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Equity portfolio model outperforms NGX – Coronation

NW4DEC23 (1)

In the latest Nigeria Weekly Market update published on Monday, Coronation Asset Management shared that their equity portfolio trading model, Model Equity Portfolio (MEP), outshone the NGX All-Share Index by 4.93 percentage points as of December 1, 2023. MEP surged by 44.29 percent, surpassing NGX’s 39.35 percent gain year-to-date.

The MEP, described by Coronation  Asset Management as a “notional” or imaginary portfolio of stocks, was devised not just to experiment with investment strategies and risk management but primarily to outperform the Nigerian Stock Exchange’s flagship All-Share index.

Analysts at Coronation’s said that they set their weekly preferences based on market conditions, adjusting their positions to match opportunities or threats in the market. They’ve done this for four years since starting this approach.

The asset management company said, “This year, the Model Equity Portfolio is up 44.29 percent compared with the NGX All-Share’s 39.35 percent gain, an outperformance of 4.93 percentage points.”

Aside from the outperformance in market returns, analysts at the company identified a striking benefit of the MEP. They noted that it is “an easy portfolio to manage (even if we do pay notional commissions and respect actual market liquidity when making notional trades).

“At N30.9 billion (it was N10.0 billion at inception four years ago), it is smaller than and easier to adjust than some institutional portfolios.”

Another benefit of the MEP is that it is “not constrained by benchmarks or limits, so, for example, if we wish to hold a large proportion in notional cash, we can.”

The Asset Management company heaped their praise on the MEP based on research they carried out at the beginning of 2023.

Read also:NGX, IsDBI eye increased issuances of Islamic finance instruments

An experiment that was based on not placing a position on top-performing stocks that are likely to outperform the NGX All-Share Index. Such stocks over the years have been Dangote Sugar, BUA Foods, Oando, United Bank for Africa, and Geregu Power.

What was the strategy that helped them outperform the NGX index?

According to analysts at Coronation Asset Management Company, their strategic investment decisions were made based on three major economic events that happened this year. One such event was the removal of fuel subsidy.

As a result of this decision to remove fuel subsidy by President Bola Ahmed Tinubu, an overweight position was taken on TotalEnergies, which resulted in 35 basis points.

The decision to liberalise the forex market and unify the exchange rate markets also had a significant impact on their investment, as that announcement helped them milk out 317 basis points from the banking sector.

Read also: CIBN, NGX partner to boost financial market

Another was the global rise in oil prices, which earned them 82 basis points from their investment in Seplat Energy.

They admitted saying that “of our 493bps outperformance year-to-date, 35bps come from a decision to overweight an oil marketing company, 317bps come from a decision to overweight banks, and 82bps comes from an overweight in an upstream oil company.

“Remove these (our three best ideas), and our outperformance would have been much lower, by 0.59 percentage points.”