fLAB Equity : A Dynamic World-Equity, Multi-Factor, Sector-Neutral Approach

In recent years, institutional investors have employed a new approach to Equity portfolio construction: factor-based investing. This increasingly popular approach lies between passive and active investing, allowing investors to target specific risk factors as well as market beta.

Factors are the primary market drivers of Equity returns. Only a few set of rewarded factors are backed by academic consensus:

1. Quality: Average of trailing 12-month Return on Invested Capital (ROIC) and Return on Equity (ROE) and Interest Coverage Ratio
2. Momentum: Average of the trailing 6 and 12-month total returns
3. Low Volatility: Average of the trailing 6 and 12-month standard deviation.
4. Value: Average of trailing 12-month EBITDA to Price and Revenue to Price.

We have found out that the best factor combination (Absolute Performance, Sharpe Ratio & Maximum Drawdown) since the launch of real pure factor investing strategies (Jan 1999) has not been constant. In fact, world factor performance has been impressive vs. MSCI World but quite divergent:

Adapting multi-factor allocations

The key to the fLAB Equity fund lies in being the first investment fund whose portfolio is made up of those stocks with the best relationship with the 4 factors in all type of market scenarios.

Each quarter, for each geographic area, we will choose the best stocks with the best 4 factors combination depending on:

1. the macro cycle
2. the own 4 factors momentum
3. the market sentiment (risk On/Off), measured by credit spreads and volatility curves

The rebalancing is quarterly made in the 3 geographic areas. The resulting portfolio, with the best stocks by factors is forced to be Sector Neutral against its index using Bloomberg Optimizer. That is, we will have a stock portfolio that will be almost identical in sector weighting to MSCI World but with those stocks that have the best factor combination and therefore, a greater probability of success.

fLAB Equity fills a niche market that does not currently exist (and with low management fees) and can perfectly replace investments in global Equity, whether through ETFs or Investment Funds.

How do we create our fLAB Equity portfolio?

85% of the MSCI AC World Index (United States, Europe and Japan):

1. As Article 8 SFDR UCITS Fund, the worst ranked shares in ESG compliance will be removed, as well as those included in our Exclusion List.
2. Screening of the large-mid cap stock universe in these Geographic Areas (S&P500, Europe 350, Nikkei 225) using our fLAB Factor Model, will select the best stocks in each of the GICS Sectors, to create our Investable Universe.
3. For each of these 3 main markets, the Portfolio Optimizer will find the best final combination of stocks with the following constraints:
   • A Maximum % Active Risk vs each Benchmark (S&P 500, Europe 350, and Nikkei 225)
   • Full GICS Sector Neutrality (+/- 0.25% for each sector)
   • Maximum % allocation per share
   • Final Picks: 60 stocks in USA, 22 in Europe and 18 in Japan

(These constraints could be slightly modified to optimize the final portfolio).

15% of the MSCI World Index (Emerging Markets and Asia Pacific ex-Japan) will be invested through UCITS ETFs (max 10%) and Index Futures