Montgomery Global Investment Management (MGI) has joined a growing cohort of offshore managers pitching to the NZ market.
In a just-inked deal with third-party funds marketing firm, The Investment Store, the Sydney-based the $500 million plus MGI is testing NZ interest for its pair of value-oriented global equity funds.
Chris Demasi, MGI co-founder, said the manager was promoting both a long-only international shares fund and a long-short variant (under the Montaka brand) to NZ investors.
Demasi said both funds were targeting value assets with an eye on downside protection with the latter factor attracting more interest as investors anxiety about toppy share markets continues to rise.
“Initially, people would talk about wanting downside protection,” he said, “now we’re starting to see them put their money where there mouths are.”
As at the end of July, MGI assets were divided roughly equally between the long-only and long-short strategies, which both now boast a three-year track record.
“At heart we’re value investors,” Demasi said. “We’re trying to buy a dollar for 50 cents. We want to buy stocks with low expectations built in as they’re the ones best able to outperform.”
He said the MGI long-only strategy focuses on identifying under-priced “high-quality firms with structural tail winds” while sticking to disciplined buy and sell processes.
“Quality is not the same as brand,” Demasi said. “We’re looking for businesses with a set of competitive advantages that can extract high returns on incremental capital.”
For example, the long portfolio includes UK-listed wealth management firm, St James’s Place, which has emerged as the largest advisory firm in the country over the last few years.
Demasi said St James’s Place has accrued some 4,000 financial advisers under its banner and about £100 billion under management by servicing a growing, and aging, UK retail investor market.
But the current St James’s Place share price of £11 implies almost zero growth in the business rather than the strong upward trend the MGI analysis suggests.
“The share price has appreciated about 20 per cent each year and we see this continuing,” Demasi said.
Typically, the MGI long-only fund holds between 15 to 30 “high conviction” stocks with the ability to move to about 30 per cent in cash. Since inception in June 2015 the fund has returned 47 per cent after fees compared to 35 per cent for the benchmark MSCI World index.
Meanwhile, the Montaka portfolio includes a similar mix of long stocks along with between 25-40 short positions.
Demasi said each short follows a “stock specific” strategy rather than hedging approaches such as pairs-trading.
“It’s an active portfolio of shorts looking to generate absolute returns,” he said. “It’s not just an inverse of the long portfolio; a great short is not the same as a poor long.”
The manager uses four criteria to identify short candidates that are: in a declining industry; over-valued; carry “asymmetric risks” such as looming regulatory change; and, market “misperception” that has failed to pick up on “creative accounting” or even corporate fraud.
“To stay in the [short] strategy you need the first two elements,” Demasi said. “But it’s the other two points that can trigger dramatic overnight falls.”
In July 2016 the manager has lumped the Campbell’s soup company in its short portfolio betting the market had mispriced the firm that was facing potentially disadvantageous consumer trends while holding high debt levels and declining core profitability that was masked by acquisitions.
Campbell’s share price has fallen about 40 per cent since Montaka lodged the short, Demasi said.
“We still have to educate people about the long-short process,” he said. “But investors in NZ are generally sophisticated and understand it well.”
On tour in NZ last week, Demasi said investors here were keen to explore new options.
“NZ investors and advisers were early adopters of global equities [compared to Australians] and we think we have the right strategies,” he said.
MGI has nine staff including six on the research team, of which a couple are based in the firm’s just-opened New York office.
Both MGI funds are available to NZ investors as Australian unit trusts under the trans-Tasman Mutual Recognition regime
Last month another Australian-based global equities firm, Antipodes, set up shop in NZ offering long-only and long-short products as portfolio investment entities fronted by Wellington-headquartered firm Implemented Investment Solutions.
The arrival of MGI and Antipodes heralds a competitive time for Australian-based global share managers with perennial favourites Magellan and Platinum still drawing the Kiwi crowds.