Welcome to AI-FUNDS

with capital protection

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about us

AI-FUNDS is the trading name of an investment management company formed by the partnership of Quantitative Analysis Service, INC (QAS) and Unbiased Portfolio Management Ltd (UPM). 

QAS provides uniquely calculated quantitative momentum ratings on a wide range of global investment instruments. QAS has been successfully providing institutional research using its tools drawn from “big data” science for over 40 years.

Referring to QAS; Fidelity International’s Anthony Bolton states, in his best-seller ‘Investing Against The Tides’, “The great advantage of the American Service is that it routinely classifies where in the cycle the charts suggest each of the leading stocks in its universe has reached”.

UPM is the trading arm of Unbiased Financial Group LLP (UFG). The UPM Investment Committee has over 180 years of experience of working in the City. UPM employs Chartered Engineers and Chartered Fellows of the Chartered Institute for Securities & Investment. UPM provides a performance based managed portfolio service for intermediaries.

UPM has been working with QAS since 2015 to design products which are systematically driven.

UPM has been following the progress of Artificial Intelligence since 1983 and now that machine learning has improved, has designed a fund which has capital protection as its main objective.

Strategies

VT AI-FUNDS Tactical High Yield Bond

This document is for professional investors only and is not suitable for retail clients.

Accordion Content

Our philosophy is a relentless focus on capital preservation. 

This unique multi-manager fund uses active smart beta to seek risk reduced returns, through exposure to high yielding corporate bond funds in conjunction with systematic asset allocation. The core investment objectives are:

▲ Seeking to consistently deliver an average 6-9% compound total return per annum over a 3 year business cycle.
▲ Very low annualised volatility, typically less than 3%, which is a fifth of the equity markets.

This UK UCITS fund invests into large high yielding (HY) fixed income collective investment schemes (CIS), across several management groups, to provide daily liquidity and scalability. However, if the HY market weakens all the HY funds will be sold to protect the capital. To remove FX volatility, each CIS fund is hedged back to sterling (see Fund Structure below).

With cash rates on hold for the foreseeable future, the fund could provide a stable and attractive high yield; using the credit risk premium. In the current environment, the fund may act as a volatility dampener and provide an important defensive building block in an investor’s portfolio. It should improve resilience, as it behaves differently to a static portfolio. It follows the high yield sector, but has capital protection capability to reduce risk.

The fund is a member of the IA Sterling Strategic Bond sector and is suitable as an alternative to absolute return or a strategic bond allocation. The aim of the fund is to provide an element of predictability; by consistently earning income for the client, pay the intermediary and grow above inflation, whilst protecting the capital. UPM uses the fund in our cautious / balanced allocations. Also, as it is designed for withdrawals, it fits our centralised retirement proposition to help the client sleep better at night.

This robust but cautious investment strategy aims to provide a total return greater than the US high yield benchmark. By using rules based drawdown protection, it is able to mitigate short term risk. By removing the human element from decisions, the strategy can persistently perform without any behavioural biases.

The high yield indices are monitored daily by QAS, in order to calculate the probability of the price momentum trend factor changing (over multiple timeframes). When the market risk rises, a signal is flagged by QAS and the asset allocation is tactically shifted into money market collective investment schemes (CIS) funds to reduce volatility.

Additionally the strategy also monitors the relative strength between the US and European HY indices and will dynamically tilt the asset allocation accordingly.

The strategy also monitors US treasuries and if the markets deteriorate further and high yield spreads also widen, an allocation of up to 30% may be made into long duration sovereign CIS funds.

Details

A wide range of QAS fixed income ratings have been analysed by Unbiased Portfolio Management (UPM) using clean data from 2002 to 2018 to augment a QAS  systematic algorithm with the aim of investing 100% in the high yield sector until momentum rolls over.

The US Corporate High Yield Bond TR index is the primary index on which the algorithm is based. After the US markets close, QAS runs the rating programs on the closing prices of the input indices. The systematic algorithm is then run against the ratings of the individual indices to determine which regime to be in.

Once the algorithm advises to switch regime, i.e. risk on to risk off; trades are placed and the whole high yield asset allocation is tactically switched from CIS high yield funds into CIS money market funds as soon as realistically possible and cost effectively via the Authorised Corporate Director (Valu-Trac (VT)).

Once the algorithm advises to switch back, i.e. risk off, to risk on; the asset allocation is tactically changed back.

However, if the ratings on the US treasury index go positive, whilst the algorithm is in the risk off regime, the asset allocation to US treasuries and gilts will be increased accordingly to a maximum of 30%.

The smoother returns are provided by blending corporate bonds from a range of countries. Different fund manager styles are combined with various valuation points to improve diversification, therefore reducing drawdown and volatility.

Each large daily priced CIS fund carries out the underlying fundamental bond analysis to reduce idiosyncratic risk and allocates globally, but biases the asset allocation to a particular country. The aim is to blend each CIS fund to improve the overall risk / reward. The minimum number of CIS funds to be UCITS compliant is 6, as no one CIS fund can be greater than 20% of the overall allocation.

When the high yield indices turn, if spreads start to widen and if the QAS system so indicates, the allocation is switched into at least 6 CIS money market funds and/or short dated sovereign CIS funds to protect the fund.

If the US treasury / gilts indices price momentum trend factor goes positive, a percentage of the asset allocation is allocated to CIS funds that are biased to sovereigns. This is set at a maximum of 30% (see Fund Construction for more information).

The strategy does not use any leverage, it is highly liquid with daily dealing. The fund is competitively priced with no performance fees. To improve distribution it is a UK UCITS OEIC structure with no minimum investment and platform friendly (see Investment Process and Policy for details on fund due-diligence).

The strategy works with the following partners:

        

Fund Construction

Each underlying CIS follows its benchmark, but will perform slightly differently against its peers as each one will have a slightly different mandate. Some will be biased to the US, some to Europe and some to the UK. They will have different betas, duration and credit ratings. The valuation points will also differ; some will have a VP before the market opens, some after the close.

The daily fund prices of each of the individual CIS funds since the fund launch has been loaded into an internal system. The system has the ability to change the percentage up to a maximum of 18% (to allow for 2% drift). The aim is to blend each fund’s characteristics to identify the optimal risk / reward combination for each of the 4 risk regimes:

1. US HY
2. Euro HY
3. Money markets
4. Treasuries

Once the optimal ratio has been determined this ratio is fixed until a change is identified in the ongoing monitoring process (see Investment Process and Policy below).

Investment Process and Policy

Fund Screening

Detailed Due Diligence

▲ Distribution profile of returns
▲ Risk adjusted returns against peer group

Qualitative

▲ Team organisation
▲ Strategy
▲ Scalability

Operational due diligence

Ongoing monitoring and Due Diligence

▲ Annual review of allocation percentage
▲ Any material changes to team
▲ UCITS constraints
▲ Performance outside of expectations (both unexpectedly strong performance or peak to trough drawdowns outside of expected range)

The strategy has been ‘real’ back tested to 2002 and the maximum peak to trough drawdown was 1.2%. The annualised return from 2013 to 2019 using a range of 3 and 5 year periods net of underlying fund manager fees varied between 7.93% and 10.63% (N.B. in 2018 the strategy was positive but pulled down the average return).

Since 2002 there have been 4 negative calendar years for the benchmark. Whereas our strategy protected the value of the fund and there were no negative years (see Performance Detail for more information).

Performance Detail

It should be noted that before 2013 there were only a few collective investment schemes (CIS) funds that we could use as they did not have a share class that was hedged back to GBP. Even the ETF, HYG was only created in April 2007. Also it is not possible to purchase the US Corporate High-Yield Bond TR index as it is constructed from corporate bonds and purchased from the over the counter (OTC) market. The index has nearly 2000 bonds and approximately 900 issuers. Each CIS manager charges for the fundamental analysis and also currency hedging; therefore producing a drag on performance. All returns shown are net of all underlying fund charges.

The strategy is to protect capital and to produce a total return. The goal is to always invest into high yielding corporate bonds but of course when the strategy switches into money market funds the yield will reduce but the capital will be protected.

Annual discrete performance of the strategy since 2013 is shown below against the US High Yield TR index and a well-known competitor:

A segregated account was opened on 16th April 2018 and the performance of the strategy using ‘hard cash’ (my pension) over the following 12 months was 6.83% net of 0.73% OCF fees and of course mirroring the ongoing test. The performance up to the launch date 7th October, nearly 18 months, was 10.07%. The strategy only switched once in 2018 (10th October) and can be visibly seen on the chart below.

As the funds aim is to protect capital, the key risk with the strategy is that it could be possible to underperform the HY index when a switch is delayed by a day or two; as can be seen in early 2019.

NB. Past performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

Name VT AI-FUNDS Tactical High Yield Bond
ISIN GB00BKRSF562
Regulator FCA / (UCITS)
Structure Open Ended Investment Company (OEIC)
Fund domicile UK
Fund Manager Unbiased Portfolio Management Limited
Asset Class Fixed Income
Strategy / objective High yield fixed income with capital protection
IA Sector Sterling Strategic Bond
Morningstar Category TM Global High Yield Bond
Performance target 6 – 9% over the credit market cycle
Benchmark US Corporate High Yield TR Index
Benchmark yield Approximately 6%
Style / risk profile Cautious
Minimum holdings 6 CIS funds
Maximum CIS holding 20% per CIS, 30% per fund manager
Maximum country allocation 100%
Yield – range 4% – 7%
Duration – range 2-4 years
Maturity – range 3-6 years
HY Credit quality – range BB / B
Key Investment Parameters High Yield exposure : Max 100% Standard money market exposure: Max 100% Long government bond exposure: Max 30%
Daily volatility target 1 – 3% per annum
Synthetic Risk & Reward indicator Weekly volatility between 2% – 5%, SRRI = 3
Annualised stress test volatility 2002 – 2018 Daily SD 1.84%, Weekly SD 2.56%, Monthly SD 3.25%
Annualised volatility 2014 – 2018 Daily SD 1.32%, Weekly SD 2.62%, Monthly SD 3.24%
Sharpe ratio 2014-2018 Daily 3.79, Weekly 2.76, Monthly 2.24
Max drawdown 1.2% peak to trough over 6 years
Number of switches into R3/R4 Average 4.5 sales per annum over 6 years
Number of days in R3/R4 Average 93 days (25%) per annum over 6 years
Percentage days in R3/R4 48% 2 weeks or shorter
Longest period in R3/R4 71 days
Administrator Valu-Trac Investment Management Limited
Depository Nat West Trustee and Depository Services Ltd
Custodian Royal Bank of Canada
Auditors Johnston Carmichael LLP
Launch date 7th October 2019
Gearing None – long only
Fund currency GBP
Liquidity Highly liquid with daily dealing
Dealing restrictions None
Valuation 12am BST
Settlement (Subscription) T + 4
MexID VMAADF
Bloomberg ID VTHYBSA.LN
Citicode QNGM
SEDOL BKRSF56
Lipper 68575639
Share type Accumulation only
Income Variable – by selling units
AMC 0.98% Seed share class
Ongoing charge 0.98% Seed share class
Performance fee None
Fees None
Minimum investment None
Communications Website updated when regime changes and fact sheet updated monthly.
Platforms  

Market Fundamentals

▲ The high yield universe has grown from $0.6 trillion to over $2.0 trillion in the last decade ▲ There are around 3000 issues globally ▲ Europe tends to have slightly higher average quality (BB-) and slightly lower average duration than the US ▲ Euro HY market is around $0.4 trillion ▲ The average market capitalisation of the listed business that make up most of the investable universe is approximately $20bn

Our philosophy is a relentless focus on capital preservation.

This unique multi-manager fund uses active smart beta to seek risk reduced returns, through exposure to high yielding corporate bond funds in conjunction with systematic asset allocation. The core investment objectives are:

▲ Seeking to consistently deliver an average 6-9% compound total return per annum over a 3 year business cycle.
▲ Very low annualised volatility, typically less than 3%, which is a fifth of the equity markets.

This UK UCITS fund invests into large high yielding (HY) fixed income collective investment schemes (CIS), across several management groups, to provide daily liquidity and scalability. However, if the HY market weakens all the HY funds will be sold to protect the capital. To remove FX volatility, each CIS fund is hedged back to sterling (see Fund Structure below).

With cash rates on hold for the foreseeable future, the fund could provide a stable and attractive high yield; using the credit risk premium. In the current environment, the fund may act as a volatility dampener and provide an important defensive building block in an investor’s portfolio. It should improve resilience, as it behaves differently to a static portfolio. It follows the high yield sector, but has capital protection capability to reduce risk.

The fund is a member of the IA Sterling Strategic Bond sector and is suitable as an alternative to absolute return or a strategic bond allocation. The aim of the fund is to provide an element of predictability; by consistently earning income for the client, pay the intermediary and grow above inflation, whilst protecting the capital. UPM uses the fund in our cautious / balanced allocations. Also, as it is designed for withdrawals, it fits our centralised retirement proposition to help the client sleep better at night.

This robust but cautious investment strategy aims to provide a total return greater than the US high yield benchmark. By using rules based drawdown protection, it is able to mitigate short term risk. By removing the human element from decisions, the strategy can persistently perform without any behavioural biases.

The high yield indices are monitored daily by QAS, in order to calculate the probability of the price momentum trend factor changing (over multiple timeframes). When the market risk rises, a signal is flagged by QAS and the asset allocation is tactically shifted into money market collective investment schemes (CIS) funds to reduce volatility.

Additionally the strategy also monitors the relative strength between the US and European HY indices and will dynamically tilt the asset allocation accordingly.

The strategy also monitors US treasuries and if the markets deteriorate further and high yield spreads also widen, an allocation of up to 30% may be made into long duration sovereign CIS funds.

Details

A wide range of QAS fixed income ratings have been analysed by Unbiased Portfolio Management (UPM) using clean data from 2002 to 2018 to augment a QAS  systematic algorithm with the aim of investing 100% in the high yield sector until momentum rolls over.

The US Corporate High Yield Bond TR index is the primary index on which the algorithm is based. After the US markets close, QAS runs the rating programs on the closing prices of the input indices. The systematic algorithm is then run against the ratings of the individual indices to determine which regime to be in.

Once the algorithm advises to switch regime, i.e. risk on to risk off; trades are placed and the whole high yield asset allocation is tactically switched from CIS high yield funds into CIS money market funds as soon as realistically possible and cost effectively via the Authorised Corporate Director (Valu-Trac (VT)).

Once the algorithm advises to switch back, i.e. risk off, to risk on; the asset allocation is tactically changed back.

However, if the ratings on the US treasury index go positive, whilst the algorithm is in the risk off regime, the asset allocation to US treasuries and gilts will be increased accordingly to a maximum of 30%.

The smoother returns are provided by blending corporate bonds from a range of countries. Different fund manager styles are combined with various valuation points to improve diversification, therefore reducing drawdown and volatility.

Each large daily priced CIS fund carries out the underlying fundamental bond analysis to reduce idiosyncratic risk and allocates globally, but biases the asset allocation to a particular country. The aim is to blend each CIS fund to improve the overall risk / reward. The minimum number of CIS funds to be UCITS compliant is 6, as no one CIS fund can be greater than 20% of the overall allocation.

When the high yield indices turn, if spreads start to widen and if the QAS system so indicates, the allocation is switched into at least 6 CIS money market funds and/or short dated sovereign CIS funds to protect the fund.

If the US treasury / gilts indices price momentum trend factor goes positive, a percentage of the asset allocation is allocated to CIS funds that are biased to sovereigns. This is set at a maximum of 30% (see Fund Construction for more information).

The strategy does not use any leverage, it is highly liquid with daily dealing. The fund is competitively priced with no performance fees. To improve distribution it is a UK UCITS OEIC structure with no minimum investment and platform friendly (see Investment Process and Policy for details on fund due-diligence).

The strategy works with the following partners:

        

Fund Construction

Each underlying CIS follows its benchmark, but will perform slightly differently against its peers as each one will have a slightly different mandate. Some will be biased to the US, some to Europe and some to the UK. They will have different betas, duration and credit ratings. The valuation points will also differ; some will have a VP before the market opens, some after the close.

The daily fund prices of each of the individual CIS funds since the fund launch has been loaded into an internal system. The system has the ability to change the percentage up to a maximum of 18% (to allow for 2% drift). The aim is to blend each fund’s characteristics to identify the optimal risk / reward combination for each of the 4 risk regimes:

1. US HY
2. Euro HY
3. Money markets
4. Treasuries

Once the optimal ratio has been determined this ratio is fixed until a change is identified in the ongoing monitoring process (see Investment Process and Policy below).

Investment Process and Policy

Fund Screening

Detailed Due Diligence

▲ Distribution profile of returns
▲ Risk adjusted returns against peer group

Qualitative

▲ Team organisation
▲ Strategy
▲ Scalability

Operational due diligence

Ongoing monitoring and Due Diligence

▲ Annual review of allocation percentage
▲ Any material changes to team
▲ UCITS constraints
▲ Performance outside of expectations (both unexpectedly strong performance or peak to trough drawdowns outside of expected range)

The strategy has been ‘real’ back tested to 2002 and the maximum peak to trough drawdown was 1.2%. The annualised return from 2013 to 2019 using a range of 3 and 5 year periods net of underlying fund manager fees varied between 7.93% and 10.63% (N.B. in 2018 the strategy was positive but pulled down the average return).

Since 2002 there have been 4 negative calendar years for the benchmark. Whereas our strategy protected the value of the fund and there were no negative years (see Performance Detail for more information).

Performance Detail

It should be noted that before 2013 there were only a few collective investment schemes (CIS) funds that we could use as they did not have a share class that was hedged back to GBP. Even the ETF, HYG was only created in April 2007. Also it is not possible to purchase the US Corporate High-Yield Bond TR index as it is constructed from corporate bonds and purchased from the over the counter (OTC) market. The index has nearly 2000 bonds and approximately 900 issuers. Each CIS manager charges for the fundamental analysis and also currency hedging; therefore producing a drag on performance. All returns shown are net of all underlying fund charges.

The strategy is to protect capital and to produce a total return. The goal is to always invest into high yielding corporate bonds but of course when the strategy switches into money market funds the yield will reduce but the capital will be protected.

Annual discrete performance of the strategy since 2013 is shown below against the US High Yield TR index and a well-known competitor:

A segregated account was opened on 16th April 2018 and the performance of the strategy using ‘hard cash’ (my pension) over the following 12 months was 6.83% net of 0.73% OCF fees and of course mirroring the ongoing test. The performance up to the launch date 7th October, nearly 18 months, was 10.07%. The strategy only switched once in 2018 (10th October) and can be visibly seen on the chart below.

As the funds aim is to protect capital, the key risk with the strategy is that it could be possible to underperform the HY index when a switch is delayed by a day or two; as can be seen in early 2019.

NB. Past performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

NameVT AI-FUNDS Tactical High Yield Bond
ISINGB00BKRSF562
RegulatorFCA / (UCITS)
StructureOpen Ended Investment Company (OEIC)
Fund domicileUK
Fund ManagerUnbiased Portfolio Management Limited
Asset ClassFixed Income
Strategy / objectiveHigh yield fixed income with capital protection
IA SectorSterling Strategic Bond
Morningstar Category TMGlobal High Yield Bond
Performance target6 – 9% over the credit market cycle
BenchmarkUS Corporate High Yield TR Index
Benchmark yieldApproximately 6%
Style / risk profileCautious
Minimum holdings6 CIS funds
Maximum CIS holding20% per CIS, 30% per fund manager
Maximum country allocation100%
Yield – range4% – 7%
Duration – range2-4 years
Maturity – range3-6 years
HY Credit quality – rangeBB / B
Key Investment ParametersHigh Yield exposure : Max 100%
Standard money market exposure: Max 100%
Long government bond exposure: Max 30%
Daily volatility target1 – 3% per annum
Synthetic Risk & Reward indicatorWeekly volatility between 2% – 5%, SRRI = 3
Annualised stress test volatility 2002 – 2018Daily SD 1.84%, Weekly SD 2.56%, Monthly SD 3.25%
Annualised volatility 2014 – 2018Daily SD 1.32%, Weekly SD 2.62%, Monthly SD 3.24%
Sharpe ratio 2014-2018Daily 3.79, Weekly 2.76, Monthly 2.24
Max drawdown1.2% peak to trough over 6 years
Number of switches into R3/R4Average 4.5 sales per annum over 6 years
Number of days in R3/R4Average 93 days (25%) per annum over 6 years
Percentage days in R3/R448% 2 weeks or shorter
Longest period in R3/R471 days
AdministratorValu-Trac Investment Management Limited
DepositoryNat West Trustee and Depository Services Ltd
CustodianRoyal Bank of Canada
AuditorsJohnston Carmichael LLP
Launch date7th October 2019
GearingNone – long only
Fund currencyGBP
LiquidityHighly liquid with daily dealing
Dealing restrictionsNone
Valuation12am BST
Settlement (Subscription)T + 4
MexIDVMAADF
Bloomberg IDVTHYBSA.LN
CiticodeQNGM
SEDOLBKRSF56
Lipper68575639
Share typeAccumulation only
IncomeVariable – by selling units
AMC0.98% Seed share class
Ongoing charge0.98% Seed share class
Performance feeNone
FeesNone
Minimum investmentNone
CommunicationsWebsite updated when regime changes and fact sheet updated monthly.
Platforms  

Market Fundamentals

▲ The high yield universe has grown from $0.6 trillion to over $2.0 trillion in the last decade
▲ There are around 3000 issues globally
▲ Europe tends to have slightly higher average quality (BB-) and slightly lower average duration than the US
▲ Euro HY market is around $0.4 trillion
▲ The average market capitalisation of the listed business that make up most of the investable universe is approximately $20bn

Downloads

Please see below for an archive of our literature.

Contact us

Contact: +44 (0)20 8715 4004.  37 Dorset Road, London, SW19 3EZ
AI-Funds is a trading name of Unbiased Financial Group LLP, which is authorised and regulated by the Financial Conduct Authority (FCA) 726137. Legal Information, Terms and Conditions.