Totus Capital’s proven approach for good times and bad

Ben McGarry

Totus Capital

Totus aims to compound and preserve investors’ capital alongside the Portfolio Managers’ own over the longer term, regardless of conditions in the broader equity market and the economy. We do this by seeking out the best businesses available to us at sensible prices within global equity markets (mostly US and Australia) and shorting a range of lower quality businesses against this.

Totus runs a long high quality, short low-quality portfolio. In terms of our long book, we believe that high-quality companies with tailwinds, economic moats, and high returns that are profitable, generating free cash with aligned management will tend to surprise positively over the medium to long term.

Long Short Investing – Compounding uncorrelated returns

Note: Data pertains to the Totus Alpha Fund from 2 April 2012 to 31 May 2022. Source: Totus Capital, Bloomberg. Past performance is not a reliable indicator of future performance.

Against that, we run a short book of companies that are experiencing headwinds in highly competitive industries, generally with low-profit margins or low returns on invested capital. They are often expensive and complex. We look for red flags such as unsustainable aspects of a business, insider stock sales, aggressive accounting, or a fit for our ‘fads, frauds and failures’ bucket and we try to identify a catalyst for the market to focus on those red flags.

Our research process involves theme identification followed by a bottom-up analysis of companies and industries with a focus on company financials and competitive landscape. In addition to the numbers, we assess qualitative factors such as corporate governance, insider ownership, and business sustainability when looking for opportunities on both the long and short side of the portfolio.

The bulk of our returns over the past decade have come from our long book – high-quality companies that we attempt to own them for the long term. During tougher periods for markets (such as during the European debt crisis in early 2012, 2015-2016 weakness, the onset of the Covid-19 pandemic in Q1 2020, and the start of 2022), the value that our short book delivers is in providing an attractive off-set when our longs are not performing. The short book provides an important shock absorber during market sell-offs but has also generated positive returns since inception (real alpha generation in a market up 9.5% p.a.).

Protecting purchasing power in good times and bad

Source: Totus Capital, Bloomberg.

We are coming out of an “everything bubble” in which low interest rates, low inflation, and central bank money printing pushed corporate margins and valuations to record levels. Extreme optimism saw story stocks and unproven business models (such as Buy Now Pay Later and Crypto) given the benefit of the doubt as investors ignored fundamentals and went all in on risk. This virtuous circle for asset prices (stocks, bonds, crypto, housing) is now working in reverse as central banks lift interest rates and drain liquidity to fight inflation. Looking back at previous inflationary periods suggests a difficult time ahead for long-only investing. The ability to protect capital and perform in down markets should be top of mind for all investors.

When the good times end, quality businesses get impacted, but they feel difficult times a lot less than the poor businesses do. Tough times are when good businesses take market share, get into fighting shape and set up for the next leg of growth. Businesses that can meet or exceed growth expectations are rewarded while underperformance brings shorting opportunities. With profits from our short book, we have a chance to buy those good businesses while they are on sale.

Our flexible investment mandate allows the team to select the best investment opportunities in Australia and global developed markets, unconstrained by arbitrary sector, market capitalisation and index restrictions.

Uncorrelated Returns for the long term

Note: Data pertains to the Totus Alpha Fund from 2 April 2012 to 31 May 2022. Source: Totus Capital, Bloomberg. Past performance is not a reliable indicator of future performance.

Delivering superior uncorrelated returns requires doing things that are different from the index. The result of our index agnostic portfolio construction approach is that fund performance can be volatile in the short term. Since inception, the Strategy has experienced multi-month periods of underperformance relative to the index and has also had two down (calendar) years. Anyone considering an investment in the Strategy should do so with a medium to long term investment horizon (ideally 5-7+ years).

Conclusion

As the “everything bubble” deflates, we are seeing some of the best opportunities (long and short) in years for the Strategy. It has performed well so far in 2022 (up solidly absolute and up big relative) and with our experienced investment team and proven investment process we are well-positioned to navigate the more challenging environment currently facing investors.

Note: The Totus Alpha Strategy is accessible to Australian and NZ investors via the Totus Alpha Fund (wholesale) and the Totus Alpha Long Short Fund (daily priced retail PDS). The Totus Alpha Long Short Fund gains its exposure by investing in the Totus Alpha Fund (Underlying Fund).

To request additional information about the Totus strategies, please email ir@totuscapital.com.au or send a message using the ‘contact’ button on this wire.

Managed Fund
Totus Alpha Long Short Fund
Global Shares
Managed Fund
Totus Alpha Fund
Global Shares
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This communication has been prepared by Totus Alpha Management Pty Ltd (ABN 42 155 226 734), a Corporate Authorised Representative (CAR419151) of Totus Capital Pty Ltd (ABN 96 151 256 772 and AFSL 409648). It is general information only and is not intended to provide you with financial advice, and has been prepared without taking into account your objectives, financial situation or needs. The Trust Company (RE Services) Limited (ABN 45 003 278 831 and AFSL 235150) is the Responsible Entity and the issuer of the Totus Alpha Long Short Fund (ARSN 637 884 532). Before investing you should read the relevant Product Disclosure Statement (PDS). The PDS and Target Market Determination (TMD) is available by calling +61 2 8072 9945 or visiting our website www.totuscapital.com.au, prior to making any investment decisions. If you require financial advice that takes into account your personal objectives, financial situation or needs, you should consult your licensed or authorised financial adviser. To the extent permitted by law, The Trust Company (RE Services) Limited and Totus Alpha Management Pty Ltd, their officers, employees, consultants, advisers and authorised representatives, are not liable for any loss or damage arising as a result of any reliance placed on these materials. Information has been obtained from sources believed to be reliable, but we do not represent it is accurate or complete, and it should not be relied upon as such. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past Performance is not a reliable indicator of future performance. The Trust Company (Re Services) Limited and Totus Alpha Management Pty Ltd do not guarantee investment performance or distributions, and the value of your investment may rise or fall. Total returns and estimated valuations have been calculated using the mid-point of unit prices, before taxation, after ongoing fees, and assuming reinvestment and distributions. We encourage you to think of investing as a long-term pursuit. The presentation contains some forward-looking statements which reflect the expectations of Totus Alpha Management Pty Ltd about the future prospects of companies held within the portfolios of the funds. While Totus Alpha Management Pty Ltd considers its expectations to be based on reasonable grounds, there is no guarantee that those expectations will be met. Actual performance of the portfolio companies will be impacted by a variety of factors, including circumstances that cannot be foreseen, and could differ significantly from the expectations of Totus Alpha Management Pty Ltd. These statements should therefore not be relied on up as an accurate representation or prediction as to any future matters. Where portfolio companies do not perform in line with Totus Alpha Management Pty Ltd’s expectations, the funds could be adversely impacted.

2 funds mentioned

Ben McGarry
Portfolio Manager
Totus Capital

Ben has 19 years of financial markets experience on both the buy and sell side. As an analyst at UBS Australia and Morgan Stanley in London, Ben covered a broad range of companies and sectors.

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