Strategies

The Sparinvest value equities strategy aims to generate superior long-term returns through investment in deeply undervalued stocks. Our fund range covers both developed and emerging markets.
Sparinvest was the first Danish investment house to adopt a value investment approach, when the value equity team was formed in 1997. Since then, we have remained focused on serving our clients through disciplined application of our value investment philosophy and bottom-up stock selection processes. We consider stocks through the lens of a long-term investment horizon, and believe in rigorous fundamental analysis to help us uncover the risks and opportunities facing our portfolios. This naturally includes a consideration of environmental, social and governance issues. We believe in being active, engaged owners, using the power of dialogue and voting to work towards enhanced corporate value at our holdings.

With more than 100 years of combined experience in value investing, our team of long-tenured portfolio managers and analysts are curious and critical thinkers, with a passion for analysing stocks to generate and execute investment ideas.

We offer:

• A fundamental, long-term approach to stock selection
• A cohesive, long-tenured team
• Disciplined value investment processes 
• A holistic approach to risk
• Serious & considered integration of responsible investment issues 
• A long & solid track record of style-consistent value investing
  
   

Since 2005, Sparinvest’s pioneering value bonds strategy (for corporate bonds) has delivered a much lower default rate than the market average. The strategy is based on academic evidence that value and size are identifiable risk (and therefore alpha) factors within the credit premium*.

Our investment process uses fundamental analysis to select corporate bonds paying higher yields than are justified by the risk of investment. There are no currency plays or derivatives. Our Value Bonds strategy is:

• 100% bottom up
• Off benchmark
• Designed to exploit alpha factors
• Not reliant on official credit ratings
• Focused on bondholder protection for M&A upside
• Risk focused - including ESG

Benefits for investors:

• 100% bottom up investment process - means a thorough investigation of each bond invested in by a team specialising in both credit and security analysis and with a strict approach to indebtedness. This means investors get a well-diversified portfolio of bonds that have passed our rigorous quality control checks and which offer a high recovery rate.
• Off benchmark - active management is conviction-led and can lead to considerable divergence from benchmark. Whilst this alpha-focused strategy may deliver higher volatility than average, it is also likely to result in higher long-term returns for investors.
• Designed to exploit alpha factors -  Our experience shows that the bonds of value and small-cap companies, as well as companies headquartered in emerging markets, often pay higher yields than are justified by the risk of investment. By exploiting this knowledge we are able to deliver high return bond investments at lower fundamental risk.
• Not reliant on official credit ratings - The companies in which we find alpha are often unfairly penalized by official credit ratings agencies on grounds unrelated to their ability to repay creditors. The fact that the majority of market players rely on official ratings creates value opportunities for us. By relying instead on our own in-depth research, we can target high yielding bonds from fundamentally strong but under-rated companies.
• Bondholder protection - we analyse all bond documentation to ensure that bondholders are as well protected as possible for the risk of providing credit. We favour companies with strong protective covenants in place to protect against SEO risk-taking and to offer ‘positive optionality’ (upside in bond prices) in the event of M&A activity.
• Risk focused - we focus on fundamental risk in all its potential forms, including default risk, liquidity risk and LBO/change of control risk. We believe that environmental, social and governance issues can impact on a company's ability to repay its debts and must therefore be considered alongside financial risk factors.

Offerings

Sparinvest’s value bonds strategy covers the global universe of corporate credits, including emerging markets. Therefore the following strategic options are available:

Choice of Credit Rating:

• Investment Grade
• High Yield
• Whole ratings spectrum

Choice of Regional Exposure:

• Developed Markets
• Emerging Markets

Choice of maturity date: we can offer fixed-maturity solutions. Ask us for details.

This strategy is also available with optional ethical screening.

* In 2001 professors Elton, Gruber et al undertook a study of the spread between rates on corporate bonds vs. sovereigns. They concluded that a significant proportion of the credit premium could be explained as being a reward to investors for bearing the systemic risk of investment in smaller and undervalued companies.

The Danish bond market incorporates a 200-year old mortgage bond market, viewed as one of the safest and best regulated in the world. (Both Mexico and the US are now investigating similar models.) With the special Danish tradition for fixed-income investment, this discipline has always been one of Sparinvest’s strongest cards – and one for which we frequently win industry awards.

Our Fixed-Income strategy is:

• Minimal trading
• Consistent interest rate sensitivity
• Optimized on clearly-defined durations
• Disciplined and duration-focused
• A route to Danish Mortgage bonds

Benefits for investors:

• Minimal trading - because transaction costs eat into bond fund performance, we avoid regular trading based on the release of key economic figures or interest rate predictions. Portfolios are only changed if there are any market anomalies to be exploited. This means cost-savings for investors.
• Consistent interest rate sensitivity - we understand that investors need fixed-income investments with constant risk profiles as a reliable mechanism to offset liabilities or diversify against riskier assets. We aim to provide well-behaved investments that maintain their position on the duration spectrum.
• Optimized on clearly-defined durations - we manage on the basis that it is impossible to predict short-term interest rate movements but entirely possible to optimize portfolios for different defined durations. We model on basis of diversification, duration and risk criteria. A clear duration policy also helps to minimize trading.
• Disciplined and duration-focused - we believe it is possible to achieve good performance relative to the benchmark over time by remaining duration-focused – irrespective of market direction or interest rate movements. Our Fixed Income managers remain disciplined and true to our investment strategy at all times to provide reliable investment vehicles.
• A route to Danish Mortgage bonds - The Danish government and mortgage bonds market has unique attractions and offers diversification benefits to investors outside Denmark. Sparinvest offers unique expertise and knowledge of the prepayment risks (premiums) involved with callable mortgage bonds.

Offerings

• Targeted duration options, working to achieve optimal returns within a pre-defined timescale. Any duration is possible;

• Short, medium and long Danish Bond strategies to enable investors to access the diversification properties of the Danish fixed-income market which includes one of the world’s largest and best-run mortgage markets;

• European bonds - long or short duration

• Emerging Market sovereigns (in local or hard currency)

• Index-linked bonds.

Click here to download our report on the Danish mortgage bonds market.

If I "have noticed anything over these 60 years on Wall Street, is that people do not succeed in forecasting what’s going to happen to the stock market."

Benjamin Graham

Given that markets cannot be predicted, we aim for continuous, well-diversified investment portfolios with a tilt towards known asset outperformance factors. Our constant aim is to maximise the return potential from each unit of risk taken.

Our Strategic Asset Allocation strategy is:

• Focused on client goals
• Optimized for client's risk budget
• Continuously invested
• Widely diversified
• Tilted towards outperformance factors
• Regularly rebalanced

Benefits for investors:

• Focused on client goals - together with our clients we aim to formulate realistic investment goals and create a bespoke strategic plan to reach them.
• Optimized for client's risk budget - The starting point for the strategy is to establish the individual investor’s risk tolerance and investment time-frame. We can then use knowledge of long-term historic asset correlation and volatility patterns to construct optimal, efficient portfolios.
  
• Continuously invested - as consistently-accurate market timing is impossible, we remain continuously invested. This has the dual benefit of minimizing transaction costs and ensuring that investors are in place to benefit from the substantial upswings that often follow steep market declines.
  
• Widely diversified - we aim for a wide diversification of assets, organised in such a way that they should generate the maximum possible return for each available unit of risk in the client’s overall risk budget.
  
• Tilted towards outperformance factors - We work with academically-proven outperformance factors* – currently value, small-cap and momentum investment.
• Regularly rebalanced - we view regular rebalancing as essential to keep the portfolio in line with client goals.
  

Offerings
Sparinvest's Strategic Asset Allocation expertise is available to clients who seek help in formulating model portfolios designed to match long-term objectives. We offer:

• 'Off the shelf' solutions based on pre-defined time/risk profiles;

• Bespoke solution with individually-tailored portfolios, based on specific, agreed targets; or
• 'DIY solution' providing access to our unique pooling struture whereby clients can create their own strategic asset allocation, based on our strategies.

Where an optimal portfolio for a client requires exposure to an asset class that Sparinvest is unable to deliver, we will use style-based returns analysis to find the best investment partner to provide it.

* Studies by Fama and French supply evidence of the outperformance of value and small-cap styles. The discovery of outperformance from momentum strategies is attributed to Jegadeesh and Titman.

Years of academic study have concluded that equity investment with a tilt towards certain outperformance  factors - specifically value, small cap and momentum* - can lead to excess returns over the longer term. Even more interesting is the fact that value and momentum strategies are negatively correlated, meaning that a combination of these two factors within a portfolio could become even more interesting over time.

Sparinvest's Intelligent Quant strategy is:

• Designed to capture the full beta potential of a given index
• Tilted towards proven excess return factors
• Designed to exploit negative correlation
• Designed for ESG improvement
• Lower cost
• Available as a tailor-made solution 

Benefits for investors:

• Full beta potential - The strategy offers full exposure to the performance of a given index at a level of tracking error that can be adjusted according to preference. This means that investors don't miss out on index returns.
• Proven excess return factors - Sparinvest manipulates the index exposure to create an emphasis on proven long-term outperformance factors. Investors benefit from having a portfolio tilted towards the excess return factors identified by investment academia - using value, small-cap and momentum overlays.
• Exploits negative correlation - The fact that value and momentum strategies are negatively correlated has the effect of increasing the overall performance of a portfolio or decreasing its risk.
• Designed for ESG improvement - Where there is a choice of stocks fulfilling the investment objective of the fund, the one with the higher ESG score is preferred. The long term intention is to consistently improve the ESG score of the portfolio over time. Although it is as yet unproven academically, we believe that this is also a potential long-term outperformance factor.
• Lower cost - This strategy is neither fully active, nor fully passive and therefore offers charges that are lower than our 100% bottom-up stock picking funds.
• Tailor-made solutions - we currently run this strategy based on the MSCI World Index but can easily transfer it to any other equity index

Sparinvest currently runs one fund based on its Intelligent Quant strategy.
 

* Studies by Fama and French supply evidence of the outperformance of value and small-cap styles. The discovery of outperformance from momentum strategies is attributed to Jegadeesh and Titman.