In the past few weeks the average economist’s recovery shape prediction hasn’t become any more uniform than the prediction form the last quarter of 2009.
About half of the leading authorities on this subject are convinced that the shape of the recovery is certainly not going to be V-shaped, while the other half is saying that the worst of the recession is over and that we are heading for a speedy recovery.
But how to prepare your portfolio for a recovery shape which is by definition uncertain? One obvious way is diversification. In other words: by not putting all your eggs in one basket, you are less likely to break them all at once. At Finsens, sufficient diversification is always part of our portfolio construction process. Another way is by not focussing on strategies who are based on prediction about future economic developments, but instead look for investment strategies who concentrate on selecting stocks with the use of financial statements. By correctly assessing these financial statements, one can determine of a companies assets are attractively valued. The focus is on fundamentals: assets, earnings, liabilities etc.
One such methodology for stock valuation is cash return on capital invested (CROCI), a valuation model developed by Deutsche Bank. CROCI provides a fund manager with a metric to evaluate a firm’s profit as a percentage of cash invested. Deutsche Bank offers several funds and certificates whose strategic stock selection approach is based on the CROCI model. Such funds offer several benefits. First, the stock selection process is 100% quantitative. It doesn’t rely on analyst’s forecasts or the company’s. Second, and most important, the CROCI index has historically tracked the index during up markets and outperformed during down markets, and thereby making it less volatile than the market. For example, the CROCI Euro Index has outperformed the Dow Jones EURO STOXX by an average of 8.9% per year since 1996, while having 5% less volatility.
At the start of 2009 Deutsche Bank also launched the alternative CROCI Carbon Funds. The carbon funds combine the CROCI model with carbon emission data to select attractively valued companies with low greenhouse gas emissions. The idea is that companies with higher emission are less likely to have sustainable performance, since the costs of emission is likely to rise in the future due to increasingly strict regulations. Hence, not only do the CROCI carbon funds create an opportunity to invest in companies with low emissions, the funds also are also well positioned to deliver good returns.
We believe the CROCI funds or CROCI Carbon could make an excellent addition to your portfolio to profit form current market conditions. If you would like more information about the funds discussed, please do not hesitate to contact us.
| 
