Zilla Capital: Embracing Digitalization in Asset Management Strategy
Updated 10/23/2023 6:00:00 PM
Arab Finance: Asset management plays a pivotal role in the Egyptian market, driving investment strategies and helping investors navigate the complexities of the financial landscape. As the country's economy continues to evolve and grow, the need for digitalization and the incorporation of technology that can effectively manage investment portfolios becomes increasingly critical.
In an exclusive interview with Arab Finance, Marwan Younis, Managing Partner and Head of Asset Management at Zilla Capital, talked about the new AI system “Momentum Trading.” He also shared the company’s plans, recent success, and approach to asset allocation, as well as his insights on the evolving landscape of asset management in Egypt.
1-Could you share with our reader the asset management portfolio and strategy at Zilla Capital? Does it cover Egypt only, or does it cover other markets as well?
Zilla has developed a cutting-edge investment system called the "AI Momentum Portfolio," which incorporates artificial intelligence into our stock selection and allocation process. The strategy revolves around identifying and investing in rapidly growing stocks that generate significant returns within a short timeframe. We have extensively backtested this approach for over two years, ever since Zilla commenced its asset management operations. Initially applied across various markets, our current focus is on the Egyptian and US markets. Zilla Capital is in the process of inaugurating its operations in Saudi Arabia, where the Saudi market will be covered starting in 2024.
2-What are the biggest challenges of attracting regional and foreign clients to run their equity and fixed-income portfolios locally?
Currency risks are the biggest challenge, as most investors fear that the devaluation will diminish their investments.
3-What is the current size of the asset under management (AUM) at Zilla Capital, and how has it grown over time?
We started with EGP 300 million; now our AUMs are roughly EGP 700 million.
4-How have the portfolios managed by Zilla Capital performed compared to benchmark indices?
The firm has a track record of delivering strong returns to its clients, with promised returns of 20%-40% annually. Zilla Capital does not benchmark its performance against any index. Instead, the firm focuses on delivering absolute returns to its clients through its unique investment strategy and experienced team of investment professionals.
5-How does Zilla Capital utilize a top-down approach when considering active asset allocation, and how does a bottom-up approach come into play?
Zilla Capital follows a top-down approach to active asset allocation, which involves making allocation decisions based on macroeconomic factors and broad market trends. This approach starts with a comprehensive analysis of the global and regional macroeconomic environment, including factors such as gross domestic product (GDP) growth, inflation, interest rates, and geopolitical considerations.
Once the top-down allocation strategy is established, Zilla Capital incorporates a bottom-up approach to select individual securities within the chosen asset classes or sectors. The bottom-up approach involves conducting detailed research and analysis on specific companies, industries, or investment opportunities.
6-How does Zilla Capital Asset Management balance risk and reward, and what strategies does it use to minimize losses?
Zilla takes an approach of risk and reward ratio of 2:1; this ratio is protected by the discipline of our stop-loss, which is 7.5%, and our take profit, which is 15%-20%.
7-How is Zilla Capital leaning towards digital and technology in its operations and business strategy?
Data-Driven Decision-Making: We place a strong emphasis on data-driven decision-making. We harness the power of big data, artificial intelligence (AI), and machine learning (ML) algorithms to analyze vast amounts of information and extract valuable insights. These technologies enable us to make more informed investment decisions, identify patterns, and uncover hidden opportunities in the market.
Digital Client Experience: We prioritize delivering an exceptional digital experience to our clients. We are in the process of developing user-friendly online portals and mobile applications that will provide clients with convenient access to their portfolios, performance reports, and account management tools. Through these digital platforms, clients can track their investments, review market insights, and communicate with our team in real time.
Our strategy is to become a 100% digital asset management firm by the end of 2024, where client interaction and decision-making processes are all automated via our website and mobile application.
8-Can you tell us about Zilla Capital's asset management financial performance last year?
Our performance in Egypt since inception in the fourth quarter (Q4) of 2022 is 65.83%; in the US, it has been 21.74% since Q2 2023. Zilla Capital started its asset management activity in October 2022.
9-What are some of the potential benefits of momentum trading, and how can investors use momentum to build their portfolios?
Momentum trading allows investors to capitalize on the rapid growth and impressive returns of hot-growth stocks within a short timeframe. This strategy is not suitable for long-term investors, and the only way to utilize it is by partnering with our firm as asset managers.
10-What is the recommended portfolio allocation among equity, gold, fixed-income, and cash for the year ending 2023?
Equity: given the expected economic growth and positive market sentiment, I suggest allocating a significant portion of the portfolio to equities. However, it is important to carefully select a mix of growth-oriented stocks across different sectors. In simpler terms, companies that generate revenue in foreign currencies are attractive investment options due to their earnings benefiting from the devaluation of the local currency and the country relying on these companies to increase their exports and bring in hard currency. I suggest a 50% allocation to equities.
Gold: As a hedge against market volatility and inflation, I recommend maintaining a moderate allocation to gold. Gold has historically served as a haven asset during times of uncertainty and can provide diversification benefits to the overall portfolio. A 10% allocation to gold is advised.
Fixed-income: In the current interest rate environment, I would advise allocating a portion of the portfolio to fixed-income instruments such as bonds. However, it is crucial to consider factors such as duration, credit quality, and interest rate expectations when selecting fixed-income securities. This allocation can provide stability and generate income for the portfolio. A 30% allocation to fixed income is suggested.
Cash: It is prudent to maintain a certain level of cash holdings to capitalize on potential investment opportunities that may arise in the market. Cash can provide flexibility and act as a reserve for deploying capital during market downturns or when attractive investment prospects emerge. A 10% allocation to cash is recommended.
11-Finally, can you walk us through the process of developing a macroeconomic outlook for Egypt and selecting the most attractive prospects in terms of valuation and current financial health?
In analyzing the economic landscape of Egypt, we recognize the importance of assessing interest rates as they play a significant role in shaping borrowing costs, investment decisions, and overall economic activity. The instability in interest rates creates a level of uncertainty, and high inflation rates can impact businesses and investors alike. It necessitates a thorough evaluation of the potential consequences for consumer spending, business expansion, and investment sentiment.
Despite these challenges, one factor that has provided some impetus to the stock market is the devaluation of the currency. A devalued currency can enhance the competitiveness of exports, attract foreign investments, and stimulate economic growth. In turn, these positive effects can contribute to the performance of the stock market as investors seek opportunities to capitalize on the potential benefits arising from the devaluation. Some stocks in the EGX30 have already outperformed the dollar move against the EGP and have already been a good hedge against the severe devaluation that took place starting in March 2022.
These are the criteria for selecting the best candidate for investing:
Identify Potential Investments: Based on the macroeconomic and sector analysis, identify companies or assets within the selected sectors that show promising growth prospects despite unfavorable economic performance.
Conduct Fundamental Analysis: Perform in-depth fundamental analysis on each potential investment, considering factors like financial statements, revenue growth, profitability, cash flow generation, and debt levels, taking into account the existing high-interest rate environment.
Evaluate Valuation Metrics: Assess valuation metrics such as EV/EBITDA ratio, price-to-book (P/B) ratio, and discounted cash flow (DCF) analysis to determine the attractiveness of the investment opportunities.
Compare with Peers: Compare the valuation of potential investments with their industry peers to understand their relative value and identify undervalued opportunities.
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