Short of ideas? Make Short Selling Mainstream
Investor Daily’s Tim Stewart attended our recent live briefing and Q&A for investors and their advisers, and he picked up on our comments regarding short selling. Interest in the Montaka Global Fund is significantly higher than we anticipated and in a low return environment that makes perfect sense.
Before turning to some of the reasons returns might come from short-selling, let’s look at whether the good times are over and why low returns are likely for the foreseeable future.
Despite 600 interest rate cuts and $12T of bond purchases, since the global financial crisis, growth globally remains anaemic and policy makers are finding their fiscal and monetary levers are no better than pushing on a string. Seven years after the crisis that prompted the fall in interest rates, they remain locked at all time lows because their effectiveness in stimulating spending is hobbled by record debt levels.
With rates already at zero, central banks are completely impotent in any attempt to prevent the next recession. For clues about what might trigger a recession, which is merely a further slowing in economic activity from current mediocre levels, its worth looking to credit markets. A record $947bn of junk debt is maturing between now and 2020, and $400bn is set to mature in 2020 alone – the highest amount of rated debt to mature in a single year in history. According to Moody’s Investor Services, the number of US defaults doubled in 2015 to 109 and the value of the defaults was almost 40 per cent higher. Defaults leads to job losses, which in turn slows spending and while Moody’s data suggests the stress (the Moody’s Liquidity Stress Index for “junk bond” issues hit a six-year high in January, recording its biggest one-month jump since the bottom of the GFC in March 2009) has hitherto been confined to the oil and gas sectors sectors, they now note it is spreading beyond energy.
Of course it all comes down to whether the debt can be refinanced. On that front Moody’s three-year refunding index, which measures whether sufficient liquidity exists in credit markets to refinance the coming debt maturities, is at levels only seen at the depths of the GFC.
Returning to Tim Stewart from Investor Daily: “Speaking at Montgomery Investment Management’s Sydney roadshow this week, chief investment officer Roger Montgomery said long/short investment strategies should not be “relegated” to an alternative asset class.
“On the assumption that the value of active management is becoming more important in a low-return environment, it is “much, much easier” to pick the companies that are being disrupted than those that are doing the disrupting, Mr Montgomery said.”
Read the full article here: WHY SHORT SELLING SHOULD BE MAINSTREAM
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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.
peter s
:
I have noticed you’re still around 40% net long in the Montaka Fund. I would be interested in the reason for this.
Is it risk management?
Fewer short opportunities than long?
An overall bullish view of markets?
Or are you in the process of building towards a fully hedged portfolio?
With the funds performance hurdle rate set at the cash rate I would have thought you’d be fully hedged.
Just as a side note I am very happy with my investment in the Montaka fund and this comment is not meant as a critique. I am just interested in the thinking of the team at Monti. Funds as I trust your judgement completely.
Roger Montgomery
:
Hi Peter,
The net market exposure for Montaka at any point in time is a reflection of two inputs, primarily:
(i) The relative ease with which the Montaka research team can identify attractive long opportunities versus short opportunities (at the moment, it is easier to find attractive shorts than it is to find attractive longs); and
(ii) A top-down view of market-wide valuations and global risks.
We expect to see Montaka’s net market exposure typically vary between 30% and 70% over the market cycle.
Many thanks for the feedback.
peter s
:
Given you say “at the moment, it is easier to find attractive shorts than it is to find attractive longs” I would have thought you would go market neutral or net short. To answer my own question I imagine the reason you keep a net positive market exposure is due purely to the mandate of the fund. I personally would prefer more aggressiveness on the short side (Andrews impressive history working for Jim Chanos was a big motivation for me investing in this fund) but I understand you have more clients than just me to please!
Roger Montgomery
:
Hi Peter, the 30% to 70% net long exposure is a soft target. The hard limit would be a gross exposure of 250% i.e. zero long and 250% short.
Andrew
:
Hi Roger,
I have read your book Value.able and have a good understanding of value investing but i am interested in learning about short selling. What books would you recommend reading on the subject. I’m not keen on doing this strategy for myself but would like to know more about it from an interest point of view.
Thanks
Roger Montgomery
:
Hi ANdrew, I don’t have a suite of books on short-selling wide enough to offer a useful comparison, however The Smartest Guys in the Room and Power Failure (on the subject of the collapse of Enron) are worth reading for their insights into the shenanigans that can provide the fuel for a good short. An Australian book with a wider list of examples and a must-read is “Pigs at the Trough – Lessons from Australia’s Decade of Corporate Greed” by my old friend Adam Schwab. A book I have not read but which seems to receive reasonable reviews online is The Art of Short Selling by Kathryn F. Staley. Whether it contains a reasonable framework or not, I cannot say.