Speaking at Montgomery Investment Management’s Sydney roadshow this week, chief investment officer Roger Montgomery said long/short investment strategies should not be “relegated” to an alternative asset class.
On the assumption that the value of active management is becoming more important in a low-return environment, it is “much, much easier” to pick the companies that are being disrupted than those that are doing the disrupting, Mr Montgomery said.
A successful recent short of Montgomery Investment Management’s long/short Montaka Global Access Fund was the US firm Outerwall, which owns 43,000 DVD vending machines.
Expanding on the theme, Mr Montgomery gave the example of Karl Benz driving the first horseless carriage past a blacksmith in the late 19th century.
“You never would have been able to predict which car manufacturers would have been the winners over the next 100-150 years,” Mr Montgomery said.
“In the US there have been 1,300 car manufacturers and they’ve all gone broke. And of the four that remain in the US today only one of them wasn’t bailed out during the GFC, and that was Ford.
“So picking the winner was very difficult, but you could easily pick that the blacksmith was going to be the loser.”
Andrew Macken, who runs the Montaka Global Access Fund, gave an example of a long and short position on a key US economic metric – wage growth.
“US wage growth is not only positive, it’s accelerating. Year-on-year US wage growth is slowly but surely increasing – in fact it’s accelerating,” Mr Macken said.
“We also know something about minimum wages – they’re only going one way as well. Minimum wages for the states are increasing well above inflation.”
Furthermore, US presidential candidate Hillary Clinton has pledged to increase the minimum wage by as much as 70 per cent, Mr Macken said.
On the long side of its global portfolio, the Montaka fund holds HR outsourcing company Insperity, which partners with SMEs and takes a cut from employees’ salaries (and therefore stands to gain from increases to the minimum wage).
The short play on US minimum wages is Regis – a network of around 9,000 budget hairdressing salons in the US, Mr Macken said.
“These salons come with razor-thin profit margins, probably for obviously reasons, and the biggest component of the cost structure is wages,” he said.
“So it doesn’t take much in the way of wage growth to materially impair the profit margins of these hairdressing salons.
“In many cases we think that they’ll be wiped out completely.”
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