This blog post comes to you from Midtown Manhattan in New York City. It has been a noteworthy week in the Big Apple. Tuesday was voting-day for the New York Primaries. For those less well-versed in US politics, the Primaries are the election processes run by both the Democratic and Republican Parties to determine who will represent each party at the upcoming general Presidential election in November.
The day belonged to Hillary Clinton and Donald Trump. As did the traffic – Secret Service motorcades caused gridlock on the island. In the media, there too was only one story: Donald vs Hillary. Nothing else mattered.
Yet for Montaka, our center of gravity is not Midtown Manhattan. And this is to our advantage and the advantage of our clients. While the US was going Trump-crazy, we were more interested in the stellar results being put up by Challenger (ASX: CGF), a Montaka long position; or the weak results put out by Mattel (NASDAQ: MAT), a Montaka short position. There is something to be said for being somewhat removed from the US-centric view of the world.
Another Montaka difference is our refusal to buy junk. As pure value-investing disciples will know, value-investing is simply the art of buying one dollar for fifty cents. At Montaka, we take the approach one step further and restrict the universe of opportunities to high quality businesses. By “quality”, we are referring to the demonstrated ability for the business to earn high returns on invested equity sustainably.
While our approach will deliver attractive returns over the medium and long term, it will also unfortunately result in periods of underperformance relative to lower quality businesses – or “junk” to which they are so affectionately referred.
Since February, we have observed something in the markets that can only be described as a “junk rally”. Low quality businesses have rallied hard while high quality businesses have hardly moved. The only way to do well during this period has been to own junk – and we will not do that. Unfortunately, our approach, therefore, results in volatility in performance. Over the long term this washes out but the short term can certainly be frustrating.
Anecdotally, I was speaking to a friend who is a Portfolio Manager at a multi-billion dollar global value fund based in New York. Upon expressing frustration that low quality businesses were rallying against all fundamental reasons, he quipped: “It’s actually great! We own the junk!”
You see, not all investors share the same philosophy of buying high quality businesses. Many investors will buy any business if they believe they can buy it cheaply. Montaka will not do this. And as a result, Montaka is forced into playing defense during these junk rallies. Taking a long term view is key, in our view. With time, quality will deliver over junk. This is where Montaka is different.
Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.