Are you familiar with the phenomenon of an investment gradually becoming everyone’s favorite, featured everywhere from the economic press to TikTok videos? Gábor Czachesz, the portfolio manager of the VIG ACTIVE BETA fund, which is a rarity in Central and Eastern Europe, demonstrates how we can leverage media hype to our advantage with the help of the appropriate algorithms.

Investors have always sought strategies that allow them to achieve above-average returns while minimizing risks. The funds known as ‘intelligent beta,’ also called strategic beta or factor-based investments, are one such system that has become popular in recent years. What does beta mean, and what makes it intelligent?

Gábor Czachesz: The beta coefficient is an important factor in the capital market evaluation model, which shows how much of a decline can be expected in a stock, or how much more profit can be realized compared to the market average. Therefore, the fund’s return is largely determined by the broader market, but from this, the most promising stocks are selected based on predefined rules or factors. This can result in higher risk-adjusted returns for investors.

The devil is most likely in the details here, namely in the selection of the right factors. What factors does the ACTIVE Beta rely on?

We select the stocks of American and European companies that are currently favored by investors, by applying a systematic approach. The fund’s assets are primarily in foreign currency, and we undertake or increase stock exposure when the leading stock indices are in an upward trend according to the indicators we follow.

How does the ‘favorite’ phenomenon develop on the stock market?

A characteristic of human decision-making is a kind of ‘herd mentality’: investors, whether small or large, accept something as a good investment if others also say it is good. What makes something a ‘favorite’? It requires a good product (for example, iPhone, Tesla), then media attention: the rating spreads quickly through the media universe: analysts pick it up, the financial press reports it, and finally, it reaches social media. This creates a general ‘hype,’ which in turn impacts the operations of the celebrated company: they gain easier access to well-trained labor or cheap financing. Becoming a favorite is often a self-reinforcing process, and we measure this growing popularity.

What is considered such a ‘favorite’ right now? Something that is talked about a lot?”

Naturally, our model is more complex, containing a few ‘secret ingredients’, but for example, how frequently is it mentioned in the media  – which is measurable – is an important factor. Similarly, revenue growth, which indicates that the product has found its target audience and is liked by consumers, signifies momentum. However, financial profitability is not as crucial a criterion in this selection process. The initial composition of the fund includes stocks of companies such as the American chip manufacturer Nvidia, which has tripled in price over the past year due to the AI craze, the British Rolls Royce, which has nearly appreciated as much and is also involved in the defense industry, and the Danish Novo Nordisk, which manufactures weight loss drugs—its market value exceeds the entire Danish GDP. Of course, significant market capitalization and stock exchange turnover are also important: the turnover rate of the fund’s portfolio is above average, so it can change up to twice a year.

The stock prices of technology companies have increased in an impressive manner, but after the April correction, many started to worry. How does risk management work at the fund?

During a prolonged bull market, the ‘favorites’—due to their above-average share price increases—usually become overweight in investor portfolios. However, if a correction period sets in, major institutional investors like to quickly sell the most liquid stocks. Often, these are the ‘favorites’ from which they can also exit with some profit realization. Therefore, ‘favorites’ can not only rise above average but can also fall in the same manner.

It seems essential, therefore, to monitor the broader market trends.

It’s extremely important. Therefore, if our indicators suggest that the general upward market trend becomes questionable, we may completely eliminate the stock exposure. This level of flexibility is reflected in the term ‘active’ in the Fund’s name and is one of its unique features. Based on our experience, such significant restructuring is quite a departure from the practices of traditional portfolio managers.

Who would you recommend this investment for?

Due to its special strategy, the fund – which will also be available in the VIG international network -, can be an effective complement for both private and institutional investors to investment approaches typically based on fundamentals. This investment method is fundamentally time-consuming and costly, suited for professionals, but with the ACTIVE Beta Fund, it is now accessible to a wider audience. The Fund is recommended for investors willing to take significant risks. We advise everyone to consult with their financial advisor to invest wisely in intelligent beta funds in order to fully leverage the associated benefits.