Our philosophy, process, proprietary models and investment techniques are strongly rooted in the study of economics, security analysis and behavioral psychology. We believe investor expectations are strongly influenced by the announcements and forecasts of perceived market experts, including company management and Wall Street analysts.
By incorporating a combination of proprietary quantitative and behavioral valuation techniques, we are able to significantly predict which companies are likely to be the beneficiaries of future favorable earnings announcements and higher earnings forecasts. These predictions can lead to excess returns in stock portfolios.
"A wealth of information creates a poverty of attention"
At Jackson Creek Investment Advisors, we have a distinct view of how the equity markets work and how investors behave. Our philosophy and proprietary models are strongly rooted in the academic study of economics, security analysis, and behavioral science.
Harnessing Market Pyschology
Our internal research suggests that security prices and investment returns are influenced by changing investor expectations…and that investor expectations are strongly influenced by earnings surprises reported by companies and estimate revisions made by Wall Street security analysts. Often, one earnings surprise is followed by another, and another, but investors seem “surprised” by each announcement.
In addition, Wall Street analysts do not behave in a manner consistent with the tenants of a completely efficient market. To the contrary, sell-side Wall Street analysts are influenced by a complex set of factors, ranging from the inherent difficulty of forecasting future profits, overconfidence, availability bias, group think (including a desire to fit within their peer group), behavioral herding, concerns about reputation and compensation, and pressure to maintain relationships with management teams, among other factors. Our models allow us to analyze behavioral patterns of analysts and find investment opportunities where systematic errors in earnings forecasts are likely to persist.
The first step in our investment process is to apply a series of proprietary quantitative models to our investment universes. Jackson Creek's quantitative model - which includes several sub-models that anticipate security analyst behavior, predict earnings surprises, and assess valuation - ranks all stocks in an investable universe on a daily basis. These rankings correspond to the greater or lesser likelihood of a particular company announcing a positive earnings surprise or receiving a positive analyst revision - events which are often associated with excess stock returns.
Over the years we have conducted extensive research that validates the quantitative model's ability to predict earnings surprises and estimate revisions. We believe the models are able to be predictive at a high level of significance among ranked deciles of stocks, but within the most attractive decile, for instance, the predictive success is dependent on analysis conducted by the investment team. This is important in that we construct concentrated portfolios and we seek only the most attractive stocks for our holdings.
Optimizing Factor Exposure
Using analytical tools that are distinct from those of portfolio management, the risk management process assesses the risks embedded in the strategy. We closely monitor the levels and trends of fundamental factor exposures, economic sector exposures, and the composition and magnitude of residual risk versus various benchmarks and indices. This risk management process has resulted in stable sector and style exposures, and a realized beta significantly lower than the market.