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Downside Protection, Without Upside Reduction

22012019_downside protection

Downside Protection, Without Upside Reduction

Global equity investors were certainly tested during the December quarter of calendar 2018 (4Q18). Over this three-month period, the Global Equity Market, as represented by the MSCI World Net Total Return Index in Australian dollar terms, declined by 11.0 per cent.

Screen Shot 2019-01-21 at 10.53.46 am

Source: Bloomberg

Our Montaka strategy seeks to significantly protect the downside in market conditions such as those in which we recently found ourselves. As shown below, Montaka declined by 6.1 per cent, net of fees, over the December quarter – representing roughly half the decline of the Global Equity Market.

Our Montaka strategy includes a portfolio of short positions in global businesses we identify as being structurally challenged, misperceived and overvalued. In periods of market decline, these positions often generate profits to help cushion any declines in Montaka’s long portfolio.

Screen Shot 2019-01-21 at 10.46.47 am

Note: Montaka returns shown are net of fees

Source: MGIM

Importantly, however, our Montaka strategy has not forgone the upside in strong market conditions. Shown above are Montaka’s returns since inception three-and-a-half years ago of 27.7 per cent, net of fees. This is higher than the 25.5 per cent return delivered by the Global Equity Market. We call this: downside-protection, without upside-reduction.

You can learn more about our Montaka funds here.


Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Why in the discussion of Montaka, it is commonly compared against the MSCI World TR Index on the blog which is an equity index.

    But in the PDS for performance fee’s the benchmark is the 10year US Treasury bond rate?

    Which should i use as a measure for performance comparison?

    • Hi Jon,
      We believe the 10YR bond rate is more appropriate given the low average beta (or “market-riskiness”) of the Montaka portfolio, which has averaged around 0.3x. Through this lens, Montaka is arguably more bond-like than equity-like.
      We show Montaka relative to the MSCI World TR Index in this blog for interest only. In our view, it is a genuine achievement for Montaka’s 0.3x beta portfolio to outperform a 1.0x beta MSCI World Index, after all fees.
      Hope this is helpful.

      • Thanks Andrew,

        That’s been perplexing me for a while.

        So with the lower beta is this preferable with short investment horizons vs something such as Montgomery global? Or since they both have 5 year horizons in the PDS, its just a different product with different characteristics.

        Is the expectation then that the lower beta under performs vs a 1.0 beta over the longer term? Or the fact that you can achieve gains on the upside and downside outperforms in more market conditions?

      • Hi Jon,
        I think you are right to characterize Montaka as simply a different product with different characteristics.
        We would expect Montaka to protect more of the downside in a declining market environment than the Montgomery Global Fund.
        Montaka also has more flexibility to vary its beta (or exposure to the underlying market risk) depending on market conditions.
        So more flexible and more versatile than a typical long-only fund would be a fair characterization IMHO.
        All the best,

      • I always thought the 10y benchmark would be appropriate only if the fund was neutral or near to it. But as long as the fund keeps performing the way it is, can’t complain. I wish the fund had gone neutral when I questioned Roger on it a few months back. He said there needed to be a ‘catalyst’ though (to move towards market neutral).
        On another note I would be interested to to read another update on your thoughts for the AUD given it is such an important driver of returns for Montaka (and a big reason for why I invested).

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