A little insight in the two market indices that Apple Tree uses for implementing its investment strategy: the leading Dutch index, AEX, and the European index, EUROSTOXX50 (ESTX50). This month we will look at the composition of the AEX and the correlation of Apple Tree Fund with the AEX. Next month we will review the ESTX50.
Composition
The data is as of the end of February and does not reflect the latest banking ‘crisis’.
The AEX comprises 25 companies, and the index is a weighted average of the share prices of the underlying companies, where e.g., ASML makes up 21% of the AEX. Only 4 companies (16% of all companies) make up more than 60% of the index share.
If we look at the sectors, rather than the individual companies, we find that more than 1/3rd is technology, and only 7.7% is financials. That explains why the AEX is performing relatively well during this banking ‘crisis’ but is significantly underperforming when technology is in a slump.
Correlation
What do good or bad months in the AEX mean for the performance of Apple Tree Fund? This correlation can be graphically shown (see below) as well as captured in a number, called R-squared. This number varies between -1 and +1. A value of +1means a perfect correlation, or, if the AEX goes up, the Fund goes up. A value of -1 is the opposite, a perfect negative correlation. A value of 0 indicates that there is no correlation, or that the Fund moves ‘independently’ from the underlying index. R-squared for the AEX – Apple Tree Fund is 0.008, or almost 0. In this case, more precisely, it means that no matter what the AEX does, the Fund can still return a profit.
Data: April 2020 - March 2023
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