The NavrTraDE System
The NavraInvest investment management approach is based on the proprietary NavTraDE investment management system which used the concept of Dollar Cost Trading.
The concept of Dollar Cost Trading
In its absolute simplicity the quantitative NavraInvest approach suggests that, as the share price of a quality blue chip share declines, so the share represents a better purchase value opportunity (the share is cheaper). The reverse applies; so as the share price increases in value, it will represent an increased potential for profit taking.
Dollar Cost Trading involves buying potential value at the lower points and frequently locking in gains by selling at higher points, thus maximising the potential from share price volatility. The NavTraDE investment management system quantifies what constitutes relatively low and high points in the actual share price.
It makes intuitive sense to buy shares in quality companies when the share price is falling and to sell when the share price is rising. However, it may take considerable time for share prices to recover to previous levels and beyond. Therefore the full benefits of Dollar Cost Trading will be realised over the medium to long term.
Dollar Cost Trading differs from Dollar Cost Averaging as the latter is only an averaging technique, as its very name evidences. Dollar Cost Averaging does not attempt to identify low and high points but simply involves a set amount being used to purchase shares at regular time intervals.
The proprietary NavTraDE investment management system
The NavTraDE system is applied individually to each share in the portfolio rather than to the overall portfolio. In other words it is share specific.
The software identifies and quantifies buying and selling opportunities that occur for each share when sentiment to the share becomes unduly optimistic or pessimistic, as reflected in share price movements such as those in the chart below.
Falling share prices are regarded as an opportunity. The system 'reacts' to the movement of the current share price. When share prices fall, the system tends to generate buy signals, and when share prices rise, the system tends to generate sell signals. The amounts and number of buy and sell orders vary and tend to result in a steadily increasing or decreasing exposure to a particular share.
Consequently the portfolio is actively traded so that realised gains or losses are generated frequently. The net gains or losses are reflected in the daily unit price of the fund.
The NavTraDE system is a quantitative approach that does not rely on subjective forecasting.
Whilst a positive annual return may not be achieved for all individual shares in the portfolio, our aim is to generate a positive absolute annual return for the whole portfolio.
Income from Navra share portfolios is generated from net realised gains, interest from cash balances and share dividends. Imputation credits are subject to the length of time the dividend paying shares are held by the portfolio.
Thus NavraInvest applies a unique quantitative approach to actively manage the shares in the portfolio; we do not follow a "buy and long term hold" approach. The quantitative approach also means that we are not dependent on a fund manager deciding when to buy and sell shares as a result of fundamental and /or technical analysis and intuition.
- The process is objective and disciplined and hence is repeatable
- Gains are regularly locked in and are taken prior to potential share price falls
- The NavraInvest active trading approach can be applied to any share market (provided high quality shares can be identified by research)
- The NavraInvest system can be applied automatically at all price levels for each share
- The larger the size of the portfolio, the greater the economies of scale in terms of both fixed and variable costs such as brokerage
Active management of each individual share means that the portfolio will not always be fully invested in all shares in a portfolio at the same time. Realised gains from shares which have a rising share price are used to buy into shares which have a falling share price.
Thus NavraInvest trades shares in a manner that is contrarian to most investors, meaning that shares tend to be bought when the share price is falling, and sold when share prices are rising. Such trading means that in general it is easier to fill orders and have the market meet our desired buy or sell price.
As a result of active trading, the cash portion of the portfolio can potentially vary from zero to 100%. The portfolio will tend to be fully invested in shares in a falling market.
On the other hand, in a rising market, it is unlikely that the portfolio will be 100% in cash as it would be unusual for the prices of all the shares in the portfolio to peak at the same time.
The system is not predictive in any way. It is purely reactive. No projections are made of any financial aspects of each company. There is, however, an assumption that the share prices of quality shares which are oversold, will eventually recover, however long it takes.
It can take many months and in some cases years for the full potential gains to be realised. Therefore the recommended time frame for investment in Navra Funds is at least 5 years.
In terms of management style, we regard the NavTraDE investment management approach as style neutral because performance is not dependent on the style classification of each particular share. For the NavTraDE system to perform it requires volatility of the share price, preferably on a rising trend. In effect, this is how most quality share prices behave over time, that is, they rarely rise or fall in a straight line.
Active investment management adds value
The following shares were traded in the Navra Fund. In all three scenarios below, the NavTraDE system improved the buy and hold return by actively trading and locking in realised capital gains. Even when a share price falls, it is possible to add value by lowering the average buy price.
Rising Share Price
BORAL
Buy & Hold: 23.28%
NavTraDE system: 33.99%
Out performance: 10.70%
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Steady Share Price
FUTURIS
Buy & Hold: 0.00%
NavTraDE system: 15.45%
Out performance: 15.45%
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Falling Share Price
LEIGHTON
Buy & Hold: -10.18%
NavTraDE system: -3.37%
Out performance: 6.81%
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