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Launching a New Fund

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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.

Tim joined Montgomery as Head of Research and Portfolio Manager of The Montgomery Fund in July 2012. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Before joining Gresham Partners, Tim worked for McKinsey & Company for four years, where he was involved in strategic consulting in both Australia and Denmark.


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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice 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 advice from a financial advisor if necessary.


  1. Tim is this fund just an Australian copy of the Montaka Global Fund that to date has been by fare the worst performing of all the Montgomery Funds and if so why should it do any better then Montaka . Some times it appears the team is been spread a little thin and moving away from its expertise position that it excels at .

    • Hi Neil. I think it is a mistake to judge Montaka (or any comparable fund) over a one year period for the reasons set out in the article above and the comments below.

  2. Hi Tim,

    Like Jason I am perplexed at the use for the cash rate as your bonus benchmark. By all consensus estimates it is expected to stay quite low for a significant amount if time i.e. > 7 years.

    More disturbingly your rationale for “market neutral” funds is worrying.
    This fund has the opportunity to make money both on the up for high quality stocks & down for poor quality stocks or those expected to face significant headwind i.e. it has a higher risk that a “long only” fund. Accordingly, your modelling shows the high variations expected if things go wrong.

    The investor should therefore be rewarded for the extra risk as should the manager. From an investors perspective, using the Cash Rate as your benchmark appears to only reward the manager. I would think that a more appropriate benchmark would be that which represents the average cap rate of all stocks you hold in the fund which may be ASX300 or ASX 200 or even small cap.


    • Hi Joe. There are a few things to keep in mind here. Firstly, the structure of the fund is intended to reduce risk by removing the effect of market movements, not increase it. Secondly, in the case of a short position, dividends are an expense – not income – for the fund. Accordingly, cap rates are not really a suitable benchmark. The use of a cash benchmark is very much the norm for funds of this type. I accept that the manager needs to generate significant value to make the overall risk/return profile attractive to investors. Time will tell if we can generate the necessary value.

  3. Paul, if you are looking at performance of any given ‘long term investment’ with any less than 5 years of data then managed funds may not be your go. Its fair to say with the ups and downs of cycles within equity markets my personal belief is a 7 year time frame is an even better period to judge a fund managers performance.

  4. I invested in the global fund and have been very disappointed with the mediocre returns with little explanation from the team. How many products does Montgomery plan to release? I just hope the development of all these spin off funds are not distracting from the main task of generating solid returns.

    • Hi Paul. What sort of time frame do you have in mind when evaluating investment performance? This is an important consideration, as noted in the article above.

    • Hi Paul,

      I’ve also invested in the Montaka Global, but i think reading the bi-monthly reports, their current performance makes sense based on market movements and general market behaviour and I expect (and am excited by) drops like this where market expectations move further away from reality and value investing underperforms. Great time for a rational investor to buy more s(t)ocks when shorting is an option.

      Ahh to have seen the nintendo short in advance *sigh*

  5. Hi Tim
    The Montgomery Team has expressed the view for sometime that our market is expensive and quality stocks are hard to find at fair value.Won’t the Alpha fund be competing in a crowded space in Australian & NZ long stock positions and
    will be heavily correlated to the Montgomery fund on the long side?

    • Hi John. The long side will have some overlap with the domestic funds, but also significant differences, due to the more extensive use of computer models to construct the portfolios. As an example, the Alpha fund will choose long positions that complement its short portfolio to manage the overall balance of risk and return. Importantly, the Alpha fund does not mind if the market is expensive: it just needs to be able to build a long portfolio that is more successful than its short portfolio in order to generate positive returns.

  6. Hi Tim,
    Why have you used the RBA Cash Rate as the benchmark for your 17.5% Performance Fees to kick in. With the RBA Cash Rate at just 1.5% currently, this appears to be a very low hurdle to earn a performance fee.


    • The cash rate is indeed low at the moment Jason (though presumably won’t always be at this level). Market neutral funds use cash rates as the benchmark because it requires manager skill to generate returns above that level in a market neutral fund. In that sense it is equivalent to using (say) the ASX200 as the hurdle rate for along-only fund. The excess return above that rate that reflects value-add by the manager.

  7. Levi Boschetti

    Hi Tim,

    Will this fund be available through netwealth?

    Also will the global funds ever become available through netwealth?



    • Unfortunately, many platforms require an independent research house to have “rated” the fund and to see demand from investors/ advisers before they will add the Fund to their investment menu. These research houses usually require 12-24 months of performance history before they will consider rating the fund. We are working with these research houses to try and expedite their review of the Funds, but in the meantime, if you are happy to advise them of your likely support of the Fund then that would help on the demand side.

  8. Chinese walls?
    Since the Montgomery team is relatively small, do all the Montgomery Funds independently of each other? Can one Fund be betting against another Fund either knowingly or unknowingly.

    • Hi Ron. Far from it. We try to co-operate and share insights as much as we can across the funds. Its certainly possible for funds to take a different view on the same company – especially the Alpha Plus Fund which makes more extensive use of computer models – but this will not be a result of one fund keeping information from the other.

      • Hi Tim, any reason why the Alpha Plus Fund makes more extensive use of computer models than Montgomery’s other funds?

      • Hi Kelvin. We have made some good headway in developing the models over recent years, and think it makes sense to take advantage of them, especially in the case of a leveraged market neutral where risk management is more complex. The jury is still out as to whether they can beat the analyst team.

  9. Hi Tim

    How is this different from the Montaka Gloagal Access Fund other then only having an exposure to Australia and New Zealand?

    If you only had $50K which fund would you sign up to Montaka or Alpha Plus?

    Kind regards

    • Hi Simon. As well as focusing on Australia and New Zealand, the new fund differs in several ways. Firstly, it is market neutral, rather than long-biased. there is some material in the videos we just posted which explain this concept in more detail. Secondly, while it takes advantage of the insights our domestic research team can produce, the new fund makes heavy use of the “machine learning” work we have done in recent years to select stocks and construct portfolios. This should give it a very consistent and repeatable investment process. As to Montaka versus Alpha Plus, I can’t offer much help. I think both are very good products.

    • A couple of advantages I can see for the Alpha fund:-
      1. Montgomery’s long only Aust & NZ fund results have been impressive, whereas the long only global fund has basically tracked its benchmark. No reason to expect anything different on the short side.
      2. The Alpha fund will commence from scratch. Unlike Montaka Access which appears to have ‘started behind the eight ball’ with a built-in tax liability courtesy of the parent wholesale fund’s performance prior to the launch of the access fund.

      • In fairness to the global fund, 2016 has seen a rally in low-quality commodity businesses, and managers who focus on quality have had a difficult time. The Alpha fund is very much a “quality” investor and would likely have had a difficult run as well. Also, 1 year is not a long time in equity investing, and over longer stretches of time I would expect both Alpha and the global funds to deliver strong returns.

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