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Why ‘playing dumb’ could play a role in active management strategies

By Rhea Nath
4 minute read

An investment executive has shared the lengths taken by active management teams to uncover under-researched opportunities in the small caps universe, which can include instances of “playing dumb”.

As fund managers engage with the market to find the best investment opportunities, an active management approach often means going the extra mile to meet investment executives, employees, and other stakeholders of companies before investing, according to Ophir Asset Management’s Andrew Mitchell.

Appearing on the Relative Return podcast, the director and senior portfolio manager outlined how his day-to-day activities mean “talking to as many people as possible” in the market to gain valuable investment insights.

This helps “ascertain an edge” in the small and mid-cap universe that has historically been under-researched and under-owned.

“I am out on the road talking to as many people as possible, be they the CEOs of companies that are listed, be they competitors, suppliers, customers, anyone who will speak to me [in] trying to understand different companies,” Mitchell said.

“What we’re trying to do is ascertain an edge, work something out that the market hasn’t.

“I’ll also be talking to sell-side research, they’re the brokers, and quite often, I’ll be playing dumb, maybe trying to work out what they know and compare to see if I’ve got an information advantage to the market.”

This approach bolsters Ophir’s fundamental, bottom-up research process to identify opportunities early in a company’s life cycle and high-quality emerging businesses exposed to structural growth opportunities, he explained. The fund manager typically invests in concentrated portfolios of between 15 and 30 listed companies with a bias towards cash generative businesses with sound balance sheets and highly capable management teams.

“You know things and you ask questions, as if to try to lead the witness on the sell-side to see if they’ve worked out what you’ve worked out, and then you can ascertain that you’ve got an advantage and you think you’ve worked out that, [for example] margins should be expanding in this business for XYZ reason,” Mitchell elaborated.

“If that happens, then the next question is, how’s the market going to react to that news and that’s a real art as well. Sometimes you can get it right, but then get it wrong because the market reacts to that news, doesn’t think it’s important, but something else happens that it thinks [is] far more important.”

Reflecting on a successful active management approach, he believes it comes down to “gathering information, tallying it, putting it together, creating a thesis, understanding the edge and then spending time trying to work out how the market is going to react to that edge”.

Previously, Ausbil portfolio manager Andrew Peros spoke to InvestorDaily about how an active strategy allows the firm to tap into a broader segment of the market than a passively managed fund could aspire to unlock.

“We genuinely believe in active management, particularly in the small-cap universe,” he said.

Particularly, he said, the firm keeps its research in-house so that it can make “well informed decisions”.

“We’re constantly hitting the road, shaking hands with management teams.

“We even go as far as trying to tap into ex-employees and you’re not going to really get that value add from a passive fund or a passive investment. So that’s where we really like to get the edge,” Peros said.

He highlighted the value of connecting with former employees for “amazing” insights, though acknowledged that active fund managers may encounter occasional “bad news” in the pursuit of such information.

“If you are able to filter through some of the noise and filter through some of the bad news, you can really build a great picture,” he pointed out.

“And [in] assessing the culture of companies, you often get that from employees, both current and ex-employees.”

This, Peros said, is a great forward-looking indicator of where a company is heading.

Earlier this year, a Natixis Investment Managers survey of 500 investment professionals across 26 countries, including Australia, found the majority of fund managers believe active will be essential to finding alpha in 2024.

It underscored a resurgence in active investments as market dynamics shifted, revealing that 58 per cent of managers reported that active investments on their platforms outperformed their passive offering, marking a significant departure from a decade dominated by low interest rates, minimal inflation, and passive strategies.

“With rates looking to remain higher for longer, 68 per cent of fund managers say markets now favour active managers. And given an uncertain outlook, 75 per cent believe active investments will be essential to finding alpha in 2024,” the global asset manager said.