Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Singularity: where innovation meets sustainability
In the beginning was the word and the word was ‘ethical’. Now we have lots of words: ‘responsible’, ‘sustainable’, ‘stewardship’, ‘environmental’, ‘social’ and ‘governance’. And perhaps a new word: ‘singularity’.
The Singularity Group is a Zurich-based global investment boutique and research firm which uses quantitative techniques to seek out companies which have sustainable innovation as part of their DNA.
It was founded in 2017 by Evelyne Pflugi, the chief executive, and Tobias Reichmuth, an entrepreneur who has specialised in innovative and disruptive start-ups. He is a non-executive director.
Pflugi was previously the portfolio manager in charge of the energy fund at GAM Investment Management in Zurich, as well as an active manager for various natural resources mandates. She began her investment career at Capital Group in Los Angeles.
Reichmuth currently has a business which helps other entrepreneurs develop “impactful, science-based and scalable companies providing healthy aging and rejuvenation solutions”. His main play outside of Singularity Group, however, is in the energy space. He remains chairman of Susi Partners AG, a company he founded in 2009 to provide infrastructure for the transition to renewable energy.
The GAM connection has also worked in The Singularity Group’s favour. The firm has an 18-person expert advisory board, the ‘Global Singularity Think Tank’, which includes Lars Jaeger, the head of alternative risk premia at GAM. Jaeger is well-known to Australian investors for frequent pre-covid visits to clients and prospects interested in his strategy. He wrote the book on alternative risk premia, literally, and remains an enthusiastic writer on all things scientific.
The Singularity Group has three products which are driven by the firm’s work on the ‘Singularity Index’ – one is the flagship ‘Singularity Fund’, another the more recent small-mid-cap AMC (actively managed certificate), and the third is the provision of ‘data services’ to assist investors create their own portfolios.
Pflugi says that one of its data services clients is a family office which uses the manager’s innovation scores which enable it to rank stocks in its index. In that case, the client uses the score to rank European non-technology companies.
The family office created a portfolio to diversify from an otherwise technology and US/Asia-heavy equity exposure, “without compromising on the idea that innovation is a key criterion for growth and survival. In essence, the ‘data services’ are access to our scoring data,” she says.
The 300-stock index is split roughly 50:50 between technology and non-technology stocks. To be eligible for the index, which makes up the portfolio for the Singularity Fund, a company must have at least 10 per cent of its revenue from one or more of the sectors chosen for special focus by the researchers.
The index is rebalanced twice a year, the last time, this May, replacing 71 stocks. The small-mid-cap AMC is a 100-stock subset of the index stocks, with market caps between US$1-25 billion.
Apart from market-cap range and stock count, the two long-only global vehicles differ in the market-cap weighting methodology used for portfolio construction.
Pflugi says: “Only the top two quintiles per GICS sector are used for the small-mid-cap portfolio and greater than 10 per cent Singularity score for the large-cap fund. Both times, we apply a modified market-cap weighting methodology: Singularity score x market cap in US dollars gives us a new market cap that is weighting relevant.”
The Singularity Group held an investor webinar last month (July 22) which included detail of the process and a quarterly review of performance. The process has six phases:
- Define the sectors on which to focus, currently 12, which show “exponential innovation” and reassess regularly
- Identify key focus areas, which is where the firm’s advisory board gets more involved
- Screen for companies in the key focus areas and determine relevant revenue reporting lines (not capital expenditure because the manager “does not believe the hype”)
- Use an AI-based system to assign reporting lines to focus areas and leverage AI to quantify the findings
- Determine a company’s overall exposure to one or more focus sectors to develop the Singularity scores, which quantify a company’s degree of innovation, and
- Monitor progress of the revenue share and rebalance.
Katharina Boehringer, the firm’s chief communications officer, said during the webinar that the Singularity score was a new metric which should be used in any portfolio.
“We think that innovation should be part of any portfolio as the ‘I’ added to make ‘ESGI’. We think innovation is a catalyst for resilience and, ultimately, sustainability,” she said.
Gregory Hung, Singularity Group’s CIO, who presented the performance review and outlook, said the firm thought the global economy was only about half-way through its secular bull market, which started in 2013. It would likely be extended because of a probable growth surge and slack in the labour market.
The Singularity strategy is exposed to what has come to be known as the ‘metaverse’. Hung, who joined the firm in January 2020, describes this as “the next iteration of the internet – it’s where the virtual and physical worlds come together in a seamless way”. Examples which are already well-known in popular culture include in music, gaming and movies.
Hung has a hedge fund background, most recently at Swisscanto Invest, an ESG-focussed manager, responsible for liquid alternatives, and before that at UBS Global Asset Management as a hedge fund analyst and portfolio manager.
In the June quarter this year, the Singularity Fund returned 10.1 per cent compared with the MSCI ACWI return of 7.4 per cent. Since inception on Dec 21, 2017, the Singularity strategy has delivered 21 per cent annualised compared with the index’s 12 per cent. He says the bulk of the outperformance has come from stock selection.
The 12 sectors of focus, and the best performers during the quarter, were:
- Virtual reality, Nvidia, 49 per cent
- New energy, Nio, 36.5 per cent
- Internet of Things, Snap, 30.3 per cent
- Robotics, Intuitive Surgical, 24.5 per cent
- Advanced materials, UPS, 22.9 per cent
- Big Data, Paypal, 20.0 per cent
- Bioinformatics, Danaher, 19.3 per cent
- Artificial Intelligence, Alphabet, 18.4 per cent
- 3D printing, Dassault Systemes, 13.4 per cent
- Space, Transdigm Group, 10.1 per cent
- Neuroscience, Eli Lilly, 7.5 per cent, and
- Blockchain, Square, 7.4 per cent.
Singularity Group’s best-performing stocks for the quarter included Kakao Corp (up 64.5 per cent), which is Korea’s largest mobile platform, Cloudflare (up 50.6 per cent), a web infrastructure and cyber security company, and Nvidia (up 49.9 per cent), an AI leader.
