In an evolving market where agility and precision are key, the Digital Funds Stars Europe Smaller Companies fund stands out with its dynamic and data-driven investment strategy. Managed by Chahine Capital and classified as an “Article 8” fund, it aims to consistently outperform the European small-cap market by leveraging a proprietary momentum model and AI-driven signals. In this exclusive interview, Aymar de Léotoing, Chief Investment Officer of Chahine Capital, explains how the fund’s systematic, bottom-up approach enables it to stay ahead of the curve—adapting seamlessly to shifting market regimes while uncovering under-the-radar small and mid-cap opportunities across Europe.

How would you define the Digital Funds Stars Europe Smaller Companies?

Digital Funds Stars Europe Smaller Companies is an active “Article 8” fund, managed by Chahine Capital, with the goal to achieve long-term appreciation of its capital and to outperform the European Small-Cap market. The strategy uses a proprietary momentum quantitative model to identify the “Stars” performers.

What is the investment philosophy behind this fund?

Digital Funds Stars Europe Smaller Companies is a diversified active fund managed with a pure bottom-up approach using a medium-term momentum model on small and mid caps from the developed European markets. The portfolio constituents are renewed progressively to maximise the chances of holding the best market performers. This results in the ability of the portfolio to adapt to changing market conditions. The portfolio is not stuck in one particular style and tends to “go where the market is going”, switching sectors or geographies or style whenever it’s relevant. The objective is to outperform the MSCI Europe Small Cap on the medium term.

How is the portfolio structured, and how is it diversified?

The fund’s 90 holdings are selected from a universe of circa 1500 European equities, filtered by liquidity and ESG criteria. Each month, 10% of the portfolio holdings are renewed based on our price momentum and AI-driven momentum signals, to ensure the current market drivers are reflected in the fund. The Portfolio Manager vets the companies selected by the model to avoid obvious traps, such as M&A events. The selected stocks are assigned an equal weight, unless we’re in a contracyclical period, as defined by our Economic Momentum indicator. Such a market regime is less favourable for cyclical assets, which leads us to reduce the tracking error. Both portfolio construction schemes are well-diversified.

How is risk managed within the fund, especially in volatile markets?

The fund is meant to be active, so there is some assumed active risk within a robust portfolio construction framework. Risk is controlled at least once a day to monitor a wide set of constraints, which include weights limits applied at individual stock level (max 3.5% weight), at sector and country levels (max +/-15% active weight).  A set of mechanisms have been designed to detect exuberance on the momentum factor and complement the usual investment process. Their activation seeks to mitigate the potential impact of a reversal in the market, and force a repositioning of the fund on the newest trends. By nature, the portfolio construction process results in a well-diversified portfolio at company, sector and country levels.

How does the current macroeconomic environment influence your investment decisions?

The investment decisions themselves are agnostic, including to macroeconomic environment, because the process is mostly systematic and always follows the same investment rules. However, the macroeconomic environment plays some role at two different stages of the investment process. First, the stocks selected by the momentum model directly reflect what is currently driving the market. Second, the dynamics of the macro-economy helps us determine the level of active risk allowed in the portfolio. If the market enters a regime less favourable to cyclical assets, we will reduce the active risk of the portfolio.

Since 2021, the fund has always outperformed its index. What can you tell us about it? What are the keys of this success?

The small caps is the best segment where to apply our momentum strategy. It is usually where the best performers of the whole stock market can be found. It also offers a wide variety of company profiles, often off the radar of most traditional investors, which can be transformed in the best opportunities when selected in a robust approach like ours. Risk control is an integral part of the portfolio construction process, which, coupled with a highly adaptive stock selection, has allowed the strategy not only to outperform its reference index, but also the whole European market since it was launched in December 2016.

What role do you believe this fund plays within an institutional portfolio?

Naturally, Digital Funds Stars Europe Smaller Companies can ideally be used within an institutional portfolio for exposure to European small caps. But its adaptability and its ability to detect off-radar companies can also be used in an alpha-seeking perspective at large as a complement to a classic European equities allocation.