Montaka’s objective

With so many weird and wonderful equity offerings out there, it is sometimes difficult to make sense of what you are buying. And comparing between offerings can feel near impossible sometimes. A sensible starting point in assessing any equity offering is the target return profile.

What is a target return profile? It is not a target return. It is not a hard number. While some equity offerings do provide investors with a target return of “X percent per annum”, it is your author’s view that such a number is fairly meaningless and provides a false sense of security to investors.

The absolute return delivered by an equity offering over any period is, in part, a function of interest rates, fiscal policies and other macro dynamics that are well outside of the control or skill of any investment manager. Ipso facto, putting an absolute target number out there is not particularly meaningful or helpful to clients.

An alternative approach, that we believe makes sense, involves thinking about return outcomes under different market scenarios. How might the offering behave when markets are up? When markets are down? And when markets are flat?

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How will Montaka achieve such a target return profile? There are two key parts to this answer. First, we have the ability to vary the net market exposure of the overall portfolio by adjusting the relative sizes of the long and the short portfolios. Essentially, we run a lower net market exposure (i.e. higher downside protection) when stocks look expensive; and we do the opposite when stocks look cheap.

Second, we have the opportunity to add value in both the long and the short portfolios through superior stock selection. A capacity to add value on the short side, in particular, is a skillset in scarce supply – and this is one of the key differentiators of Montaka, we believe, vis-à-vis other equity offerings that are out there in the global marketplace.

With only limited history, we can already start to observe the “value add” contribution of the short portfolio to Montaka’s overall returns. Shown below are Montaka’s actual monthly returns (in USD terms) for the first three months of the fund’s life. By examining the attributions of the total returns, one can immediately identify the short portfolio as a key source of downside protection and value-add to the benefit of our clients.

The conceptual chart below illustrates what we are trying to achieve at Montaka. In essence, Montaka seeks to protect client capital on the downside when markets fall (though unfortunately returns will not always be positive); while also providing above market returns when markets are flat or up. That said, we acknowledge that if markets rip significantly (as the S&P500 did in 2013, for example), then Montaka could well underperform the market – though should still deliver clients a nice return.

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Screen Shot 2015-11-11 at 12.08.48 pmAndrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.

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