Copenhagen asset manager Annox's first fund, Annox Quant Global Equity ESG, has experienced a stellar start since its inception in June 2020.
By selecting stocks through a data-driven process using raw data, the fund has generated a return of 53.7 percent in local currency, outperforming the global equity market and multi-factor funds offered by the largest asset managers in the Nordics.
Even though statisticians wouldn't call a nearly 12 month live period as a true proof of concept, the first signs are encouraging, and the team is confident about the future, they tell AMWatch, that recently visited Annox's office in the Copenhagen suburb of Hellerup.
"The fund's alpha is tied to many years of hard work in developing the strategy, which is now paying off," the investment strategy's chief architect Mikkel Klit Eliasen explains.
Eliasen's formal title is chief portfolio manager for the unleveraged equity fund, which combines seven underlying strategies in its pursuit of excess returns.
However, like all skilled quant funds, the investment engine is the secret sauce and secrecy is of utmost importance, which is why the team does not disclose the exact seven strategies that are the building blocks of their method.
"Our model is, among other things, designed to select stocks with sound financials. This can be companies with a low degree of debt or companies that deliver high return on its equity. The model's selection process has resulted in a well-diversified portfolio with strong attributes," Sara Sidenius Johansen, Annox' Commercial Director, says.
"We're well aware that many competitors are currently watching us because they want to know exactly how our investment strategy works," Lars Axeltoft Trégart, Partner and Chair of the board, adds.
Axeltoft Trégart does mention that the fund follows the market down when markets turn sour and outperforms it when they rally, however.
It can be relatively challenging to enter the market for a new quantitative fund because some investors are still skeptical about and reluctant to support investment strategies that do not to some degree rely on gut feelings before performance has materialized
Complete faith in the system
Before Annox' global equity fund went live in June 2020, the investment manager had a managed partner account investing in Nordic equities since September 2018, using the same investment engine.
According to the firm, the strategy outperformed by 28.5 percent in 2019, and generated roughly the same return in the first half of 2020, when Covid-19 hit.
Both the managed account and the young UCITS fund's allocation to the seven underlying strategies changes constantly, and the firm has developed its own definition for the most well-known style factors including momentum, quality and value.
We already have investors from abroad who are quite happy and we definitely see overseas client requests picking up
Do you know the basics about the companies in the portfolio or do you just blindly follow the machine's orders?
"We have a colleague who wants to know the companies, but it is not part of our model's selection criteria. We can invest in 10,000 stocks and we don't need to know who each company's CEO is, for example," Axeltoft Trégart says.
"Our geographical allocation is, for example, different from the benchmark, which has a larger tilt towards US equities," Klit Eliasen adds.
While the investment strategy is entirely run by a machine, trading is manually executed at Danish banking group Nykredit's Markets unit, and Nykredit is also responsible for fund administration.
The founders and a small group of investors seeded the fund with DKK 15m (EUR 2m).
During the first period after the official launch, the team were silent, as several investors have had mixed experiences with solely data-driven funds.
"We didn't want to market the fund in its first six months because we wanted to demonstrate our concept and be able to show a live track record," Axeltoft Trégart says.
"It can be relatively challenging to enter the market for a new quantitative fund because some investors are still skeptical about and reluctant to support investment strategies that do not to some degree rely on gut feelings before performance has materialized," he adds.
Inflow picking up
Since the fund went live, its investor base has gradually grown with inflow from, among others, family offices, corporates and retail investors picking up in recent months with AUM now at DKK 190m (EUR 25.55m)
In a couple of years, the trio's ambition is for the fund's assets to reach billions in DKK and gain more traction abroad.
To achieve this, Annox is looking into applying for marketing permission in Sweden and Norway and could potentially have a permit later in 2021.
He believes that the team is well-equipped to manage a couple of billion kroner. However, growth comes at a price.
"New investors have been pleased with how easily accessible we are. We can easily spend a lot of time engaging with potential investors, but it is not certain we will maintain that luxury in the longer-term to the same degree." Klit Eliasen says.
How big a difference do you expect it to have once you achieve your three year track record?
"It's incredibly hard to tell if it will make a difference at all. It may be that the fund is full in three years, and we therefore cannot take in institutional investors, who in some cases would like to have a three-year track record. We have to look at that in time," Axeltoft Trégart says.
Not a green fund
Why have you decided to add ESG to the fund's name?
"We have an ESG scoring filter developed by Thomson Reuters, which screens all 10,000 stocks in our investment universe. The fund is not a green fund because then it would be more constrained," Axeltoft Trégart says.
Do you consider the screening filter sufficient to call the fund ESG?
"Yes, absolutely. This is part of our toolbox. If we invested in companies with unsustainable debt we would have a governance issue," Axeltoft Trégart explains.
The team has started to look into the development of an alternative investment fund.
"The most important thing is that a second fund needs to have an edge similar to our existing fund. We don't want to launch many funds," Axeltoft Trégart concludes.