The Top Down Risk Management Framework
At Ox Capital, we aim to select quality businesses with long-term growth thematics to drive upside and we use a macro framework to reduce risks in the portfolio during difficult times. The intended result is that we participate in the growth with less volatilities over time.
In 2022, when the market was volatile, we were roughly flat in absolute terms for the year. From personal experience, macro events can impact performance significantly once every few years, effectively employment of risk management can drastically reduce the negative impact.
Our top-down risk management framework has two parts – quantitative and fundamental. The quantitative part of the framework is basically a model called MOAT (Macro Overlay Aggregate Tracker). It takes input from more than a million data points, and we capture a wide range of data like credit creation from the major economies, EPS revision changes from a range of industries globally and swath of market data to get a quantitative picture of the economy.
What interests us is when our framework tells a different picture to the general market narrative. It tells us there is potential mispricing of assets. If appropriate, we can choose to take risk management measures like raising more cash, have different exposures or hedge the portfolio.
The fundamental part of the framework involves understanding business fundamentals and government policies and based on our experience investing in emerging markets to assess the likely trajectories of the key economies and sectors.
For example, in 2022, our MOAT model showed that the developed market economies were likely to weakening throughout the year and fundamentally we observed that smartphones and PC sales, over-indexed during Covid times thanks to lockdown and stimulus, was slowing down rapidly. At the same time, because of shortage of chips for autos, the valuations for semiconductors was bid up and it was seen as a safe place to hide. We took the opposite action of reducing and hedging our exposures in this sector which yielded great results.
Another example was we bought into the best quality Indonesian stocks late 2021 thanks to our MOAT model flashing green and our qualitative work showing improving fundamentals in the economy. The Indonesian market was one of the best performing markets in the world, and the market is starting to warm up to the idea that Indonesian stocks may be interesting in coming years!
Our top-down risk management framework has proven to be a useful tool to reduce downsides during volatile times. It relies on systematically looking at quantitative and fundamental inputs and using experience to decipher the actions necessary. This complements the core of our effort which is to own quality stocks with long term growth by effectively reducing the volatilities experienced by our investors.
Past performance is not a reliable indicator of future performance. For Performance of the Fund please see our performance page.
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