Wednesday, December 11, 2019

U/O Matrix via Applied Indexation – Establishing Predictive Value 2019

U/O Matrix via Applied Indexation – Establishing Predictive Value 2019 exercise demonstrates the capability to confer the directional value of select securities utilizing benchmark applications of peer group analytics and valuation.

Exhibited in this Establishing Predictive Value series is 1) the importance of both standardized specific and descriptive nomenclature in fundamental benchmark index component member assignments, 2) period outperformance based on differentiated growth rates delineated by business segment operations (BSOs) within proprietary segment verticals (primary/secondary/tertiary classifications as determined), 3) capacity to profile M&A employing common BSOs and 4) development of portfolio strategies including clinical applications for long/short active/passive managers.

In a combined Renewables/Diversified Industrials/Technology sector-themed overlay based on publicly-sourced Alternative Energy Subindustry Benchmark ETFs PBW/PZD, aggregated are top and bottom constituent equity performers (YTD as of 112919) displayed by refined sector/industry/subindustry nomenclature (BSOs) in tandem with a five-period sequential quarterly data set of forward-looking inverse indicators derived from variances between respective market capitalization and position weightings across proprietary segments (Wind, Solar, Fuel Cells, Smart Grid, Water, LED, Biofuel, Automotive, Natural Gas) and within segment verticals (53 classifications, including 184 single and multi-listed component members).

Interesting to note during general examination of niche ETF strategies (thematic, Smart Beta and factor-based) against conventional benchmarks, actual historic performance suggests only an intermittency of outperformance amidst observed economic cycles and subcycles. However thematic capture, coupled with a fundamental bias towards Smart Beta and factor-based attributes (plus period recognition), lends opportunity as a tactical and strategic complement to equity and corporate credit portfolio strategies (Alpha, Alpha-Beta)The robustness of generated data patterns below corresponds to absolute performance dispersion, arithmetic to mean proxy total returns (scroll down and right to center).

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To advance analysis, needed is a reconciliation of specific business segment operations among representative component members apart from the general sector designations presented in standard fund reporting.

At Venn’s intersection, sets and subsets of competing interests endure. Proprietary research suggests its dynamic principle in relation to business segment operations is three-fold: 1) multinational and Large-cap companies function as benchmark sector/industry/subindustry proxies based on scale and business segment operations, 2) Small- and Mid-cap companies compete as peers and are delineated by business segment operations and 3) among subsets of 1) and 2) are vendors provisioning multiple economic sectors, asset classes and geographies. Successful trading strategies (systematic, momentum, thematic) isolate Value in Growth by not overlooking the prospective Alpha drivers directly associated with ecosystem and supply chain verticals or profiles of Small- and Mid-cap companies functioning as competitive peers and, hence, acquisition candidates.

From a portfolio management perspective, designing strategies based on business segment operations lends the advantage of iterative index applications by exploiting the inefficiencies in third party data nomenclature assignments which inevitability skew peer group analytics and valuation. While means and methods vary of course, a latticed framework—gleaned from competitive market information, built by segments/classifications, interpolated for integrity—exhibits the proportionality revealed by business segment operation considerations and distinguishes differentiated growth rates beyond simple revenue line aggregation. Additionally, a developed thesis for security selection in the Energy complex incorporates: 1) a barbell to CAPE as an extrapolation, 2) a barbell of Cleantech to Diversified Industrials as a foundation and 3) a barbell of Value to Growth implicit in corporate anatomy.

Common portfolio position weight allocations (0.5% < x < 4.0%) may be aligned consistent with long/short peak-to-trough cyclical/counter-cyclical exposures and emerging technologies among individual and multi-listed component members. Importantly, often discarded negative PE companies are included to capture points of inflection for cash flow growth and forward earnings momentum. In the end, a structure of analysis in the Energy complex is borne from the examination of business segment operations within diverse companies across economic sectors and asset classes plus, on a standalone basis, competitive peers—by definition, Alpha is singular.

Forward looking statements, estimates and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. This content is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. The author's opinions are subject to change without notice. No part of this product, related articles, publications or web-based content may be reproduced in any form or referred to in any other publication without express written permission of Universal Orbit © 2019 and David B. Kleinberg.

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