INSIGHTS Market Insight

When was the last time you regretted not reading the small print? Think of when you booked an all-inclusive stay at a deluxe hotel and ended up paying extra for breakfast. Or when you had to pay a cancellation fee for your ‘cancel anytime’ gym membership. This risk of missing a non-negligible detail manifests itself in a multi-year trend seen in investors’ allocation decisions – that of accelerated inflows into passive equity strategies and outflows from active equity strategies (Fig 1).  

 

Passive strategies have witnessed impressive inflows over the past decade primarily due to their comparatively low fees and tax liabilities as well as the struggling performance of their active counterparts. However, what you see is not always what you get! In this piece, we look at a broad range of country indices and assess the idiosyncratic risk exposure underlying a supposedly broad allocation to a country. Fig 2 illustrates that a handful of companies account for half the volatility of a country’s index, an observation that is consistent across both developed markets (DM) and emerging markets (EM). In the largest two markets (US and Japan), which comprise c. 60% of the MSCI ACWI, less than 10% of listed companies account for half the volatility of the respective index. It is also remarkable that this number exceeds ten companies in only seven countries.  

The sector and revenue breakdown of these companies is perhaps even more striking. Spain’s two biggest banks, Santander and BBVA, account for 30% of index volatility. This is despite deriving only a small portion of their revenues onshore (15% and 24% respectively). Sweden’s industrial companies (Volvo, Sandvik and Atlas Copco) derive less than 40% of their revenue from Europe. LVMH, Christian Dior, Hermes and Kering account for one quarter of France’s index volatility, while the bulk of their revenue is derived from Asia (40%, 41%, 58% and 45% respectively). So much for ‘exposure’ to home economies.     

It is important for us to echo that this is not a DM vs EM story. Consider, for example, Australia and India, which currently have an equivalent weight in the MSCI ACWI. Four of Australia’s eight companies represent the country’s biggest banks, compared to India’s eleven companies spread out across five different sectors. Or take Italy and South Africa, where three banks account for one third of Italy’s index volatility, while South Africa provides a broader sector diversification. This is despite Italy having twice the weight of South Africa in the MSCI ACWI.  

Can investors truly diversify their portfolio by allocating passively? The risk underlying market-cap weighted passive strategies may be driven by a small number of companies, which may not be diversified from a sector exposure perspective and whose apparent and actual country exposure may differ. At Arabesque, we are disciples of diversification; our portfolios are equally weighted and cognizant of sector and country biases. In other words, we feel that we have read the small print. 

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.

INSIGHTS Market Insight

More is not always better. Eating four scoops of ice cream on a hot summer day is not necessarily more satisfactory than eating just two. The more ice cream you eat, the lower your marginal utility from one extra scoop becomes and higher the likelihood you regret your decision when on your weighing scale the next morning. This rationale underpins a decades old debate among financial market practitioners – that is how many stocks are enough to diversify your portfolio?  

Deciding on the number of stocks in a portfolio will ultimately depend on the level of risk an investor is willing to accept, as well as the transaction and opportunity costs involved. Holding too few stocks exposes the investor to stock specific, diversifiable risk (often termed ‘idiosyncratic risk’), while holding too many stocks increases both transaction costs and the opportunity cost associated with monitoring a larger portfolio. There is, therefore, a portfolio size beyond which the marginal diversification benefit of adding an extra position does not outweigh the associated costs – a point of ‘diminishing diversification’. 

We assess the number of stocks required to meaningfully reduce idiosyncratic risk across five Risk Premia: Momentum, Value, Carry, Size and Quality. As Figure 1 illustrates, a 100-stock developed market (DM) portfolio reduces volatility by 7% for Value and 5% for Momentum and Size compared to a 10-stock portfolio, with the diversification benefit being slightly less significant for Carry. The 100-stock portfolio can reduce idiosyncratic risk by at least 80% compared to the 10-stock portfolio for most of these Risk Premia. For the ‘less risky’ Quality Premium, peak diversification can be achieved through a 50-stock portfolio.  

his is perhaps even clearer through a sector neutral lens (Figure 2). A sector neutral 80-stock portfolio removes c. 75% of diversifiable risk compared to a 10-stock portfolio for all Risk Premia except Quality, which again requires a lower number of stocks to diversify idiosyncratic risk. One can also see that all Premia have structurally lower volatility when sector constrains are imposed. This is supported by Kritzman and Page (2002), who show that diversification across countries and sectors provides the greatest diversification potential, after security selection. 

In practice, the optimal size of a diversified portfolio is a function of the scope of diversification, the desired risk reduction and the respective risk measure. However, a general rule of thumb is that holding 100 stocks cognizant of sector constraints can diversify away 90% of idiosyncratic risk, a rule supported by our own data.  

As Cleobulus, an ancient Greek philosopher and poet, said: “Μέτρον ‘Αριστον” or “Everything in moderation”. It is important to maintain balance and avoid unjustifiable extremes, be it when deciding how much ice cream to eat or when choosing how many stocks to hold in our portfolios. At Arabesque, we construct our portfolios in a similar manner, defining thresholds that offer our investors an appropriate trade-off between portfolio size and diversification. 100 stocks tends to be our 2 scoops of ice cream.  

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.

INSIGHTS Market Insight

As the old Wall Street saying goes, “When the shoeshine boy tells you of a ‘hot’ investment, it istime to sell.” It was the prominent American businessman, Joseph P. Kennedy (father of John F.Kennedy), whose intuitive sense told him that when the time came that a shoeshine boy knew asmuch as he did, there was something wrong with either him or the market.The saying touches upon an important behavioural aspect of Inancial market practitioners. It isoften at extremes, that ‘emotional’ investors will make exactly the wrong decision at exactly thewrong time; either buying at the market peak or selling at the market low. This leads to a return gap between the expected return of an investment and the return realised by an investor – the Behavior Gap.

The Behavior Gap applies not just to single stock decisions, market highs and bottoms, but also to factors and even fund allocations. One study from Research Affiliates shows that, when sorted on their prior three-year return, U.S mutual funds with the worst performance out perform those with the best three-year return over the subsequent three years. This suggests it is prudent forinvestors to take a long-term view when selecting their investments – basing a decision on soundinvestment rationale rather than being overly inXuenced by shorter-term deviations inperformance.It is no secret that Momentum as a style has had a tough time of late, down about 10% relative tothe market since its peak last year. However, as can be seen below, the volatility of its excessreturn has only been as high as this on two occasions over the past 20 years: during the tech-bubble unwinding in the early 2000’s and the global Inancial crisis in 2008. This suggests thatmuch of the ‘pain’ may have already occurred as Momentum has historically outperformed by c.120bps p.a. after periods of high excess return volatility.

It is important for us to echo Kennedy’s sentiment. It is at these extremes that investor emotion ismost tested and those who remain patient have a chance to reduce their Behavior Gap. This samelogic underpins our rules-based, quantitative investment approach; we aim to remove as muchemotion as possible from the investment decision-making process and seek to provide investorswith a return equal to the investment return.

References

Richards. 2012. ‘The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.’

Arnott, Kalesnik, Wu. 2017. ‘The Folly of Hiring Winners and Firing Losers’. Journal of PortfolioManagement.

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.

INSIGHTS Market Insight

It is hard to pick up any current financial publication without a piece debating the continuing Value-Momentum rotation and the impending inflationary environment we face. In this piece we make the case that rather than choosing Momentum or Value, having both as building blocks in a diversified portfolio is prudent.

If an asset’s price goes up, ceteris paribus, it gets more expensive. If it continues to go up (Momentum), ceteris paribus, it continues to get more expensive. Whilst ‘ceteris paribus’ in financial markets is inconceivable, this concept still holds and underpins the antagonistic relationship that Momentum and Value have. The friction in this relationship manifested itself following the vaccine announcements at the end of 2020. The Pfizer & BioNtech announcement on 9th November triggered Value to outperform Momentum by 6.5%, a 10-sigma event and the most extreme daily rotation between the two since records began – even more extreme than when the US Federal Reserve cut rates in October 2008.

How can I reduce my factor rotation risk?

Broadly speaking, Momentum and Value are negatively correlated, with an average correlation of -0.34 making them ‘enemies’ in the conventional sense. Since the financial crisis this relationship has been even more strained with an average correlation of -0.61. Whilst not the only important factor to measure diversification potential, a negative correlation between two assets likely indicates that there are benefits to be had from some combination of the two.

We create an efficient frontier through differing combinations of Momentum and Value (Fig. 1). It shows that an allocation of 40% Momentum and 60% Value would lead to the highest risk-adjusted returns with a Sharpe Ratio of 0.71, greater than both 0.39 for Momentum and 0.27 for Value. This combination would also reduce the maximum drawdown to -41.4% compared with -76.8% for Momentum and -58.7% for Value.

Rather than treating Momentum and Value allocation decisions as discrete, the evidence suggests that combining the two can lead to superior risk-adjusted outcomes for an investor. This phenomenon can also be extended to diversification across asset classes . As the old saying goes, ‘keep your friends close and your enemies closer.’

References

Correlation, Return Gaps and the Benefits of Diversification’ (Statman & Scheid, 2008) 

‘Value and Momentum Everywhere’ (Assness, Moskowitz and Pedersen, 2013)

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.

INSIGHTS Market Insight

As with nearly any trend, be that the latest flared jean or music album, they are ‘cool’ until they aren’t. The same holds true for financial markets. Momentum performs well during trending markets. The most recent decade (2010-19) witnessed the longest bull market in history with global equities returning an average annualized return of +8.5%. It is therefore no surprise that it has been a ‘trendy’ decade with MSCI Momentum achieving an average annualized return of +11.9%.

The Covid-19 pandemic further enhanced Momentum’s performance as investors piled into stocks that were net beneficiaries of ‘working from home.’ However, the announcement of successful vaccine trials at the end of 2020 led to a change in investor sentiment. Investors’ appetite for risk returned with the expectation of economies re-opening. A rotation in market leadership ensued with cyclical stocks outperforming their defensive counterparts. Year to date, Energy and Financials stocks are up 22.5% and 12.5%, respectively, whilst Tech stocks are lagging, up only 2.6%.

Rotations in market leadership are not conducive to the success of traditional Momentum based strategies as portfolios must re-align themselves with the latest trend. As can be seen below, the prevalence of cyclical sectors in a 6-month Momentum basket has been increasing since the first vaccine announcements (November 2020). Financials, Energy and Materials now carry a 4x heavier weight than they did back in October 2020 in favour of tech stocks which have halved in weight.

Whilst there are shoots of the same effect in a 12-month Momentum basket, the risk-on rotation is not yet mature enough for value stocks to feature so prominently in longer-term Momentum portfolios. However, as we go 12-months past the 8-year Value ‘low’ (23rd March 2020), it is likely that this will change, as a longer-term more established trend is formed.

Given the severity of this rotation, it is no surprise that Momentum strategies have suffered this year with MSCI Momentum displaying a -15% drawdown. As investors with Momentum strategies, we remain hopeful that this may be the start a new longer-term trend that will provide us with the market conditions conducive for successful Momentum investing

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.

INSIGHTS Market Insight

For most investment strategies, how to weight securities in a portfolio is a fundamental design decision. The entire active management industry is premised on the underlying principle that deviating from capitalization weighting adds value, thus justifying a management fee. Two common approaches in listed equity markets are absolute weighting decisions (an equal-weight starting point) or relative ones (a capitalization-weight starting point).

We at Arabesque Asset Management, as evidence-based, systematic investors, are disciples of the former.

The evidence suggests that equal-weighting decisions (absolute) have, over the long-run, been superior to capitalization-weighted (relative) ones (Banz, 1981; Amihud, 2002). This is highlighted in Fig.1 that shows the S&P 500 equal weighted (S&P EW) outperforming the S&P 500 capitalization weighted (S&P) since 1990 by c. 1.3% p.a. However, this long-term observation is subject to short-term deviations.

During times of concentrated market leadership, such as when the weight of the top 5 stocks in the S&P 500 spikes, the capitalization approach triumphs. For example, during the tech bubble in the late 1990’s tech companies surged, driving much of the index returns, and rapidly increasing in weight. This in turn, lead to the S&P outperforming the S&P EW by 6.2% p.a. in the years 1995-99.

However, when this bubble eventually unwound in 2000, the S&P EW came roaring back, posting an average of 10.7% p.a. outperformance over its cap-weighted counterpart in the 5 years subsequent.

Diversification, diversification, diversification; capitalization-weighted construction will pull you into corners of the market when they surge, such as during the tech bubble. Then of course, when these bubbles unwind, the diversification benefits of the equal-weighted approach will come to the rescue; it is of course the only free lunch in finance.

Whilst we refrain from making predictions, the extreme concentration of the S&P 500 following the megacap surge over the past 3 years is hard to ignore. The top 5 stocks now account for over 20% of S&P 500 weight. Should a broader market recovery ensue on the back of the Covid-19 recovery, then good things may just come to those that equal-weight…

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.