We talk to a Swiss EAM that is tapping insights from behavioural finance, which adopts a systematic investment strategy to do so. It is an example of the degree of specialisation that is happening in this part of the wealth industry.

This news service recently interviewed Taranis, a Swiss asset management business founded as recently as 2020. As we continue to develop and expand coverage of the Swiss EAM industry, we talk to a firm making waves in the space. The interview is with Marco Guardiani, who is involved in their marketing and communications.

The business was founded by Julien Leegenhoek (CEO and portfolio manager), Zlatan Plakalo (partner and portfolio manager) and Guardiani. Before Taranis was created, Leegenhoek was managing an equity thematic franchise focused on technology with Plakalo in a top-tier Swiss private bank. The firm has built a research and development team, including several quantitative and investment analysts.

Taranis says that its “DNA is to take our investment decisions on a market timing strategy”. 

Taranis’ flagship fund, Taranis Market Sentiment, offers a systematic investment strategy that aims to generates returns by harnessing markets' risk, and through its proprietary behavioural finance algorithms. 

“Our investment process leverages different factors such as behavioural trends and global cognitive analysis with rigorous statistical modelling in order to capture market opportunities,” Guardiani told this publication. “Taranis Market Sentiment offers a competitive risk/return strategy that we believe complements a portfolio allocation acting as an `Equity+’ product. We see our technology as unique.”

“In fact, looking at equity funds or ETFs, there is very little homogeneity of strategy between them. When one buys an equity fund for instance, its strategy bundle not only [incorporates] the stock picking of the portfolio management team, but also the portfolio construction and the market view. ETFs, for instance, formulate the stock picking in a rather quantitative way, with a fixed market view. In both cases, the market view is not elaborated in a systematic dynamic way,” he continued.

“To differentiate from the market, at Taranis, we have developed what we believe is a unique technology to evaluate the probability of the market to go up or down, based on market sentiment. Our algorithms gather multiple sets of alternative data, that we combine to generate trading signals on the S&P 500 index. We wanted a stand-alone vehicle to show the proof of concept,” Guardiani said. "Going forward, we aim to launch more investment products, and our market timing will be the key building block of our portfolio construction in every fund. We believe that this unified view of the asset management base can be very transformative.”

Guardiani argues that Taranis brings a “fresh spirit” to the investment world. 

We asked Guardiani about the case for adopting behavioural finance.
“Behavioural Finance is not a new topic in economic theory. As early as 1936, John [Maynard] Keynes already questioned the validity of the `homo-economicus’, introducing the notion of `animal spirits’ in his General Theory of Employment, Interest and Money: `markets are moved by animal spirits and, not by reason’,” he said.  

“In the 1980’s, finance theorists began to challenge the consistency of the efficient market models, as empirical data were showing various anomalies, inconsistent with traditional models. Behavioural finance theories sprung up and gained traction in academic research. Later, Nobel prize winners Akerlof (2001) and Schiller (2013) detailed the effects of animal spirits – such as overconfidence, fear, bad faith, corruption, a concern for fairness – in understanding economic and financial cycles,” Guardiani continued.

Empirical finance research has also shown that less than than 10 per cent of market movements on major stock indexes are explained by fundamental factors such as earnings, dividends, or macroeconomics (i.e., Goyal, Welsh 2008). At Taranis, we try to address a part of the unknown through behavioural finance. Our own way to apprehend markets is to analyse its participants, their behaviour and ultimately their risk appetite. Indeed, we believe that investors' positive (negative) mood causes periodic optimism (pessimism) in evaluating assets’ systematic and idiosyncratic risk and thus, correlates with their demand for risky assets.

“Despite recent advances in the field of behavioural finance, we still believe it is an emerging field of research and offers tremendous prospects to better understand stock markets. In our peers’ group, we find many big players, such as Franklin Templeton, Pimco, Alpha Z or Dominicé & Co, already including behavioural factors in their strategies. However, we believe that our exclusive focus on behavioural finance, our alternative datasets and our technology make our strategy stand out from our competitors.”

“Behavioural finance is still an emerging field of research in economics, despite the tremendous advances we have seen in academic research over the past two decades. As technology is moving forward with new techniques (e.g., machine and deep learning) and as the amount of data available continues to grow exponentially, we believe there are still plenty unexplored opportunities to make the right bridge between academic research and investment strategies.

“In addition, despite the oldness of the notion of `animal spirits’, quantifying its effect is rather nascent yet achievable, as stated by Alan Greenspan in 2009: `Fear, euphoria, time preference, herd behaviour – all can be defined in term of numbers’.

“Hence, we are very enthusiastic with the years of research ahead to better understand how complex financial markets work. We believe that behavioural factors will become as important as fundamental factors in portfolio construction. As with any approach to asset management, we think their efficiency is inherently dynamic and time-varying. Hence, investors must continuously reassess their validity in order to maximise their outcome."

Clearly current events have shocked markets and given examples of how emotions can grip markets. Any comments or any lessons from this? 
“Indeed, financial markets had to cope with various shocks over the past two years, with strong fears embedded in the market, that translated into a prolonged period of increased volatility. The market felt constantly on the edge since our launch. Looking at the VIX index, it has been trending above 15 since the pandemic. 2021 saw five occurrences with a VIX index crossing the 25 threshold: January meme-stock frenzy, the rising rates in March, May and November, and the market correction of September, underlining market nervousness.

“However, stock markets and specifically the S&P 500 index have nevertheless posted strong returns, with 2021 being in the 15 per cent most positive years historically. This bullishness translated into 75 per cent of months with a positive performance. Despite market volatility, we could see a market sentiment that remained overall positive during that period, with our longer-term indicators. However, throughout that period, we could see a period of drastic change in investors’ sentiment and fall 2021 is a good example of it. 

“Indeed, we could observe an erosion of investors’ bullishness coming out of the summer, and September was the worst month of 2021 on the S&P 500 index. Interestingly, investors’ nervousness in September flipped into a period of high bullishness, with October being the best month of 2021. We believe our shorter-term indicators were able to capture a good part of those trends. As such, our strategy ended the year with 49 per cent net return for our investors. 
 

What do you think gave you the competitive edge this year? 
“Since the launch of Taranis, we believe our competitive edge lies in our combination of technology and science with human and market experience, in order to offer a differentiated product that, we hope, continues to perform in the future. Our flexibility as a small company, our curiosity and passion about stock markets and our talented team help us continuously challenge ourselves and improve our strategies. The key to success is continuous research and development, across all steps of our investment process, which allows us to offer a unique strategy that gets better every day.

“Our biggest challenge has always been to ensure that our strategy offers the most compelling features to our clients, from performance to liquidity, to communication etc., and to bring a team of young talented people together to work towards that exact goal.

“In 2022, we expect to expand our trading strategies (e.g., more geographies and more instruments) and to continue growing our team further. 

“All full-time members of our team are under 40. We live and breathe a startup culture: innovative, fast, out of the box, aspirational. Our competitive advantage is the result of the team's commitment and the quality of the product we bring to market. At Taranis, we always try to give the best of ourselves without looking too much at competition. We like to think that we don't compete with others, but we compete with our former selves. We are strongly convinced that success comes with time and requires hard work and passion, and this is the mindset we want to preserve in the future.

How did your firm react to the pandemic and what lasting changes do you expect from this period? 
“Our company was founded during the pandemic. In fact, our product was launched on 28 December 2020. In a time of general uncertainty, we wanted to take this risk and commit our team towards our goals. We realised that our flexibility and commitment were key success factors during such time. 2021 confirmed that all our efforts were not in vain and strengthened our mindset for the future.

What do you see as the prospects for wealth management in general? 
Wealth management has a lot of great opportunities in many ways: asset classes, flexibility, quality of the experts and technologies available. Adoption of new technologies, together with changes in the approach to customer value creation are the main determinants of the change now and in the future. However, we believe that one element is missing: the market timing. We offer to our closest clients a vision of the market timing that we have in our product Taranis Market Sentiment. Bundled to the full range of products available for clients, we believe that the market timing can make a great difference.  

To whom do you look for inspiration and ideas? 
“The origin of Taranis started when our CEO, Julien Leegenhoek, began his journey to understand the roots of humans’ collective behaviours. His inspiration and ideas were coming mostly from outside the financial world. Being a big collector of old books, Julien brought his various influences, from science, myths to history, to Taranis. Gustave Lebon, for instance, has described his view on collective behaviours in his book The Crowd: A Study of the Popular Mind. Interestingly, he described how a group of clever people can collectively [behave] without common sense, notably because of people’s tendency to adjust to the lowest common denominator. David Landes in The Wealth and Poverty of Nations describes very well the determinism in history, making it more understandable. Arsène Wenger has been very inspirational, given the positivity he could bring to a team and his use of new technologies on the pitch, continuously measuring new sets of data.

"Those statistics helped totally reshape the way of training and [programmes] diets of players. Not to forget the most famous hedge fund managers, James Simons, Ray Dalio or Kenneth Griffin, to cite a few, with their unique approach to the market and the world, and their unique capabilities to go from an idea to a successful company. As behavioural finance is a nascent field where a lot has yet to be created, we are getting our inspiration from various field and backgrounds."