Home / News / Overcoming career risk in the fund management game

They say that career risk is among the biggest factors that drives the perceived underperformance 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 underperformance, particularly where an active fee is being paid.

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 underperforming. The Australian market has a large representation of this strategies, with the regular S&P or SPIVA assessments showing a large majority of ‘active’ strategies tended to underperform.

One manager that isn’t hugging the index, is Monash Investors. The group was founded in 2012 by Simon Shields and Shane Fitzgerald after successful stints at UBS and may well be among the most well-credentialed ’boutique’ managers in the country. The group runs a single strategy, the Monash Absolute Investment Fund, which they suggest has the simplest, but appropriate objective ‘to generate double digit returns….and avoid loss of capital over the medium-term’.

After close to a decade in operation, the group have managed to attract assets under management of $90 million with investors attracted to their forthright views and more recently their consistent returns. Despite a strong long-term history, delivering 11.3% per annum over the last five years, compared to just 6.5% for the ASX 200, 2020 may stand out as a watershed year for the group.

On returns alone Monash have done enough to garner the attention of the masses, delivering a return of 45.5% over the 12 months to February, being 30% higher than the 3.6% delivered by the benchmark. Yet it isn’t just in performance where they have delivered, but also in both their stock selection and risk control.

According to the team, they were 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 they decided to ‘sell positions and establish short positions in companies whose deteriorating business outlook impacted their valuations the most’. This included, you guessed it, overseas travel and transport. With their willingness to forget about ‘career risk’ in focus, Monash reported increasing their cash balance from 20% to 50% in a single week, protecting investors from a significant crash. 

As we know now, it isn’t all about avoiding the losses, but also having the wherewithal to deploy capital back into markets at the appropriate time, which they did. Monash have been long-term investors in the one-and-only Afterpay Ltd (ASX: APT), which bottomed at just $8 in March 2020 and then reached as high as $150 in early 2021. The group managed to look through the constant speculation and concerns of ‘excessive valuations’ to deliver solid compounding returns to their investors by sticking with what they know; ignore the index and invest in compelling companies.

Commenting on the Afterpay position, Shields notes that the holding was completely removed from the portfolio on the 12^th of February, at a price of $153, just shy of the all-time high of $160. And rather than move on completely, confirmed that they ‘still like 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 and ultimately 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 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, 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 require a unique mindset and skill set to deliver on both the return and capital protection objectives that investors seek.