The science behind risk

Emperor Asset Management is no ordinary asset management firm. The company uses a clever blend of science and math to minimise risk and maximise returns.

Emperor Asset Management, a division of First World Trader and Purple Capital, does things a bit differently than most asset management companies.

Thomas de Lange, chief investment officer of Emperor Asset Management, started his career as an engineer in the mining industry where he gained experience over 20 years. When he was looking for his next challenge to exit the mining sector, he turned to asset management as a logical decision since he had spent his whole life doing investments of his own. But more than that, he had developed algorithms that he used to assess investment and risk, turning investing into a science.

De Lange worked on his own until he approached Purple Capital to form a joint venture, which eventually turned into Emperor Asset Management in early 2011.

Since then Emperor has consistently made significant returns and boasts a booming portfolio of shares and equity derivatives.

So what’s the secret? According to de Lange: Science.

Quantitative Decisions

De Lange uses a lot of what made him a good metallurgical engineer to help make him a successful investor.

“You question everything and you want to prove everything,” he says.

He took his analytical nature and used it to create the unique Emperor Asset Management “Quantitative Strategy.”

Using empirical rules he has formed over the last 20 years, de Lange has created algorithms that allow Emperor to assess the risk of investments and make investment decisions that would normally be left to the judgment of the fund manager.

“The advantage of this is that we can practice it, and prove if it is wrong or right,” explains de Lange. The evidence shows that this method is very successful. In fact the return for last year, after fees, was 51.7 per cent.

The other advantage is that unlike good judgment and instinct, an algorithm and science can be taught. This means that even people who don’t have great financial judgment can be successful. De Lange has even taught courses to students where he educates them on this unique method; the students consistently outperform the market when utilising these strategies.

Hot Sectors

According to de Lange there are a few big performers in its portfolio that have been faring quite well recently. The best share has been Coronation Asset Managers closely followed by consumers. He also says that resource stocks are starting to come back after the difficulty during the Fall season, with Kumba Iron doing quite well.

De Lange believes the market is starting to tilt away from consumers now and expects to see platinum make a resurgence. When it comes to the mining sector, things are quite volatile. However, de Lange says investors need to remember that resources will always be in demand, so it is just a matter of which companies are the most resilient.

Managing Risk

Risk is always at the top of any investor’s mind. Balancing risk and return is how investors make money and Emperor Asset Management is no different. The company relies on its quantitative strategy along with a few other tricks help manage risk.

Emperor Asset Management uses what is called “momentum investing.” Emperor uses this form of investing over the old-school methods, even though it comes along with an increase in risk, because it is confident in its methods.

To lower the risk, the company invests about 25 to 30 per cent of value shares in its portfolio, as well as watching the interplay between dividend growth, earnings growth and momentum. When it comes to the company’s approach to value shares it all comes down to math. Using multiple algorithms the company is able to rank the value shares and invest accordingly to balance the risk in other portions of the portfolio.

Another aspect of risk management is what Emperor calls “gearing.” Basically, the company adjusts investments constantly along with market fluctuations to help reduce risk.

The final outcome of all this is a stronger investment position.

“By having a reduced risk profile, as a result of the strategy and the shares we select and the weights we assign to them, that means we can now afford to increase our risk budget,” says de Lange. This all results in far better returns than would normally have been possible.

Another form of managing risk is hedging. Emperor Asset Management hedges by monitoring the market and using what is called macro-market timing. The company focuses on long investments  during bull markets and short during bear markets. De Lange says that assessing a market comes down to two basic factors: Market sentiment and market valuation.

By watching the combined effects of these factors Emperor has more than enough time to react to fluctuations.

Not Just Big Players

Another unique aspect of the Emperor Asset Management strategy is that the company, unlike other asset managers, will take smaller clients.

While some companies turn you away if you have less than R1 million, Emperor will take you on as a client because it knows that small clients may know bigger clients or may even one day be a bigger client themselves. In fact, the investing strategy used by Emperor supports any size of investor because all the clients get a specialised risk assessment and their portfolio is geared for them individually.

Retirement planning is another aspect the company focuses on. Emperor works with many people who forgot to save for retirement – a chronic issue that plagues a majority of people in the developed world – and are now stuck without a plan.

“People have painted themselves into a corner in terms of retirement planning,” says de Lange. “We can show these people that we can get them out of that corner.”

By taking a slightly larger risk, Emperor is able to offer these people a much higher chance of recovering their retirement. There is a demand for these higher risk investments, provided that they come with bigger returns. While Emperor cannot guarantee the return on these investments, de Lange says the success rate is around 90 per cent.

Future Plans

De Lange says the plans for the future all come down to looking for bigger investors and attracting interest from fund of hedge funds. To accomplish this Emperor is currently working towards getting its category 2-A license. This license will allow it to really bring in these major hitters and drive further growth. Along with this license, Emperor Asset Management is looking to become its own separate entity from First World Trader and Purple Capital.

Emperor is flourishing in a market that is ripe with opportunity. The company’s unique approach to investment along with complete transparency for clients has made it an attractive choice for big and small investors alike. All of this strategy and experience along with a good measure of learning from mistakes has resulted in a powerhouse of investment.