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### Captor Scilla Global Equity

Captor Scilla Global Equity, Scilla Global hereafter, is an actively managed fund that invests in global equities. The fund is based on Captor’s management strategy Scilla.

Captor’s Scilla strategy invests in companies that offer an attractive relationship between expected return and risk compared to the global market on average. The stock selection is also based on well-defined guidelines for liquidity and volatility. Scilla Global is screened to ensure that the Fund’s holdings comply with international norms and conventions. Furthermore the fund excludes companies deriving revenue from involvement in the fossil fuel industries. Special emphasis is placed on the fund’s risk, which means that in a volatile market, the fund can hold a larger cash position and apply a certain leverage in low volatility periods.

Investors and academic researchers have long searched for investment styles or factors producing excess market returns over the long run. Since Captor’s Scilla strategy is rule based, historical simulations are therefore possible. Simulations show that the strategy generates excess market returns. Here we compare Scilla strategy to factors which have historically demonstrated excess market returns.

There are several Factor Index providers and historical data is readily available through data vendors. The factor indices used in this study are introduced below. All these factor indices are tradable via exchange-traded funds (ETF’s).

#### Volatility

A minimum volatility strategy involves buying stocks based on the estimate of their volatility and correlations with other stocks.

#### Yield

A yield (or high dividend yield) investment strategy gains exposure to companies that appear undervalued and have demonstrated stable and increasing dividends.

#### Quality

The quality factor is described in academic literature as capturing companies with durable business models and sustainable competitive advantages. The index provider employs three fundamental variables to capture the quality factor;

Return on equity – which shows how effectively a company uses investments to generate earnings growth;

Debt to equity – a measure of company leverage; and

Earnings variability – how smooth earnings growth has been.

#### Momentum

The momentum factor refers to the tendency of winning stocks to continue performing well in the near term.

#### Value

The foundation of value investing is the notion that cheaply priced stocks outperform pricier stocks in the long term. The index provider applies three valuation ratio descriptors on a sector relative basis:

Forward price to earnings (Fwd P/E);

Enterprise value/operating cash flows (EV/CFO); and

Price to book value (P/B)

#### Size

The size factor has captured the tendency of small-cap stocks to outperform bigger companies over the long run.

**Performance**

Scilla Global started 2019-02-12. Since Captor’s Scilla strategy is rule based, historical simulations are possible and available since 2006. The simulated time series is based on gross dividends and has no management fees whereas the fund data is subject to net dividends and management fees. Since there are no management fees for the factor indices, fund data is adjusted accordingly. All factor indices are United States dollar (USD) based whereas Scilla Global is based in Swedish krona (SEK). Fund data and simulations are therefore exchanged to USD using historical exchange rates.

To mimic the behaviour of Scilla Global time series. Historical data for all factor indices subject to both net and gross dividends are used. Time series are built using returns gross dividend before 2019-02-12 and returns net dividend thereafter. Historical data subject to gross dividends for quality and size factor indices have missing data. In these cases, net returns are adjusted using returns for world index gross and net dividends.

Normalized timeseries for Scilla Global (SCIGLOC), factor indices and world index are shown below.

Scilla Global performs very well over the period with a return around 250%. Quality performs best among the factor indices and is one of three styles that performs better than world index. Value, Yield and Size performs below world index and thus have negative excess market returns.

Professional investors typically compare the return of an investment to its risk and seek to maximize the risk-adjusted return. Compound annual growth rate (CAGR) plotted against volatility is shown below. Here volatility is based on weekly observations and annualized.

As shown, Scilla Global have provided the highest return to a low risk over the period. Only the Volatility factor show lower risk during the period. This is reasonable since Scilla Global does not optimize portfolio volatility whereas the Volatility factor index does.

The ratio of CAGR and Volatility is shown in the table below. Scilla Global has the best risk-adjusted return with a ratio of 0.78 over the period. This is double the risk-adjusted return of world index.

From the discussion above, Scilla Global performs very well over the analysed period. Since factor performance is cyclical and different factors outperform during different macroeconomic environment, three different subperiods; Financial Crisis, Subsequent Bull Period and Scilla Global live period are analysed below.

#### Financial crisis (2007-06-19 – 2009-03-09)

The financial crisis began in 2007 with a crisis in the subprime mortgage market in the United States and developed into a full-blown international banking crisis. World index lost more than 50% of its value during the period.

Since Scilla Global is designed to minimize expected shortfall it is expected to perform well compared to factor indices and world index during the period. A graph of Compound annual growth rate (CAGR) plotted against volatility show that is the case

Scilla Global has the highest CAGR and the lowest volatility. Thus, offers the best risk-adjusted return characteristic. The lower volatility for Scilla Global than Volatility factor index most likely stems from built in de-leveraging and that correlations tend to be close to one during crisis which penalize Volatility factor index.

#### Bull period (2009-03-09 – 2015-04-10)

By March 2009, world index reached a trough. Aggressive quantitative easing spurred a recovery in the stock market thereafter. CAGR against volatility for the period is shown below.

Scilla Global have the second lowest CAGR and volatility during the period. Since the differences in CAGR is smaller than differences in volatility, Scilla Global still offers second best risk-adjusted return only beaten by the Volatility factor.

#### Live period (2019-02-12 – 2019-10-08)

Scilla Global started 2019-02-12 and the analysis was done 2019-10-08. Return versus volatility is shown below. Here return is not annualized since the live period is shorter than a year. Volatility is annualized as before.

During this period, Volatility factor index stands out with the highest return and the lowest volatility. Scilla Global has among the highest return with the second lowest volatility and therefore still offers second best risk-adjusted return.

**Investment style**

Individual factors outperform during different macroeconomic environments. Since Scilla Global provide excellent risk-adjusted returns over the full sample, financial crisis, subsequent bull period and the live period it is interesting to see if the strategy changes its investment style depending on macroeconomic environment.

The investment style of Scilla Global is analysed by linear regression analysis of the strategy versus factor indexes. Since all factor indices and Scilla Global are subject to movements of the stock market correlations between weekly return series are high. This is not ideal for regression. Therefore, all return series are converted to excess return series by subtracting world index returns.

Stepwise regression is a systematic method for adding and removing terms from a linear model based on their statistical significance in explaining the response variable. The method begins with an initial model and then compares the explanatory power of incrementally larger and smaller models. Since we are interested in small models, stepwise regression is started from a constant model. MATLAB output for the analysed periods are shown below.

The regression formulas show that Scilla Global changes its investment style slightly depending on macroeconomic environment. In all periods Volatility factor is most pronounced. This is reasonable since Scilla Global is a low volatility strategy. For the full sample and during the financial crisis there is also an element of Momentum factor. Most likely this stems from Captor’s Scilla strategy definition of volatility. Since volatility is calculated from the downside tail of the return distribution, a component of positive momentum is introduced.

When regressors in a general linear model are orthogonal to each other, they do not share any descriptive variability and are completely uncorrelated. The relatively low regression fit for Scilla Global indicate it is an additional factor in the factor space investigated above. If Scilla Global is added to the factor universe and we try to construct each factor by linear combination of the others it turns out that Scilla Global is hardest to construct from other factors while Value is easiest to mimic. Thus, Scilla Global present the most unique investment style.

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