Presented in a Q&A format, Kenanga Investors Executive Director and CEO Ismitz Matthew De Alwis shares insights into the Kenanga Alternative Series: Islamic Global Responsible Strategies Fund in this second of a three-part series.
Maintaining an edge in investment is a multifaceted effort.
Chicago Global (CG) as the target fund manager has deep ties to the University of Chicago and the broader academic community, a gateway to cutting-edge research and insights. This network of accomplished scientists serves as both a sounding board and a collaborative partner, helping to stay at the forefront of investing.
A commitment to continuous learning and adaptation ensures quick incorporation of new AI techniques while retaining the flexibility of human oversight to navigate changing market conditions.
Several key strategies help maintain this competitive edge:
- Building on a data advantage: Data sources are continuously expanded and refined to ensure AI models have the most comprehensive and up-to-date information.
- Integrating deep domain expertise: The team combines financial and economic expertise with AI/ML capabilities, allowing for more nuanced and effective applications of these technologies.
- Robust testing and validation: AI models and strategies undergo rigorous testing to ensure reliability and effectiveness across various market conditions.
- Proprietary AI development: Instead of relying on off-the-shelf AI solutions, custom AI models are developed and refined. This bespoke approach tailors tools specifically to the investment philosophy and goals.
- Focus on explainable AI: Priority is placed on developing AI models that are both high-performing and interpretable. This emphasis on explainability sets the approach apart from black box methods and aligns with increasing regulatory scrutiny in the financial industry.
The future of investment lies in the intelligent integration of AI and human expertise.
By maintaining a unique blend of technological innovation and seasoned judgment, coupled with a commitment to transparency and ethical practices, the strategy is well-positioned to navigate the evolving investment landscape and deliver sustainable, competitive returns.
In a world where data is increasingly abundant and complex, this approach turns that complexity into opportunity.
This strategy goes beyond the capabilities of legacy investment methods, leveraging AI to process vast amounts of data and uncover hidden patterns. However, human oversight and intuition remain essential. This balanced approach is seen as the key to success in the rapidly evolving world of investment management.
Could you explain how the Fund has performed relative to its benchmark indices and describe how the strategy seeks to generate alpha while managing downside risk?
The strategy is designed to generate a similar return to global equities with less risk. Historically, the strategy has outperformed its benchmark in absolute terms, as well as on a risk-adjusted basis. It has delivered 15.6% per annum, outperforming both MSCI ACWI Islamic (8.2%) and MSCI ACWI (9.8%).
The Fund’s higher Sharpe ratio of 0.82, compared to the MSCI ACWI Islamic (0.37) and MSCI ACWI (0.41), indicates it is achieving better returns per unit of risk taken, benefiting from a balanced approach to generating alpha while controlling risk.
The primary objective is to maximize investors’ time horizon. The research is clear: although investors search for funds that can beat the market, most investors fail to match the market because they get knocked out of the race by the normal – and inevitable – declines.
The portfolio is designed with risk control at the fore, to give investors ample staying power. Longer holding periods give investors a better chance of enjoying the returns they deserve, and that compensate them for the risk they bear. Long-horizon investing, or staying power, is essential for investors achieve their investment goals.
Broadly, the investment approach combines the following strategies:
- Factor investing: The portfolio utilizes four core pillars: investing in companies with good value, quality, sentiment, and defensiveness. All of these are backed by extensive academic research and empirical evidence.
- Tactical overlays: Additional strategies like earnings analysis, volatility extraction, and liquidity assessment are employed to capture short-term market inefficiencies.
- Integrated risk management: Risk considerations are incorporated at every stage of the investment process, rather than treat risk as an afterthought.
- Global diversification: The portfolio spans over 40 markets globally, reducing country-specific risks.
- Equal-weighted methodology: This approach reduces the concentration risk, and the volatility that comes with it.
For implementation, additional tools are used:
- Continuous rebalancing: This enables the portfolio to adapt to market shifts ahead of the crowd.
- ESG integration: Controversial firms are penalized to help mitigate losses that arise from fraud, litigation, and regulatory infractions.
By combining these strategies, the Fund aims to deliver superior risk-adjusted returns over a full business cycle.
What are the key advantages of using an AI/ML-driven approach over traditional investment strategies?
An AI/ML-driven approach offers several key advantages.
First, it allows the manager to absorb and distil into intelligence vast amount of information, compared to what would be possible for human analysts to process manually. This expanded data universe can be harvested with pattern recognition algorithms, which enable the investment team to identify subtle relationships and trends that humans might overlook.
Additionally, the systematic approach helps eliminate emotional decision-making and impulsive trading. Over time, this results in a more objective and consistent investment process.
Second, the AI/ML models can rapidly adapt to changing market conditions and new information, providing a significant edge in today’s fast-paced financial markets. This scalability allows for a much larger universe of securities than traditional methods. This unlocks richer hunting grounds with less competition.
Importantly, the ML techniques enable more sophisticated risk modelling and scenario analysis, enhancing overall risk management capabilities. Lastly, unique insights are gained by incorporating alternative data sources.
Third, and most crucial, this methodology benefits from the fast-paced innovation cycle in computational hardware, such as GPU (graphics processing unit) capability and AI methods like new gradient-descent approaches. This setup results in an edge in a field still dominated by spreadsheets and quarterly earnings calls.
Disclaimer: Investors are advised to read and understand the Master Prospectuses (MPs), the Supplemental Master Prospectus (SMP) (if any), Information Memorandums (IM) (if any), Schemes’ Disclosure Documents (DD), Supplemental Disclosure Documents (SDD) (if any), Product Highlights Sheets (PHS) as well as consider the fees, charges and risk factors involved before investing. The MP, SMP (if any), IM (if any), DD, SDD (if any) and PHS have been registered and/or lodged with the Securities Commission Malaysia (SC), who takes no responsibility for its contents and related advertisement or marketing materials, does not indicate that the SC has recommended or endorsed the product/service. The advertisement has not been reviewed by the SC. Investors have the right to request for a copy of PHS and other relevant product disclosure documents which are available at our office, at any authorized distributors and our corporate website before making investment decisions. If you are in doubt when considering the investment or any of the information provided, you are advised to consult a professional adviser. A Fund’s track record does not guarantee its future performance. Kenanga Investors Berhad is committed to prevent conflict of interest between its various businesses and activities and between its clients/director/shareholders and employees by having in place procedures and measures for identifying and properly managing any apparent, potential and perceived conflict of interest by making disclosures to clients, where appropriate. Kenanga Investors Berhad 199501024358 (353563-P)
Read the first article of this three-part series.
