True to Label

Whatever fund management asset class you operate within, we sit at a very important inflection point where the macro and micro environments are vexing & challenging in equal measure. Conflicts, notably in Ukraine and now Israel only serve to complicate the geo-politics still further. What worked yesterday may not work tomorrow, what seemed cheap last year can look expensive now.

Given this backdrop, it’s all too tempting for fund managers and company founders to want to pivot fundamentally. The new bandwagon (whatever it might be!) looks more appealing than ever, particularly if recent results weren’t great. Indeed, the concept of pivoting has become fashionable and the veil behind which the last, probably misplaced, pivot is legitimised.

This week we want to talk about the difference between learning from what didn’t work as expected and a fundamental pivot and why we think the former is essential daily and the latter very rarely needed. We touch upon the concept that old school methods or techniques can blend harmoniously with ultra-current thinking.

To illustrate where we land on this subject, we’re going to role play and assume the seat of a deep value fund manager. Unique amongst the entire investment industry – these are the super brave contrarian guys who often have the tightest, most disciplined teams. Fund managers tend to gravitate to deep value almost as a cult, these teams find each other.

In our experience they resemble the most successful professional sports groups with an incredibly definitive focus on their performance culture. To stick to a strategy that can underperform for years on end takes enormous guts and resilience. It’s not putting it too strongly to suggest many from this investment ‘religion’ are determinedly devout.    

So here we are in Q4 2023 running a deep value public equity portfolio that has come off one of the most challenging 3 years stretches in the last 3 decades. We lost a bunch of clients, we didn’t see any inflows, the consultants stopped taking our calls & even our life partners are wondering why we do what we do. The indexers killed it, the growth funds killed it and even the GARP guys did good. There is no way to hide from it, we lost money whilst it seemed even the taxi driver doubled his money since COVID. We were authentic with our investors hoping some would see that if we were making money like the Bay area bigs then something would be wrong wrong. Even that didn’t work, they were calling it a day & calling us dogmatic.   

If we’re a boutique we’re worrying about making payroll and even if we’re a silo in a tier 1 player, we’re getting called into more and more CIO ‘close the door’ meets.

This is the exact moment when we’re at most risk of a pivot and losing everything that we just spent decades building. To butcher Winston Churchill’s phrase, it’s darkest before dawn.

So, we gather ourselves and remind the team of the steel and grit that defines us. We remind the room that we may have the oldest of old school strategies but we also have secret weapons – we have thoroughly modern data about every trade we did for the last 10 years, we use machine learning to help do our bottom up research; we have all the tools to avoid repeating prior mistakes and discover new ones in real time. We can avoid value traps now better than ever before. We’re ready for the next cycle which we suspect is much nearer than it feels.  

We go to our old clients and the new ones and repeat our stance 8 times to get 1 listen. That 1 listen starts to work as growth opportunities diminish and valuations of those vogue stocks start to look horribly stretched as EPS declines. They see that we adapted, we stayed curious, we adapted the ‘how’ but never touched the ‘why.’   

And the point of this tale, during these times of extensive global dislocations we implore our wonderful fund manager friends to stay ‘true to label’ – we appreciate that markets can be irrational for longer than we can all stay solvent but this is your moment to take the best of tech and blend it with what you deeply believe in and hang tough.  

If this paper talks to you, please reach out and tell us about your own journey through an investment wilderness, past the mirages and through to the nectar of double digit returns when the world least expected it…