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Dr. Jennifer Rasch: “We optimize the portfolio with artificial intelligence”.

What do you actually do if ETFs or funds do not meet your own requirements? Dr. Jennifer Rasch has made a virtue of this question. Together with her colleague Dr. Caroline Löbhard, she developed an algorithm that filters out the companies with the best possible risk-reward profile from a sustainable stock universe. Jennifer explains in an interview how this works and how high the returns have been so far.

Interview with Dr. Jennifer Rasch

Sustainable investing continues to be the big thing. Fund companies have sometimes moved to paint their ETFs green. For example, my All-Country World Index ETF was turned into an ESG ETF overnight last year. At the same time, I dare to doubt that Meta and Amazon are particularly ESG-compliant holdings. Both are among the top 10 ACWI ETFs.

Most other ESG-compliant ETFs omit the two stocks and have a very different composition among the top-10 companies. Because of this, one can begin to question how sustainable these ESG or SRI ETFs really are.

Actively managed eco funds set completely different criteria for sustainability, but on the other hand have very high total expense ratios. So what to do if you are not convinced about the sustainable products on the stock market? My guest today has also asked himself this question.

A virtue out of necessity

I have Dr. Jennifer Rasch as my guest today. She has a doctorate in computer science and made a virtue out of necessity. Together with her colleague Dr. Caroline Löbhard, a mathematician with a PhD, she developed an algorithm that filters out the companies with the best possible risk-reward profile from a sustainable stock universe.

Using state-of-the-art mathematical techniques and artificial intelligence, a rule-based mix of stocks is created that is truly sustainable and is expected to perform well over the long term.

How the whole thing works, why a start-up was founded from this approach and how successful it is, is what I’ll be talking about with Jennifer in the next 60 minutes. The result is also a slightly different episode that takes a closer look at both theory and practice.

Shownotes

Presented by the Blogger Lounge at Invest 2022.

After a very long break of more than three years, Invest will finally take place again in Stuttgart on May 20 and 21. Of course there will be a blogger lounge again with some bloggers.

I will also be there and am already looking forward to finally getting out of my own four walls again. You can look forward to numerous talks, lectures and discussion panels and be there for free.

Register for free

How does it work? It’s easy! Simply register with the code Finanzrocker here:

*1. step: click on ticketing at www.messe-stuttgart.de/vorverkauf
*2. step: redeem promotion code Finanzrocker22
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This way you save up to 25 Euro. I look forward to sharing with you and you will have the opportunity to meet other people with an interest in finance.

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Listen to the interview with Dr. Jennifer Rasch now

To the summary of the interview

About Jennifer Rasch

Jennifer holds a degree in mathematics and a PhD in computer engineering.

After six years as a Research Associate at the Fraunhofer Institute, she founded the startup Goldmarie Finanzen with Dr. Caroline Löbhard in 2020.

You have a diploma in mathematics and a PhD in technical computer science. What attracted you to the world of numbers and formulas?

I’ve always liked math and love logical thought structures. Studying was insanely hard, but very valuable, also for everyday life.

During my studies I got more and more interested in applications. From mathematics to applied mathematics and programming. All the way to the ultimate application: Entrepreneurship!

Where does your interest in the stock market come from?

Only since I started earning my own money, I started looking into finances and retirement planning. Just one year later, we founded our company “Gold-Marie”.

That’s how it came about: I definitely wanted to invest in sustainable companies – but most sustainable investment products (funds and ETFs) were too expensive for me.

With my background in mathematics, I set up a classical optimization model to create a risk-return optimized portfolio. For now, it was just for me and my current co-founder. There was so much interest from the community that we started a company at the end of 2019.

In 2020, you founded the start-up “Gold-Marie” with your co-founder Dr. Caroline Löbhard. What’s behind it?

At least the name Gold-Marie is unique in the financial industry. We found the name fitting for two reasons: 1. That it is a female name and 2. The meaning of the name. Gold-Marie comes from the fairy tale Frau Holle and is rewarded for her good deeds. Figuratively speaking, this fits in with our approach to sustainable investing.

Your product is a kind of robo-advisor for sustainable investment. How do you rate the robo-advisor market in general?

There are about 30 robo-advisors in Germany. Most of them create a mixture of ETFs and bonds, a mixture of blends, so to speak.

Only about three German robo-advisors create a mix of single stocks, as we do.

In my opinion, a robo-advisor made up of individual stocks makes much more sense, because the combination can be better optimized, it is more transparent, and one’s own preferences and sustainability criteria can be better implemented.

What do you think in general about the sustainable trend especially in ETFs? Is it really as sustainable as promised or just painted green?

Actually, most of these sustainable ETFs differ only minimally from conventional investments. Nevertheless, many invest in fossil fuels, for example, and invest 70% in the same stocks as conventional ETFs. That is simply too little for me.

How do you see the expensive eco funds? Are they more sustainable than ETFs or are there also pitfalls?

They are definitely more sustainable, but also quite expensive. In addition, with the combination of shares mt is still room for improvement.

Unfortunately, you can’t really rely on the EU criteria for sustainable investments. Now there has even been discussion about whether nuclear power and gas should count as sustainable.

I think there is no way around taking a close look at the individual companies and defining for yourself what sustainability means.

What criteria is your mathematical model based on? What role does sustainability play?

We work with a sustainability agency that provides us with sustainability data on a large number of companies.

There are certain exclusion criteria that filter companies. We also monitor how companies react to negative press reports and controversies. Otherwise, the following aspects are taken into account:

  • Greenhouse gas emissions
  • Certain ESG data (Environmental Social Governance)
  • Priorities of the company with regard to the sustainability goals of the UN -> this allows us to set priorities in the portfolios of the customers

The Value at Risk model plays a key role in your formula. Could you briefly explain this again?

We offer risk-return optimized portfolios. This raises the question: What does risk mean?

One measure of risk is volatility, for example. The more a stock fluctuates, the more risky it is. However, upward fluctuations are also valued negatively, which is not so optimal.

That is why the value-at-risk model is more suitable as a measure of risk. Here, the probability is determined with which a share does not exceed a certain loss barrier. However, we are not bound to this model and are always testing new risk measures.

Now you have the filtered companies and the risk model what comes next?

Then our algorithm comes into play, calculating an optimal combination of stocks in terms of risk and return. Using a Monte Carlo simulation, we calculate an estimate of the future returns of the portfolio.

A few years ago, I did an interview with Prof. Dr. Stefan Mittnik from LMU Munich and co-founder of Scalable. Among other things, it was about the VaR model. I see it very skeptically, because there is simply far too much trading, which is to the detriment of returns. The best example was the Corona crisis, but the performance of the robo-advisor Scalable (VaR 25%) was also the worst in comparison. Why does this work from your perspective?

I don’t think Scalable’s performance during the Corona crisis is due to the VaR model.

I agree with you that they traded too much. The mistake was probably that they sold and bought again at the wrong time using market indicators. Namely, selling when prices were falling and buying again when they were rising.

The Corona crisis has probably shown that such market indicators and stop automations are not always optimally adapted to reality and that short-term market developments can only be predicted to a limited extent.

For example, we only restructure the portfolio about four times a year.

How many positions does your portfolio consist of?

Currently about 30 positions per portfolio. In total

t, however, we have over 6,000 companies to choose from. Our agency has told us that in the future there will be about 10,000 companies or stocks that meet our criteria.

What would have been the return on your model over the past years? You guys have done Monte Carlo simulations. And how does it compare to MSCI World, other eco funds and robo advisors?

Over the past few years, the return has been 22% per year, which is higher than comparable investments in some cases.

Backtests of Goldmarie Portfolio Optimizer version 0.1 in performance comparison per year

Why did your model perform significantly worse than Estably, Solidvest and the climate fund during the Corona crisis? Was this due to the VaR approach?

That is always difficult to judge in individual cases. There were also many cases in which we performed better than the average.

We also tested whether our algorithm could optimize the return of existing ETFs such as the NASDAQ100 by adjusting the equity weighting. And indeed, our simulation showed a 7% increase in returns.

Backtests of Goldmarie Portfolio Optimizer version 0.1 in performance comparison with Robo Advisors In

2020, you launched a Wikifolio based on your model. What were the main ideas behind it?

To do a real perfomance test and find out if people are interested in our approach. After the publication of the certificate and an interview on Wikifolio, 250,000 euros were invested in our certificate within 10 days – meanwhile there are even 500,000 euros.

This is how the performance of the wikifolio “Sustainable and optimized” looks like after two years.

There are a few stocks in the wikifolio with a loss in value of over 50%. Was this due to the tech crash or what are the reasons for this? Can something like that not be ruled out according to the VaR principle?

Our algorithm creates an optimally diversified portfolio. We look at the correlation of the stocks so that their fluctuations balance each other out. So we don’t do the diversification manually, it’s a result of the algorithm.

There are also many shares that are overvalued. What role does that play for you?

None. We only look at the hand-picked criteria in terms of sustainability, return and risk.

What are your goals for Goldmarie-Finanzen in the next 2-3 years?

We plan to release a product this year that will allow us to offer personalized portfolios that incorporate personal preferences.

Cost-wise, we plan to be at 1.5% of the invested amount. That’s less than the well-known eco-funds. At the same time, more than most ETFs, but reasonable given our service.

How do you invest your money privately?

I have some safety building blocks, like a sustainable real estate fund, bond fund that I got from my grandma.

Otherwise, various individual stocks, a few enthusiast stocks, and a selection that I have had calculated by our algorithm.

Finally, I’ll do the obligatory word shuffle with you again. I’ll name terms and you say what comes to mind.

Women’s finance

We have made it our mission, especially

Addressing women and encouraging them to invest.

Berlin, the

capital

,

is my home. I live here and we founded Goldmarie here. The FinTech…


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