The Macquarie bank equity quant team has some of the brightest minds in Australian finance. Usually they are focussed on extracting value from the stock market.
But one day each year they turn their considerable talents to running their models over the Melbourne Cup field.
They have a 5 factor model which includes value (cheapness), momentum (how the odds are moving), sentiment (last available odds), quality (winning percentage) and innovative data (form plus the factors we use in our own model such as barrier and so on).
The model then ranks each horse in order on these criteria and the team place a bet on the top horse and box up the top 4 horses into a trifecta.
Their picks for 2014?
Lucia Valentina, by a head to Signoff with Fawkner coming in third and Mutual regard in fourth and a big gap to the rest of the field.
Here’s their full results:
The model this year also allows for some current market forces. “For example, We adjust our strategy slightly this year to allow for the Japanese funny business. We firstly put an each way bet on [Japanese runner] Admire Rakti.”
They add the following adjustments for the 2014 updates to their model:
- The Australian economy continues to face the prospect of low growth as we transition from mining led growth to broader based, consumer and non-mining led growth. Our equity strategy team recently reiterated this in and their stock preferences. The market is clearly being divided into winners and losers and investors have been seeking growth exposure via offshore earners. We place a tilt to proven international horses but still favour those who have Australian form (Quality, reliable horses).
- The Halloween announcement by the Bank of Japan also raised eyebrows here. A sharp drop in the yen gives a nice boost to AUD denominated prize money should Japanese owned, Admire Rakti repeat his performance in the Caulfield Cup. Do the Japanese owners have some influence here? We adjust our strategy slightly this year to allow for the Japanese funny business.
- How we will be betting:
– We firstly put an each way bet on Admire Rakti despite carrying a very heavy weight.
– We then place a bet on the top horse in our model
– And also go for the trifecta using the top quartile of horses. This best mirrors the way we (quants) approach equity investing.
As good (or bad) as any other model.