A marriage of human and machine

*This content is brought to you by Terebinth Capital

When I was young, my brother and I were captivated by Formula 1. We were fascinated by the speed, noise, drivers and complicated stats. As I grew older, I forgot about the sport, until my husband reintroduced me to it years later. I was amazed at how much it had evolved and its similarities to modern asset management.

Imagine F1 racing without the drivers or without the cars? Without the drivers, all the cars would finish at the same time with no human intuition to deliver a competitive edge. Alternatively, without the cars, it would be a tedious race run around the same track. F1 is the perfect example of human and machine coming together to provide an exhilarating sport.

In the world of modern asset management, it is perplexing that some people believe investing based on their intuition alone results in the best decisions. As many people have experienced in the Fantasy Fund Manager competition, emotional decisions are not necessarily the best and, while it might be successful some of the time, it is unsustainable.

Like F1 racing, there are ways to blend human and machine in seeking the optimal results from your investment. F1 is influenced by a variety of factors from the type of racetrack and weather conditions to the human intervention to navigate the racetrack and suitably tweak the engine and tyres to get the best out of the machine. Akin to the F1 teams adjusting their cars to track conditions, investment teams must adjust their portfolios to weather the macro environment and its impact on financial markets. Both aim to optimise the nexus between human and machine to win most of the time.

Financial markets entail a large data set: fundamental, quantitative and macroeconomic factors, across multiple geographies, sectors and asset classes. To manage this, asset management teams need to combine the ability of machines to process, assess and summarise vast amounts of data in a short period of time with a skilled investment team that understands how the machine needs to be configured, what data to use and how to implement the output. With all the relevant knowledge at their fingertips, the asset manager is rooted to make sustainably successful investment decisions creating wealth for their clients over the long-term.

Success comes from the synergy between the team, driver and machine. It means leveraging the power from both the driver and machine, which requires collaboration and feedback to fine-tune the combination for optimal performance. Asset management is similar, in that it depends on understanding and combining the strengths of humans and machines, with a feedback loop between data and decision-making.

At Terebinth Capital we believe that understanding the economic cycle (the racetrack) and where we are in the cycle give the ability to deliver additional performance through style and sector tilts. This knowledge is rooted by combining the strengths of human and machine. Unforeseen influences (like poor wealth conditions on the day of the race) make it imperative that we tap into human intuition and act with agility to take advantage of unexpected opportunities.

This is the foundation of our equity investment process and portfolio construction. A two-pronged approach is used combining quantitative “machine” tools and qualitative “human” insight. By applying bottom-up research, to interrogate fundamentals, we identify high-quality companies with attractive earnings growth potential that are trading at reasonable valuations. Due to fundamentals being strongly influenced by global dynamics, a top-down, macro approach is incorporated for tactical sector and style tilts.

The resolution to the US debt ceiling and receding banking crises have removed risk to financial stability, lowering the hurdle for renewed interest rate increases by the Federal Reserve in the US. A plethora of domestic headwinds, including the FATF grey-listing, SOE strain, electricity supply crisis, geopolitical concerns linked to Russia, and expectations for a recession continue to plague risk sentiment toward SA equities. Considering the challenging macro backdrop, we seek to grow in areas of resilience by investing in high-quality companies with strong operational track records that can provide attractive dividends and decent earnings growth.

Retail counters are the most influenced by a weaker economy, resulting in a negative impact on their earnings and ultimately their share price. While resources remain vulnerable to a global recession, we are still cautiously optimistic on a Chinese auto recovery in the second half of this year. This should underpin PGMs prices and the attendant counters. We remain overweight banks because of their cheap valuations and relative earnings resilience. As SA gold miners have run ahead of themselves, significantly outperforming their senior globally diversified peers, we have moved underweight and expect a correction as real rates increase. We continue to be overweight the technology sector on the back of a strong reporting season, China’s re-opening, and deregulation.

Our approach at Terebinth Capital is similar to that of an F1 team, we leverage the best specialist skills of human and machine, delivering sustainable returns and capital growth for our clients over the long term.

While we may not take our corners at high speed or bask in the glamour of F1, the satisfaction of meeting our clients’ expectations in the long term is reward enough. And as a bonus, we hope to see more women participating in both F1 and the asset management industry over time.