Our Quantitative Stock Selection (QSS) investment approach is a comprehensive, systematic stock screening process for exploiting market inefficiencies or stock mispricing on the basis of publicly available and audited corporate information. Measurable, effective factors are used to select undervalued stocks where the available company data is not yet fully reflected in the share price. The QSS approach does not incorporate return forecasts.
The cornerstones of the QSS approach are:
- Rule-based stock selection, free from emotional and arbitrary decisions and supported by consensus forecasts.
- Stock selection with the aim of a neutral positioning of the regions, countries, sectors and currencies relative to the benchmark in order to avoid undesirable risks.
- Quantitative stock selection model with broad-based screening of equities taking in over 120 factors.
- In inefficient markets, active stock selection according to the QSS approach; in efficient markets, passive implementation with cost-effective indexed products (ETFs).
- Sustainable long-term outperformance.
The QSS approach is based on facts and figures instead of interpretations, own forecasts or emotions.
How it works
With PARSUMO Capital’s stock selection model, financial market information on corporations is screened thoroughly and rigorously in order to identify market inefficiencies. Undervalued companies within a sector are selected for the portfolio; overvalued stocks in the portfolio are sold. It takes a powerful model to systematically and accurately compare thousands of stocks with each other and exploit opportunities arising from mispricing. Our transparent screening model evaluates around 12,000 companies filtered according to meaningful minimum criteria out of a global universe of around 55,000 stocks on the basis of various factors and gives each stock a ranking. The aim of the QSS approach is to structure an undervalued equity portfolio for a particular region or country (e.g. European or Swiss equities) and to actively manage it in order to achieve a sustainable outperformance against the benchmark. This involves selecting in each instance the best measurable 20 to 40 evaluation factors for a regional stock market out of over 120. Since each regional market has its own specific characteristics and is influenced by different factors, these factors vary according to the universe and the economic cycle.
Dynamic risk management
Rule-based approaches must also be flexible in a dynamic financial world. Existing evaluation criteria can become less effective over time and new evaluation criteria can gain in significance. A successful approach must take this into account. Based on our findings, the factors used have a different impact on the stocks depending on where in the economic cycle we are. For example, in a recession like the one in 2008, investors favored the equities of less cyclically sensitive companies with strong balance sheets. During the recovery the following year, there was a reversal of behavior and investors demanded cyclically sensitive stocks with poor balance sheet quality. In a portfolio that is managed using rigidly defined weights for the factors, the investor’s cyclical behavior leads to large, temporary deviations from the benchmark.