The Proxy Approch

An iterative process that blends high level quantitative models and methods with thematic fundamental analysis.

Iteration is our favorite word and guiding principle at Proxy. Iteration is also called successive approximation, a problem-solving or computational method in which a succession of approximations, each building on the one preceding, is used to achieve a desired degree of accuracy.

Quantitative and Systematic:

We base our investment strategies on experience and expertise but the sheer volume of existing data and the speed by which it is analyzed and processed is changing the world and the field of investment is no different. The team behind Proxy exists of both mathematicians and “old school” fundamentalists that almost ten years ago asked the question(s):

“Can we increase our predictive accuracy if we apply quantitative models on our fundamental thinking and vice versa use fundamental layers on our quantitative models?”. 

Proxy is today the proud owner of a proprietary system that in an iterative way does exactly that. We use this process in all parts of the investment process, starting with understanding potential themes that will be the drivers of the market and ending with the risk control of the portfolio, all in an everlasting iterative process.

InvestmentCycle2

Fundamental and Thematic:

Our investment logic is best described as top-down thematic, which means that our investment process starts by understanding the existing and future themes that according to our analysis will decide what category of companies will be at an advantage or disadvantage, if the theme were to be fully priced in the market. A theme can be as large as e.g. OPEC production quota or as small as a pipeline issue in northwestern Canada. In the next step we categorize our investment universe according to our thematic analysis and understand the stocks from a bottom up perspective.

Have a look at the illustration of typical themes in the oil sector below:

WTI Crude Oil term structure

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Contango situation

When nearby futures prices are cheaper than longer dated contracts, the market is in contango. The drilling activity is modest as it indicates an oversupply situation. If the contango is steep enough, it might be worthwile to store oil in tankers and sell it later at a better price.

Backwardation environment

If market turns into backwardation, nearby futures prices are more expensive than further out. In this environment, storage leads to a loss and if the price level is reasonable, drilling and production activity is high.

WTI more expensive than Brent

If WTI trades at a premium to Brent, companies with production in the US are getting better paid than the European/International counterparties. 

WTI cheaper than Brent

When WTI on the other hand becomes cheaper than Brent, the opposite is true. In this scenario some US refineries have the option to switch from international to domestic supply and thereby increase their margin.

Unique approach

A consequence of oil and natural gas companies producing practically the same product, is that a portfolio of such equities can be analyzed from the combined fundamentals. 

The ProxyPetroleum fund can as such be seen as a virtual oil and natural gas company that can quickly add or dispose assets to benefit from the market situation; to move our full production from Australia to North America is just a click away, speed that a real company could only dream of.