Overcoming career risk in the fund management game
It’s commonly stated that career risk is among the biggest factors that drives the perceived under-performance of most active managers. The evidence suggests that as successful managers attract more capital and their remuneration increases, they tend to regress back to the benchmark. But why is this so?
With success comes more assets under management and eventually the attraction of institutional or ‘wholesale’ capital. These types of investors tend to track performance on a regular basis, as short-term as three months at a time, and are quick to question any under-performance, particularly where they are paying an active fee.
Naturally, portfolio managers, like many of us, have a fight-or-flight instinct, with ‘flight’ in this case being to revert to the benchmark rather than risk under-performing. The Australian market has a large representation of this strategy, with the regular SPIVA assessments conducted by S&P showing consistently that a large majority of “active” strategies tend to underperform.
One manager that does not hug the index is Monash Investors. The firm was founded in 2012 by Simon Shields and Shane Fitzgerald after both had successful stints at UBS, and it may well be among the most well-credentialed “boutique” managers in the country. The firm runs a single strategy, the Monash Absolute Investment Fund, which it suggests has the simplest, but highly appropriate, objective, being “to generate double-digit returns….and avoid loss of capital over the medium-term.”
After close to a decade in operation, Monash has garnered assets under management of $90 million with investors attracted to its forthright views and more recently, its very consistent returns. Despite a strong long-term history, which has seen it deliver 11.3% a year over the last five years, compared to just 6.5% for the S&P/ASX 200, 2020 may stand out as a watershed year for the firm.
On returns alone, Monash has done enough to earn the attention of the market, delivering a return of 45.5% over the 12 months to February, a full 30% higher than the 3.6% delivered by the benchmark. Yet it isn’t just in performance where it has delivered, but also in both its stock selection and risk control.
According to the team, Monash was quite positive on equity markets in February 2020, but “that change when we were able to read between the lines of the disclosures made by the Centre for Disease Control and Prevention in the US” in February. At this point the team decided to “sell positions and establish short positions in companies whose deteriorating business outlook impacted their valuations the most.” This included, most obviously, companies involved in overseas travel and transport. With its willingness to forget about “career risk” in focus, Monash lifted its cash holding from 20% to 50% in a single week, protecting investors from a significant crash.
Success in managing funds isn’t all about avoiding the losses, but also having the wherewithal to deploy capital back into markets at the appropriate time, which Monash did. The firm has been long-term investors in the one-and-only Afterpay Ltd (ASX: APT), which bottomed at just $8 in March 2020 before soaring as high as $150 in early 2021. Monash managed to look through the constant speculation and concerns of “excessive” valuations of APT to deliver solid compounding returns to its investors by sticking with what it knows best; ignoring the index and investing in compelling company stories.
Commenting on the Afterpay position, Shields notes that the holding was completely removed from the portfolio on February 12, with the last parcels sold at a price of $153, just shy of the all-time high of $160. And rather than move on completely, he confirms that the firm “still likes Afterpay, and if the opportunity presents itself to buy the stock again at considerably lower prices, we would consider doing so.”
It is this willingness to be different, and hold a highly concentrated portfolio, that has enabled the consistently strong returns the firm has posted. Ultimately this has brought Monash a number of awards, including 2020’s Hedge Funds Rock Alternative Investment Winner. The fund is able to invest across the entire spectrum of ASX-listed companies, with the ability to take both long and short positions
Two contributors to the strong performance in 2021 are holdings in gift and prepaid card provider EML Payments (ASX: EML) and costume jewellery retailer Lovisa (ASX: LOV), both of which ran their businesses relatively well during the pandemic, but are even better placed for the recovery. These holdings are among just 17 individual positions in the portfolio, with just two of these short trades, in what may be a positive view on the prospects for 2021.
Long-short strategies are among the most popular in investment markets at the current time, yet they require a unique mindset and skill-set to deliver on both the return and capital protection objectives that investors seek.