Long-only managers 'limited', says Tribeca

Long-only managers 'limited', says Tribeca

The “huge” market-cap bias towards the top 30 Australian stocks in the ASX 200 makes it hard for long-only fund managers to outperform the index, says Tribeca Investment Partners.


Speaking to InvestorDaily, Tribeca Investment Partners portfolio manager Sean Fenton said long-only Australian equity funds tend to be limited by the realities of the Australian market.

The skew towards the top end of the ASX 200 index makes funds management “really hard from a long-only perspective”, Mr Fenton.

“You’ve got 200 stocks there that you rank from best to worst. There might be some stock you like, you want to own those – but to beat the index you’ve got to be overweight a bunch of stocks, and to fund those you’ve got to be underweight a bunch of stocks,” he said.

“You’ve not limited as a long-only investor what stocks you can be long, that’s true; but to fund those long positions you are limited on the stocks you can underweight, because you’re limited by the index.”

The $800 million Tribeca Alpha Plus Fund, which Mr Fenton manages, is benchmarked to the ASX 200 and uses a blended quantitative/fundamental analysis to rank stocks.

In addition, the fund uses a long/short approach to maintain a ‘market neutral’ and ‘style neutral’ setting.

“We try to have our beta close to 1 so we’re not betting on the market direction too heavily,” he said.

“One of the biggest mistakes you can make as a portfolio manager is to find a whole bunch of stocks you like and go out and buy them.

“What you’ve really done is leveraged yourself up to either a bet the market’s going up or a bet that a different style like value might be working or a sector might be working.

“That might have been working, but the market shifts and despite picking some good interesting stocks you get swamped by market thematics,” Mr Fenton said.

Long-only fund managers are not necessarily able to capture the bottom half of the ASX 200 because they simply can’t get meaningful exposure to those stocks, he said.

The median stock of the ASX 200 has an index weight of somewhere between 10 and 13 basis points, he said.

“So stock could halve and a long-only equity manager will have only made 5 or 6 basis points. It’s not really going to drive a lot of return,” Mr Fenton said.

“Whereas with a long/short fund … you could be underweight 3 per cent and make a 150 basis points active return. That’s a material enhancement to your returns,” he said.

“When you go and invest in an equity fund you’ve taken on a lot of market risk there.

“You can beat that market return and your risk’s spread a bit more between the managers’ investment insight and overall market insights,” Mr Fenton said.

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Long-only managers 'limited', says Tribeca
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