Institutional investors often ask about our investment philosophy for due diligence purposes. In this article, we explained the Goldenwise's philosophy to facilitate everyone's understanding.
We’ve never been a fan of traditional fundamental or traditional quantitative methods. We mainly implement a quantamental strategy. Our fundamental research aspects are easy to understand (i.e. value investing). Our quantitative research aspects normally focus on the behavior finance factors, which can be illustrated by the figure below:
The above quantitative factors investigate things from three categories: technical analysis factors (i.e. trading volume and price); fundamental analysis factors (financial data); behavioral finance factors (news, public opinions, strategic investment, share holding increase or decrease, analyst recommendations, etc.)
Based on our experience of investing in the global market, in recent years, it is difficult for using the technical analysis factors alone to generate excess returns in the U.S. market. However, technical analysis is still effective in the Chinese market. We believe that as time pass by, the effectiveness of technical factors will continue to decrease. In our opinion, analyzing fundamental factors are useful as a tool for efficient stock selection or diversification. However, spending too much time and efforts on analyzing fundamental factors may not be as effective as using the straightforward value investing method. On the other hand, we believe it will be worth to spend time on analyzing behavioral finance factors. As many opportunities in this field haven’t been fully uncovered yet, we can easily find our suitable strategies which are different from the existing ones to avoid competition trap with peer companies.
Unlike pure quantitative strategies, different quantamental strategies focus on different types of quantitative factors (i.e. technical analysis factors, fundamental analysis factors and behavior finance factors). This makes all quantmental strategies are somewhat different from others, making the correlations between strategies low. Also, quantmental strategies normally have lower return correlations to equity indices, adding diversification benefits to investors' portfolios.
In our investment philosophy, we must have high confidence in a company's management team before making investment decisions. From this perspective, we believe behaviors of investors in the market are far more important than technical factors, as analyzing those behaviors can help us to learn investors’ (most importantly, the smart investors, industry specialists and insiders) perception of the company's management team. Based on the above reasons, we emphasize on analyzing the behavioral finance factors listed below:
For example, leveraging on those analyses, we uncovered opportunities such as Shede Spirits Co., Ltd. 600702.SH (the controlling shareholder has changed to Fosun Group), Center International Group Co., Ltd. 603098.SH (Longi Green Energy Technology Co., Ltd. made strategic investment to the company), Beijing Tongrentang Co., Ltd. 600085.SH (management changes), Beijing Wandong Medical Technology Co., Ltd. 600055.SH (Midea Group Co., Ltd. made strategic investment to the company), and Centre Testing International Group Co., Ltd. 300012.SZ (Management changed, placement of professional managers into the top management team). Also, we are currently buying two Hong Kong companies Bossini International Holdings Limited 0592.HK and Viva China Holdings Limited 8032.HK. The logic of investing in those two companies are similar to the listed examples above. Using our quantitative system, we can immediately dig out the information that meets our requirements the best from massive news feeds/databases. Then, our fundamental team can follow up quickly with thorough analysis. This process improves synergy between our quantitative and fundamental teams, combining each team's best potential. Also, these analyses enable us to capture opportunities of both medium to long-term investments of high quality companies and short-term event-driven investments.
In the hedge fund industry, there is another investment company whose method is similar to ours, namely Marshall Vace. Marshall Vace is a European investment company which manages more than USD $50 billion assets using quantamental method. Their introduction is as below:
Founded in 1997, the company is a well-known European hedge fund company specializing in global equity long/short strategies. Marshal Wace currently has offices in London, New York and Hong Kong.
The company offers two distinct investment methods, which can reinforce each other. First, the long/short equity investment based on stock analysis and research. Second, the more advanced and systematically structured Alpha generating Marshall Wace TOPS. Through MW TOPS, analysts can analyze the stocks in the market and make decisions through information flow.
Marshall Vace's quantitative research system, which is based on behavioral finance, leverages the investment ideas recommended by experienced sell-side analysts.
The Chinese market is relatively immature. Due to delays in information transmission/interpretation and daily stock price movement limits, the mismatch between information and stock prices widely exists. Especially, the stock price cannot reflect those events immediately in response to some events such as changes in controlling rights and strategic investments. In other times, market may overreact to such information due to the herding effect or exaggeration from the media. In such market, the ability to screen and filter information in a timely and effective manner is crucial. It usually requires a combination of quantitative and fundamental methods to achieve good results. The research may include but not limited to public opinion analysis, natural language processing of information, big data, and fundamental research.
We focus on quantamental analysis and will use it as our core strategy in the future. We believe our strategy, which is based on the combination of fundamental research and behavioral finance, will have good prospects in the Chinese market.