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 aims to grow with very low volatility.
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 defend the capital. To remove FX volatility, each CIS fund is hedged back to sterling (see Fund Structure below).
The fund could be used to 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 will defend the capital when its at 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 defending 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 systematic rules to monitor the change in momentum, 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 defend 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. Sovereign
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 defended 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 over 2000 bonds and over 1000 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 defend 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 defended.
Since going live we now have access to over 25 HY funds and over 25 cautious funds.
The following chart provides an indication of how the fund has performed against a range of IA sterling sectors since launch.
Unfortunately it cannot predict 3 black swans in the week of the 9th March 2020 when an oil price war started and the US decided to shuts its borders to stop
Covid. But it strongly bounced back.
As the fund’s aim is defend 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.
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.
Please see factsheet for most recent data
| 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 | Tactical High yield fixed income |
| IA Sector | Sterling Strategic Bond |
| Morningstar Category TM | Global High Yield Bond – GBP Hedged |
| 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% – 9% |
| 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 – 2013-2019 | 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 (2013-2019) |
| 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
▲ 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
▲ Quality has improved over last 10 years. In 2008 16.2% was rated CCC today only around 10%.
Executive Summary
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 defend the capital. To remove FX volatility, each CIS fund is hedged back to sterling (see Fund Structure below).
The fund could be used to 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 will defend the capital when its at 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 defending 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.
Systematic Process
This robust but cautious investment strategy aims to provide a total return greater than the US high yield benchmark. By using systematic rules to monitor the change in momentum, 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%.
Fund Structure
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 defend 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. Sovereign
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)
Performance
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 defended 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 over 2000 bonds and over 1000 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 defend 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 defended.
Since going live we now have access to over 25 HY funds and over 25 cautious funds.
The following chart provides an indication of how the fund has performed against a range of IA sterling sectors since launch.
Unfortunately it cannot predict 3 black swans in the week of the 9th March 2020 when an oil price war started and the US decided to shuts its borders to stop Covid. But it strongly bounced back.
As the fund’s aim is defend 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.
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.
Key Facts
Please see factsheet for most recent data
| 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 | Tactical High Yield Fixed Income |
| IA Sector | Sterling Strategic Bond |
| Morningstar Category TM | Global High Yield Bond – GBP Hedged |
| 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% – 9% |
| 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 – 2013 – 2019 | 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 (2013-19) |
| 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
▲ 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
▲ Quality has improved over last 10 years. In 2008 16.2% was rated CCC today only around 10%.
Downloads
Please see below for an archive of our literature.
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.