plural A NEW WAY OF VALUE INVESTING Plural A NEW WAY OF INVESTING 2017 What Q3 is Plural ReportInvesting?
Plural implements value investing by combining the human investor with machine learning models. 2
In chess, machines beat humans. Teams of machines + human beat both. 3
Weak human + machine + superior process was greater than a strong computer and, remarkably, greater than a strong human + machine with an inferior process. Garry Kasparov (former world chess champion) 4
Typical Human Process Idea Generation Traditional processes are singular so do not maximise learning. This leaves alpha on the table. Deep Dive Typical Machine Process Systematic Indicators Portfolio Construction Portfolio Construction 5
Typical Hybrid Process Systematic Indicators Current hybrid processes miss the key interaction between human and machine. At best, these are strong human + machine with an inferior process. Deep Dive Portfolio Construction 6
We think of investing as competitive learning. Portfolio Construction The superior process is one where human and machine learn from one another rather than independently. Machine Learning Human Learning This interactive learning is key. 7
Why Plural is Superior to Quantamental Funds Quantamental funds typically have centralised data scientists bolted on to a legacy discretionary process. This limits the scope for interactive learning, which is the main benefit of a quantamental approach. Additionally, Plural uses machine learning to better implement long-term value investing, not to forecast quarterly trends. Quantamental Plural Data science bolted on to legacy discretionary process Limited interactive learning Process designed from scratch to be centred around the interactive learning Centralised team of data scientists seen as back office Data analysed for short-term trends to pick quarters Machine learning models drive improvements in human investor s long-term research and vice versa 8
Research Process - Overview Plural implements long-term value investing by maximising learning from 1) discretionary deep-dive research, 2) data analytic tools and machine learning models, and 3) each other. For each business, we study 4 factors qualitatively and quantitatively: Quality Quality of the business: - Competitive advantages - Normalised CROIC, trajectory, and reinvestment potential Value Valuation: - Normalised FCFF yield - Asset value Perception Market s interpretation of information: - What different investors know and do not know - Catalyst for variant information to disseminate Sentiment Behavioural biases of other investors: - Are investors fearful or greedy? 9
Research Process - Key Stages Stage 1 Stage 2 Stage 3 Human Estimate normalised CROIC and FCFF yield 15+ primary research calls Can primary research solve this? Industry and business analysis Learn from backtests and data analytics Can key fundamental drivers be quantified? Quantify primary research Simulate scenarios based on deep dive Machine Build proprietary KPIs and backtest Build systematic machine learning models Build proprietary data analytics tools 10
Portfolio Construction - Simulations & Stress Tests In Chess, different computer models occasionally recommend different moves. Human players can use their ability to think broadly to pick the best one. Plural uses a similar approach to constructing portfolios. Plural s models simulate potential outcomes and measure all negative outcomes as risk and positive outcomes as reward. Model 1 identifies portfolios that perform well in normal conditions, while Model 2 simulates stressed scenarios for the market, oil prices, correlations and investor skill. The human investor uses both to build a robust absolute-return portfolio. Simulation of Future Scenarios Risk Reward <-- Downside Upside --> 11
Important Disclosures Plural Investing LLC ( Plural ) is a company incorporated in Delaware. The information in this document reflects opinions and projections of Plural as of the date of publication. These are subject to change without notice at any time subsequent to the date of issue. Plural does not represent that any opinion or projection will be realised and makes no recommendation for any action. A reader who wishes to act on the information or analysis should conduct their own research and form their own conclusions. Investment is risky, and an investor could lose all of their capital. In the case of short positions, losses can exceed 100%. Individual investors, in particular, should seek competent financial advice before contemplating any personal investment action or strategy based on this information. These materials shall not constitute an offer to sell or the solicitation of an offer to buy any interests in any fund managed by Plural or any of its affiliates. Such an offer to sell or solicitation of an offer to buy interests may only be made pursuant to definitive subscription documents between a fund and an investor. These materials shall not constitute investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. All information in this document is for informational purposes only. Selective citations of, or quotations from, this document may be made under "fair use" laws, provided publication includes an appropriate reference to Plural and a link to Plural s web site, at www.pluralinvesting.com. No reproduction of the whole report, or large sections of it, including graphics, is permitted without written permission from Plural. For further information please email the company at contact@pluralinvesting.com. Copyright Plural Investing LLC, 2018. All rights reserved. 12