Launching a New Fund
We are excited this month to announce the launch of our Montgomery Alpha Plus Fund. The aim of The Fund is straightforward: to generate positive returns in both rising and falling markets and insulate investors from undesirable market movements.
The Fund will aim to hold a “long” portfolio of high quality businesses that we expect to do well, and a “short” portfolio of stocks that we expect will do poorly. Investing equally in both portfolios should reduce or remove exposure to the market’s overall direction, and creates what is called a “market neutral” fund.
Unlike conventional “long only” funds, whose performance typically depends largely on what the overall market does, a market neutral fund succeeds or fails only on the strength of its stock selection. If the right names are selected for the long and short portfolios, then the fund can deliver positive returns even where the market falls sharply. This structure may have particular appeal where equity markets look expensive, or potentially risky. The flip side is that the fund is not expected to benefit when the market rallies hard.
It is important to understand, however, that having the ability to generate positive returns in all market conditions does not imply generating positive returns all the time. Investing is a long-term game, and there will be periods when stock selection generates positive returns, and periods when it generates negative returns.
In the case of The Fund, the goal is to generate returns after all fees of 6-8 per cent above the RBA cash rate, with a level of volatility less than that of the overall equity market. We can illustrate what this means graphically, and have done so below for a forecast period of ten years.
The red line in the chart shows the growth of a $100 investment at an “expected” return of 8 per cent per annum, roughly equivalent to our return target. The blue lines show an 80 per cent confidence interval around this, assuming volatility of 12 per cent per annum, which is a bit below the typical volatility of the equity market. In other words, we estimate that there is an 80 per cent chance that the investment outcome will be between the blue lines at any given point.
Growth of $100 over Time
What the chart shows is that, even with a lower level of volatility than the overall equity market, there is still a reasonably wide range of possible outcomes, especially over shorter time frames. For example, on these numbers it is feasible that The Fund could deliver a zero return after 36 months or a return of 50 per cent.
An important point to keep in mind is that by removing some market risk, The Fund is able to reduce the length of any drawdown period, and reduce the potential for severe drawdowns of investor capital.
Naturally, we hope for an outcome more towards the top of the range, but in the event our expectations aren’t met, having some protection against calamity makes sense.
Recall that investors in the ASX200 Accumulation Index as at September 2007 waited a significantly longer time to see a positive return, and probably experienced some sleepless nights in the meantime.
To invest or find out more, please visit the fund page on the Montgomery website.