Out of the Box Investment Process

Our quantitative and systematic investment process has been designed to get ride of cognitive biases associated with traditional qualitative stock picking processes and is powered by a state-of-the-art information technology platform.

Our investment methodology is built around robust fundamental micro-economic hypotheses. If we cannot explain a relationship between a financial variable and the underlying stock market behavior, we will not use it.

Stock Selection Process

Financial market micro-structure: non-cooperative behavior and asymmetrically informed agents (Lemons problems).

Agency cost theory: conflict of interest between shareholders and managers, investors and entrepreneurs, and lenders and borrowers.

Game theory: financial reporting in the context of scarcity of financial resources.

Nash equilibrium: local optimal arising from self-interested agents that exaggerate the outcomes of their activities.

Volatility Regimes

Behavioral Finance:  Investor Risk Aversion explains the inverse relationship between significant change in equity index returns and change in its underlying volatility.

Equity Risk Premium and Asset Pricing Equilibrium: Volatility of Volatility (V2) explain why sharp market drawdowns occur more frequently than what is assume under the Modern Portfolio Theory (MPT) assumption.

Our portfolio management process is based on 4 pillars, as described below.

We manage investment solutions that combined option strategies with  a portfolio of common stocks (Active Smart Beta strategy). Strategies’ risk profiles are adapted to volatility regime conditions in the stock market. We use our proprietary Volatility Regime Indicator to increase positions in higher-risk assets/strategies during good volatility regimes and invest in lower-risk assets/strategies during bad volatility regimes. We use option overlay to provide additional excess return or to reduce volatility of the underlying stock portfolio.

Our systematic and quantitative stock selection process focus primarily on Cash Flow Metrics.  To build our portfolio, we screen the market (see S&P 500 example below) based on market cap size and a Financial Health Condition (FHC) score (16 quadrant). The Financial Health Condition score is based on a series of 3 sub-score derived from the Statement of changes in financial position.

FHScolre_ENG_corr2A&G

As illustrated below, we always invest in stock that score above median in terms of financial health condition and avoid larger size stocks during regime of Good Volatility.

Picture1_sep2017

Over long term, the market tends to reward Smaller Size stock with above median Financial Condition Health. As an example, S&P 500 stocks in the first quartile of FHC and fourth quartile of size have delivered an annualized excess return of 9.81% versus the S&P 500 Index (with an information ratio of 0.82) since 1998.  On the opposite side of the spectrum, stocks in the third quartile of FHC and first quartile of market capitalization have been under-performing the S&P 500 index by 2.7% since 1998.

quadrant

CUMULATIVE RELATIVE INDEX VERSUS S&P 500 INDEX

(January 1998 to September 2017)

cumulative_relative_FHCS_MCAP_SPX

In the table below, we show an example of compagnies in each quadrant as of september 30, 2017.

Quadrant_cie_sept2017

In most equity market, we use a dividend quality approach to generate a High Dividend Yield Strategy comprised of companies with above average financial condition health score, a strong balance sheet and a secure business model.

DisclaimerDisclaimerOpenMind Capital is registered as a portfolio manager under NI 31-103 in Canada.  We are not registered under the Investment Advisor Act of 1940 in the U.S.A. or in any others legislations . The information contained in this presentation is confidential and proprietary to OpenMind Capital. It is provided for informational purposes only. Under no circumstances does the information in this report represent a recommendation to buy or sell investment instruments. Information in this presentation is not complete and does not contain certain material information about making investments including important disclosures and risk factors.

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Our investment philosophy is based on the concept of Adaptive Investment Approach. This concept is the name given to the investment strategies that under which investors can constantly adjust their investments to reflect market conditions such as the volatility of investments, the return or the current condition of the market (Bull or Bear).

307 – 4060 St-Laurent
Montreal, QC, H2W 1Y9

(514) 667-8782

kgauvin@openmindcapital.com