How we use short-side research to identify great businesses
The Montgomery Global Fund is one of Australia’s leading global equity funds. Since inception in July 2015, the fund has turned $100 into $116. A unique feature is that our global equity fund has actively benefited from short-side research.
Montaka is the Montgomery Global Fund’s sister strategy. The two funds hold the same 15 to 30 long positions in common. In addition, Montaka holds a portfolio of 25 to 40 short positions – essentially, investments that profit as deteriorating businesses fall in value. Apart from being money-making opportunities in their own right, the research process used to identify great short candidates often throws up some wonderful investment opportunities on the long side which both Montaka and the Montgomery Global Fund benefit from.
Take the airline industry as an example. The airline business is typically highly capital intensive and highly competitive, which has led to poor returns over time. On the short side, at various times, Montaka has been able to profit from shorting certain full service European carriers. This work led our global research team to the aircraft leasing companies. They too suffer from overcapitalization and commoditization. Montaka had some success being short certain aircraft lessors as well. Yet the broader commercial aviation space is not all doom and gloom.
During the course of our work on all things planes, we identified two businesses that were capturing a lot of the value in moving people and products by air. They were the plane manufacturers Boeing and Airbus. Effectively, the companies form a duopoly in jet planes allowing them to generate high returns on capital, and a backlog of orders stretching out more than eight years sustains strong growth. At a share price less than EUR50 in the middle of last year we believed that the market’s growth and cash flow expectations for Airbus were particularly conservative – i.e. the stock was cheap. In fact, we thought the shares should be worth at least EUR75. The Montgomery Global Fund bought a position in Airbus.
Fast forward to today and Airbus shares now trade at more than EUR70, representing a gain of more than 40 per cent since the fund first started purchasing the company’s stock in 2016. A fantastic result for our global clients that originated from the nuts and bolts of Montaka’s short research process.
This is a unique attribute of the Montgomery Global Fund. We are the only global equity fund in the marketplace that benefits from proprietary short-side research.
Montgomery Global funds own shares in Airbus.