative matters.

2) More or less intuitive factors

While some factors, such as Momentum, are highly intuitive, for the reasons outlined above, others, such as Low Volatility or certain risk premia, such as Carry trade, can be more difficult to pin down.

The determinants of a Momentum strategy’s performance potential are easy to grasp: a visible environment will favor the emergence of trends, while repeated geopolitical shocks or emergency interventions by Central Banks will probably cause the market to temporarily forget fundamentals, or lead to damaging sector rotations.

Conversely, the sudden increase in volatility on a currency pair (e.g. Yen-GBP), which is costly for a FX carry strategy, may have escaped the investor’s notice if his eyes are not permanently riveted to his Bloomberg© screen, making it more difficult for him to judge its suitability for a given market scenario.

3) A varying degree of transparency

While the disciplined and rigorous application of clear, pre-established rules greatly facilitates the transparency that most investors demand, and objectifies investment decisions to a greater extent than discretionary investment managers can, it must be admitted that some systematic managers are reluctant to go into detail about the strategies they implement, or to disclose their portfolios at regular intervals.

There’s probably a touch of paranoia behind this reflex: “If I say too much, some competitors might be tempted to copy me, and I risk losing my competitive edge”. Nevertheless, the indispensable and costly human resources, in the form of highly specialized researchers, and material resources, in the form of investment in data and IT tools, create strong barriers to entry, leading us to believe that this “risk” is greatly overestimated by the quantitative investment industry.

On the contrary, many systematic managers, among which Chahine Capital, have chosen to draw on their expertise in analysis and information retrieval to offer greater transparency on their strategies, ongoing research and results, in order to eliminate any surprise effect for their investors. This makes it much easier for investors to report the results of systematic strategies to their end-clients.

4) “White-box” quantitative investment

In conclusion, the prejudice against “black box” quantitative investment seems to us to be mostly unjustified. Provided that it is implemented using readable, intuitive factors, and that systematic investment managers are sufficiently didactic and comply with the now indispensable exercise of transparency, it seems to us to be the best illustration of Nicolas Boileau’s famous maxim (1636-1711): “What is well conceived is clearly stated, and the words to say it come easily”. In short, the very definition of “white box” investment…

As every month, you can read our investment report, in which we offer you a macroeconomic analysis of the market, a presentation of the performance of our funds and their results.

You can also watch our video update on the Digital Funds range.

September proved to be a rather neutral month for the equity asset class. European equities fell slightly (MSCI Europe NR -0.4%), but this was not the case for small and mid caps (+0.5% for the MSCI Europe Small NR), and US equities progressed (MSCI USA NR +2.1%) with the dollar falling against the euro. The first half of the month was bearish. A logical observation after the strong bullish sequence observed throughout August, a bullish sequence that needed to be digested. The second half of the month was of a completely different nature, and offset the sluggish start seen at the beginning of the month. The announcement of the Fed’s first rate cut of 50 basis points, together with the stimulus plans announced in China, provided powerful support for the equity asset class at the end of the month.

Digital Stars Europe Acc posted a +0.7% increase in September, outperforming by +1.1% the MSCI Europe NR (-0.4%). The fund is up +16.7% since the beginning of the year, outperforming its index by +5.1%.

The fund’s pro-cyclical positioning (overweight small and mid caps) has been favourable. The fund’s sector positioning as well, thanks in particular to our two biggest bets: the overweight position in industry and the underweight position in healthcare. Some stocks particularly stood out, such as SÜSS MicroTec (semi-conductors) and Sectra (healthcare technology). The portfolio reviews carried out in September were diversified, mainly increasing our positions in the telecom sector, as well as in healthcare and consumer discretionary. Among the exits were mainly companies from consumer staples (food) and materials sectors. Digital Stars Europe is significantly overweight industrials and financials. The fund is underweight healthcare, consumer discretionary and consumer staples. The UK remains the fund’s top weight at 18.3%, ahead of Italy (first overweight) at 15.3% and Germany at 11.7%. With 5.4%, France remains the largest country underweight.

Digital Stars Continental Europe Acc ended September at +0.6%, outperforming by +1.0% the MSCI Europe ex UK NR (-0.4%). The fund is up +15.9% since the beginning of the year, outperforming its index by +5.1%.

The fund’s pro-cyclical positioning (overweight small and mid caps) has been favourable. The fund’s sector positioning as well, thanks in particular to our three biggest bets: the overweight positions in industry and real estate and the underweight position in healthcare. Some stocks particularly stood out, such as SÜSS MicroTec (semi-conductors) and Sectra (healthcare technology). The portfolio reviews out in September were diversified, mainly increasing positions in industrials and real estate. Among the exits were mainly stocks in the IT sector, as well as in consumer discretionary and materials sectors. Digital Stars Continental Europe is overweight in industrials, as well as in real estate, and underweight in healthcare, consumer discretionary, IT and consumer staples. Italy (first overweight) is still the fund’s top weight, but has been reduced to 15.8%, ahead of Germany at 14.8% and Sweden at 13.7%.

Digital Stars Eurozone Acc achieved +1.7% in September, outperforming by +0.7% the MSCI EMU NR (+1.0%). The fund is up +17.2% since the beginning of the year, outperforming its index by +5.5%.

The fund’s pro-cyclical positioning (overweight small and mid caps) has been favourable. The fund’s sector positioning as well, thanks in particular to three big bets: the overweight in real estate and the underweight in technology and energy. A few stocks stood out in particular, such as SÜSS MicroTec (semiconductors) and CECONOMY (technology). The portfolio reviews out in September were marked by an increase in positions in the financials and utilities sectors. Among the outflows were mainly stocks from the consumer discretionary, industry and paper sectors. The finance sector becomes the fund’s main overweight, just ahead of real estate, followed by consumer discretionary and media. The fund is underweight in consumer staples, materials and energy. Germany becomes the top weighting at 20.9%, followed by France at 19.9% and Italy at 17.8%. Italy remains the most overweight country, and France the most underweight.

Digital Stars Europe Smaller Companies Acc ended September up +0.1%, vs. +0.5% for the MSCI Europe Small Cap NR. The fund is up +17.7% since the beginning of the year, outperforming its index by +8.1%.

The strong gains in some of our holdings, such as SÜSS MicroTec and Titan Cement, and the fund’s good positioning in energy, were offset by the underweight in real estate, as well as by the underperformance of IMMOFINANZ (real estate). The portfolio reviews in September were marked by an increase in positions in the financials and energy sectors. Among the outflows were mainly industrial stocks. The portfolio is now mainly overweight in financials, healthcare and industrials, and underweight in real estate, consumer discretionary and technology. The UK (the most underweight country) remains the portfolio’s largest weighting at 25.6%, ahead of Sweden at 15.7% (the most overweight country) and Switzerland at 8.8%.

Digital Stars US Equities Acc USD ended September up +2.3%, outperforming both the MSCI USA NR at +2.1% and the MSCI USA Small Cap NR at +1.3%. The fund is up +22.0% since the beginning of the year, vs. +21.3% for the MSCI USA NR and +10.7% for the MSCI USA Small Cap NR.

A good stock selection enabled the fund to finish September ahead of its benchmark index, despite the underperformance of small and mid-cap stocks currently overweighted in the portfolio. The latest monthly portfolio review mainly strengthened positions in media and healthcare, and reduced positions in consumer discretionary, energy and financials. The fund is heavily overweighted in industry and finance. The most underweight sectors remain technology and media.