AMC on mu AI Equity Selection Europe

The current mega cap rally and consequent enormous concentrations in equity portfolios have opened up opportunities for niche stocks

In recent times, there's been a significant rally in stocks of very large companies with high market capitalizations, the so-called “mega-cap” stocks. At the same time, the valuation spreads between growth stocks (companies expected to grow at an above-average rate compared to other companies) and value stocks (companies that are considered undervalued compared to their intrinsic value) have been expanding. This means that growth stocks are becoming increasingly expensive compared to value stocks.

These market conditions have led to large concentrations in growth-focused and passive portfolios. However, the high valuations of growth stocks imply extreme growth expectations and this is causing concern among investors about potential downside risks. As a result, investors are looking for more robust alternatives within the equity space that focus on company fundamentals rather than high growth expectations.

One such alternative is investing in niche stocks that are not on the radar of most investors and have not been affected by the high valuations seen in popular sectors. These often include companies with a smaller market capitalization, or “small-cap” stocks. Such stocks are considered to have more pronounced inefficiencies and thus more potential for outperformance.
 

“Besides its substantial alpha potential, our model strongly favors small, fairly valued, profitable and defensive stocks. This makes us perfectly positioned to profit from a reversal from current extreme divergences within the equity space.”

mu Capital Management has developed an AI-driven European equity strategy with a focus on small cap stocks

To address this opportunity as well as investor concerns, mu Capital Management has developed an innovative AI-driven investment strategy wrapped up in a lean and cost-efficient AMC solution provided by GenTwo.

A Swiss investment boutique focusing on data-driven equity investments, mu Capital Management’s next-generation stock selection model relies on artificial intelligence to determine the most attractive investment opportunities. Thanks to its lean setup it is able to invest in small cap stocks with low capacity. These stocks show more pronounced inefficiencies and thus more outperformance potential.

In its newly launched strategy with GenTwo, where Marcuard Heritage serves as product sponsor, the company invests in European equities with a focus on small caps. With a more defensive risk profile compared to other small cap offerings and comprehensive control of relative risks, it offers a well-balanced European equity exposure.

This next generation AI-driven investment engine offers significant alpha potential. As it substantially differs from competitor products, it is less affected by the crowding that can occur with traditional systematic strategies. This low-capacity portfolio also has the flexibility to invest in hidden gems with low market impact and with short reaction times.

A well-diversified, high tracking error satellite portfolio with highly attractive factor exposures (small caps, value stocks, defensive stocks, profitable stocks, momentum stocks), it is ideally set up to profit from a reversal of the growth bubble and higher inflation environment. It also serves as a great diversifier to growth-heavy equity portfolios.

“Monitoring eight to nine thousand stocks every day and having a lean setup allows us to capitalize on opportunities even among very small companies.”

Working with GenTwo, the company has launched its strategy as a fully bankable AMC with a Swiss ISIN

To bring their product to investors, mu Capital Management considered a variety of options, including funds, other AMCs, and different market players. In the end, however, the company chose to work with GenTwo due to several key advantages.

For one, GenTwo's platform offered the flexibility to start at low volumes, a critical feature for mu Capital Management to build up a track record for a new strategy. The GenTwo platform was also very flexible, allowing mu Capital Management for instance to choose its own broker allowing for low transaction costs, a crucial aspect for a strategy with increased portfolio turnover. And it was customisable. At mu Capital Management’s request, and under its guidance, GenTwo was easily able to incorporate a special feature into the product – the ability to charge benchmark relative performance fees subject to a relative high water mark. This addition benefited mu Capital Management's product and can also be used in GenTwo's offering for other clients.

The product was launched in April. Neutralizing for strong factor headwinds since inception as small caps, profitable stocks and value stocks all underperformed, the strategy so far confirmed its alpha potential. 

“We were looking at a lot of options but chose GenTwo because it was the most flexible: we could start at low volumes, choose our own broker, and even add a new outperformance fee schedule to the system.”