How we invest: concepts, influences and methodologies

Investing is not the easiest of tasks. It requires dedication, time, discipline and strategy. It is precisely to solve these and other difficulties related to the subject that investment managers , such as Magnetis, do all the work for you.

Here at Magnetis, our management team prepares the entire portfolio building strategy. And algorithms perform the operations. For this, portfolio optimization techniques are used , which select the asset basket that best matches your profile and objectives.

By following sophisticated methodologies, the analysis is much more objective and impartial when compared to that of a financial advisor or bank manager. Because your own opinions and interests can negatively interfere in the strategy of your investment portfolio.

Innovating is in Magnetis’ DNA, but it is worth noting that all work is based on well-established methodologies and theories. Next, learn a little about each of these concepts that generate the best results in the investment process.

Contents hide ]

  • 1Modern Portfolio Theory
    • 1Efficient Border
  • 2passive investments
    • 1The classic of passive investments
  • 3Maximum Diversification Portfolio
  • 4active investments
    • 1Understand the strategy
  • 5Adaptation to the reality of the Brazilian market

Modern Portfolio Theory

Created by the American economist at the University of Chicago Harry Markowitz, the Modern Portfolio Theory is one of the most established theories on the optimization of investment portfolios. In fact, it was with her that Markowitz won the Nobel Prize in Economics in 1990.

According to this theory, decisions taken in the selection of financial assets must take into account the risk-return relationship.

In practice, this means that when choosing between two assets with the same return, one must decide for the one with the lowest risk. Now, when we talk about a riskier investment, it will only be accepted if it offers the possibility of a gain much higher than the more conservative options.

To achieve the best return on an investment portfolio, it is necessary to diversify investments with assets that have low correlation with each other.

Diversification allows investors to minimize the loss of a strong downward movement in the stock market with the portion invested in fixed income, or invested abroad. Well, they end up working as a kind of shield against the turmoil.

At the same time, if the stock market enters a strong upward cycle, the investor achieves a good return on his portfolio. This is exactly where another concept developed by Markowitz comes in, known as “Efficient Frontier”.

efficient frontier

In general terms, the Efficient Frontier concept says that considering the risk of just one investment is not as relevant as the set of all the applications that make up the portfolio.

Each asset has its own characteristics, but by including them in the same well-managed investment basket, the portfolio’s risk and return is much more efficient than the isolated performance of a given investment.

Thus, with the Modern Portfolio Theory as one of its pillars, Magnetis builds investment portfolios in an automated manner . Applied resources are sliced ​​into different assets that are meticulously selected by our algorithms.

With this, you can be sure that it will be the ideal combination for your risk profile, maximizing your chances of reaching the selected objective.

passive investments

American John C. “Jack” Bogle is the founder of Vanguard , one of the largest managers in the world, which has about US$ 5 trillion in assets under management, all of them in investment funds with passive management.

In his book “ Common sense on mutual funds: new imperatives for the intelligent investor ”, he lists some rules for investors: how to select low-cost index funds, not overestimate the fund’s past profitability and seek to build a basket of investments and maintain -there.

In passive management, the performance of the investment fund will always follow the variation of a reference index – the benchmark . Unlike active management, where the management team has the goal of not only replicating a certain benchmark , but surpassing it.

Among the advantages of passive management are the lower cost compared to active strategy. After all, a fixed basket of stocks that make up the benchmark index is always purchased. In this way, the operational work is less and can be automated.

Plus, there’s more transparency and fewer surprises . In other words, the investor will know at all times that the return on his investment will be equal to the benchmark index, and it will not depend on the manager’s ability (or luck) to surpass it.

The classic of passive investments

ETFs (Exchange Traded Fund) are a classic example of passive investment, launched in the late 1980s in the United States. Since then, the growth of this type of fund around the world has been quite significant.

Today, in the US alone, there are more than 1,400 ETFs, reaching the impressive mark of US$519 billion in assets (equivalent to approximately R$2.7 trillion).

ETFs are also available here in Brazil. Despite its popularity being much lower when compared to the North American market, its shares are also traded on the stock exchange.

One of the main providers is BlackRock , currently the largest manager of ETFs globally. Here you can see the complete list of Brazilian ETFs.

In its investment selection process, Magnetis takes advantage of passive management to reduce costs and increase transparency of recommended portfolios. For example, in the portion of portfolios allocated to international stocks, we use ETFs such as S&P500 and VGT that follow the main indices.

In the part of Brazilian shares, for example, we invest in Brax11 , this instrument charges an administration fee of only 0.20% per year. That’s at least 10 times less than a traditional stock fund that typically charges 2% to 3% a year!

The result is a more diversified, transparent and lower-cost portfolio. Another advantage of passive investments is the peace of mind that there are no uncertainty components related to the bets that are made by active investment managers.

Despite this, uncertainty components can increase the profitability of bolder investment portfolios, therefore, in addition to passive investments. Next, you will also understand the importance of having diversification and active portfolio management.

Maximum Diversification Portfolio

To carry out the selection of financial assets that will result in the best diversification of the investment portfolio, we also use the Maximum Diversification approach .

This strategy is an offshoot of the Modern Portfolio Theory, and aims to bring as many assets as possible out of correlation with each other, creating a portfolio with true diversification .

In Maximum Diversification, there is a premise that risk is linearly correlated with return, so that the allocation, being well constructed, will result in returns compatible with the risk taken.

In this approach, the evaluation of each possible investment is made taking into account the volatility (risk) and the correlation of each financial asset.

Unlike what happens in the Modern Portfolio Theory, the Maximum Diversification Portfolio does not take into account the expected return on assets when building the allocation. This is because there is no need, as the other factors and assumptions are sufficient.

The investment portfolio created with these characteristics is diversified into asset classes, geographic positions, and different strategies. See how active management investments can contribute!

active investments

Abroad, it is common for a significant portion of managers with an active investment strategy to fail to surpass the benchmark .

In the United States, for example, only a quarter of managers managed to outperform the S&P , the main stock benchmark, in the last 20 years.

Here in Brazil, this is not exactly how the story happens, the national market has a reduced availability of passive vehicles and the indices have a low representation of the economy as a whole.

Therefore, active management in Brazil, such as the stock fund industry , has more promising results than in other more developed markets. Managers of these funds conduct extensive research, analyze assets and assign values ​​to them, looking for earning opportunities.

understand the strategy

According to the active management index (IQT) a little more than 40% of active managers consistently beat the benchmark .

Despite being a large number compared to other more mature markets, it is important to use this strategy with moderation and a lot of knowledge, as the inexperienced person can easily have their plans frustrated by strategic inconsistency.

In active management, each manager has a type of bet regarding what will happen in the market to be able to surpass his benchmark. Since there is no guarantee that the “expected” will actually occur, it is extremely important to mitigate the risks involved in the allocation process in order to obtain results above the market average.

The active management portion of Magnetis’ portfolios relies on Maximum Diversification, which we have detailed above, thus bringing maximum “releases” of independent risks. And if any asset is performing below its benchmark, other funds will compensate with different behavior, as they are uncorrelated.

This entire framework builds a diversification hedge (protection), and we complement it with other protections via derivatives –  for more specific adversities -, thus guaranteeing that the investment portfolio is covered by several aspects.

by Abdullah Sam
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