Why we stay ‘married’ to quality businesses
Last year saw a ‘junk rally’ in equity markets: higher quality businesses delivered generally weaker returns, while lower quality businesses did better. This made it hard for fund managers like us – who are wedded to the high-quality end of the market – to keep up with the benchmark. Is our adherence to quality, through thick and thin, the right approach? We think so, and the research bears this out.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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.
wade smith
:
Any update on how your AI picks are doing?
Tim Kelley
:
Hi Wade. The Montgomery Alpha Plus Fund uses a combination of AI and business quality scores to select its long and short portfolios. While the quality dimension has had a material negative correlation with performance in the time the fund has been running (and hence driven underperformance), the AI dimension has been working, and has offset some of the quality drag.
Jon E
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The fact you are sticking with a quality approach and a defined methodology is one of the reasons you were so attractive to invest with.
Keep up the good work!
Lester Green
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Hi Tim. Thanks for the informative article. Every thought about harnessing the machine learning power of Alpha Plus to develop a “factor” which assimilates quality and market timing, in an attempt to give a heads-up on the quality drought scenario? Nothing absolute, more predictive.
Having said that, I hasten to add that I am sold on your quality argument….just looking for something innovative to break new ground.
Tim Kelley
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Have certainly thought about it Lester, but market timing is difficult for quant as well as human analysts. So far I haven’t been able to convince myself that we can do it reliably.
andrew ronan
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Hi Tim, as with the alpha plus fund, is the cost of maintaining short positions significant over time in comparison with returns on the long side.And specially in today’s world where governments and central banks effectively keep poorer quality companies on life support and even grow them with stimulus packages and low or no interest rates, it must make things very hard to predict in terms of current and future company valuations which is exactly what your trying to do I guess. And even though you may be very accurate over a long period of time, does the cost of holding positions make this strategy worthwhile? Thanks for the informative articles. Andrew
Tim Kelley
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Hi Andrew. Short positions can sometimes be expensive to maintain in terms of borrowing costs, but we factor those costs into our portfolio decisions and won’t hold shorts where the costs are too high relative to the possible reward. Taking into account the ability of a market neutral portfolio to avoid market risk, we think it makes goos sense to allocate to this type of strategy, and I’m certainly a big investor in the Alpha Fund.
Julian Watt
:
Just as the real estate market has experienced a great increase in real estate agents we see the same increase in “financial advisors” with the massive amounts that have flowed into super. On the one hand, I’m very happy with my investments in the Montgomery Funds but less happy with Skaffold. Outtake – I should leave it to the pros, but only when there is an overall above market rate of return.
That’s why they get the big bucks.
Pete
:
Gutted by vtg. Montgomery still at in at $1.30 and out at 1. OMG. Horne played you for a fool and you played us. Just another fund manager chasing their 3 plus per cent. Can you please stop mentioning Buffet. You aint no Buffet. Its FRAUD what you do. So much street cred lost…….
Tim Kelley
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Totally understand your frustration with VTG, Pete, but keep in mind that we – like everyone – will make some bad calls and have some bad years. Despite things like VTG, The Montgomery Fund has over its life delivered lower risk, smaller drawdowns and higher returns than the market, after all expenses.
simon
:
hi Tim
not trying to be smart but why are you (and most other biased fund managers) convinced or so adamant that only you are in the quality end of the market ?
what about HSO, ISD, VTG ?/
confirmation bias ?
simon
Tim Kelley
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Hi Simon. Not sure I properly understand the question, but a couple of comments that may help: Firstly, quality as we define it is forward-looking and therefore subjective. This means that we will inevitably get some quality judgements wrong (eg VTG), but these mistakes don’t mean that quality isn’t a real thing, especially accross a diversified portfoilio. Secondly, it would clearly be nonsense for us to claim that we are the only investors that favour quality – there are many others. However, we can safely claim that relative to the market, our portfolios have a strong tilt to the businesses we regard as high quality.