The pair eventually landed on a model that makes two key decisions: how much money to put in stocks relative to safer assets, and which stocks to buy. It picks stocks based on their momentum -- the only factor observed by Rachmat that has worked consistently in Indonesia.
In backtests over 25 years, the model outperformed the Jakarta Composite by an average 2% annually while giving investors some protection from equity crashes, Rachmat said.
By the time he was ready to deploy his model in the real world, Rachmat had moved to PT Pinnacle Persada Investama, Indonesia’s first quantitative asset manager. In April 2018, the firm started the Pinnacle Granditas Dynamic Balanced Fund, tapping Rachmat as its adviser.
The model’s bullish signal in July prompted the fund to increase its equity exposure to the maximum allowed. Its buying was concentrated in mining stocks because they had been outpacing the market on speculation the government would scrap a requirement that at least a quarter of the industry’s coal be sold in Indonesia, where producers earn less relative to the export market.
“Unfortunately, just one day after we did that, the minister of mines and energy canceled any plans of doing away with the domestic-market obligation,” Rachmat said. “Even with the best statistics in the world, you cannot prevent event risk.”
He has since tweaked the fund’s strategy to make its asset-allocation changes more gradual. Now when the algorithm tells him to shift between stocks and safer assets, Rachmat and his team will use some discretion when deciding how quickly to execute the change.
Whether that’s enough to boost returns and assets under management at the 16.4 billion rupiah ($1.1 million) fund remains to be seen. Even though performance has stabilized after last year’s slump, it’s still worse than 84% of peers tracked by Bloomberg in 2019.
Rachmat said the fund’s volatility remains within expectations and that he’s more concerned with long-term performance than short-term swings.
“We remain confident that this fund will deliver its promise once there is sufficient time to allow its statistical properties to shine,” he said.
This article was provided by Bloomberg News.