Why this duo is backing a high turnover approach

A low turnover approach to investing has been championed by more than a few investors, from local legend Joe Magyer (of Lakehouse Capital) to the Oracle of Omaha, Warren Buffett.

But a pair of fresh-faced fundies from Melbourne, with no prior funds management experience, are set on putting this blueprint to bed.  

Spatium Capital, a small-cap shop led by Jesse Moors and Nicholas Quinn, seeks to identify and profit from market mispricings. The average holding period of a company in its portfolio is 30-45 days. 

"The majority of our outperformance is achieved within the first 20 days of taking a position, some between days 21 to 45, and rarely post day 45," they say.

The duo believes the influx of passive investment products, as well as a general herd mentality within the market, can result in massive sell-offs. These momentary mispricings can present unique opportunities for the astute investor. 

So far it appears to be paying off, with the Spatium Small Companies Fund returning 16.6% per annum since its inception. During the calendar year 2020, the fund returned 32.2%, an outperformance of 25.6% over the benchmark. The fund recently reported that it had hit a milestone of $10 million in funds under management. 

Like other funds profiled in our Fresh Fundies series, the Spatium Small Companies Fund could be considered high risk. Subsequently, I would recommend that readers with a spare $250,000 to invest do their own research and consider their own financial situation before investing. 

Fund at a glance: The Spatium Small Companies Fund

Fund Manager: Jesse Moors and Nicholas Quinn

• Asset class: Small and mid-cap Australian equities
• Objective: To outperform the ASX Small Ordinaries benchmark by 5-6% p.a. over a five-seven year horizon.
• Minimum investment: $250,000 or as agreed with the Trustee
• Investment outlook: 5-7 years +
• Suitable for: Wholesale and sophisticated investors from Australia and overseas (excluding the US)
• Launch date: Investment strategy launch on July 2018. Fund launch on March 2020
• Performance since inception: 16.6% p.a.
• Management fee:  1.25% plus GST p.a. of GAV
• Performance fee: A 15% performance fee only becomes payable where the Fund has exceeded the returns of the benchmark (Relative Return), the Fund has achieved a positive return (Absolute Return) and that the Fund has exceeded its High Watermark.

Take us through how you built your fund from scratch to set it up for long-term success?

As making informed investment decisions has become increasingly difficult and time-consuming, our philosophy is that listed companies are more susceptible to being momentarily oversold or undervalued due to herd mentality and market psychology.

Put another way, we believe that with the influx of passive products (ETFs), ‘set and forget’ investment strategies and with the broader market appearing to move in herds more frequently, equities are prone to being sold-off hastily. 

We consider these sell-offs to be momentary mispricings, which through our investment approach, are identified at their opportune moment to benefit from their appreciation. 

By starting with this philosophy and applying our robust investment approach, we were largely unencumbered in constructing the Spatium Small Companies Fund’s original portfolio.

In our experience of operating this investment strategy for almost three years, there are often on average 5 to 10 dislocated equities, at least in the ASX300, on offer each week. 

Whilst not all of those equities will present opportunities that we will want to hold in the portfolio, our active trading approach relies on us to consistently liquidate the stocks we believe have reached their fair value, and rotate into the newest and most prosperous equities for the portfolio.

What are the strategies and techniques that set you apart from other fund managers?

Spatium Capital operates a unique approach to investing. Our differentiating quality amongst our peer group is that the average holding period per company within the portfolio is held for 30-45 days. This dynamic approach seeks to capture companies during a period where the price is temporarily dislocated and is being oversold by the market so that an undervalued opportunity might present itself. 

Whilst our lens is firmly fixed on the ASX300, the Spatium Small Companies Fund naturally has a small-company bias (approximately 85% to 90% of positions held within the Fund are within the 101-300 ASX listed companies) as in our experience, companies within the top 100 less-frequently face extended price dislocations due to their nature of being more heavily scrutinised and watched by major market participants. 

To develop this active strategy, we commence with constructing a five-factor relative valuations model which we apply to the end of day adjusted data of the ASX300. These factors include a Macro Filter, Industry Filter, Small Companies Filter, Decay Horizon Filter and finally a Hurdle Rate. 

What we are filtering for when looking at the ASX300 is: 

• How have equities responded to macro news flow (i.e. foreign exchange rates, interest rates etc.)? 
• How have they responded to market information that is bespoke to their industry? 
• How is the small-company portion of the market (101 to 300) behaving? 
• How have the equities decayed over various time periods? 

Combining the previous four factors, we determine an entry-price target for each equity to identify if there is enough upside between its current trading price, our target entry price and what price we would ideally seek to exit the company. This final step of the relative valuations model allows us to ensure that our trades are considering an adequate return. Put another way, that there is enough ‘fat’ in each of our targeted trades to provide the required upside potential for our investors.

Where are you seeing opportunities right now?

For us, the best opportunities are constantly evolving on a weekly basis. Where many of our peers may be seeking to make significant returns on a handful of equities over a multi-year horizon, our approach is very much focused on making consistent smaller gains over numerous undervalued listed companies. 

We believe that this investment approach differs in contrast to the traditional style of funds management, and affords our strategy bespoke opportunities on a consistent basis. 

This is validated by looking at our performance data and identifying that the majority of our outperformance is achieved within the first 20 days of taking a position, some between days 21 to 45, and rarely post day 45. Essentially, as one of the few, or perhaps the only, equity manager running a strategy of this design, the market is potentially overlooking and thereby not capitalising on the rise in frequent medium-term price dislocations. 

A prime example of how our strategy benefits from a dislocated market was through the COVID market downturn in 2020. By remaining convicted, we were able to find a greater number of dislocated opportunities for the portfolio that in many instances, were suffering from the increased spike in market volatility. 

Where many participants liquidated and retreated to cash, we managed the investment strategy throughout, maintaining a low cash weighting and as a result, we're able to recover the COVID drawdown well ahead of the benchmark. Whilst past performance is never a guarantee of future performance, we believe our robust investment approach will continue to provide current and prospective investors with an uncorrelated strategy, seeking to provide consistent returns over the years to come. 

Want to learn more about other newly launched funds?

Like this wire to let me know you enjoyed it. Hit follow so that you are notified of the other fresh fund manager profiles coming your way.

The interview is part of our Fresh Fundies series, focusing on newly launched funds (and their portfolio managers) with less than a three-year track record.

Over the next few weeks, we will be profiling:

• Shaun Zhang, Snowball Asset Management
• Scott Williams, Fiftyone Capital
• Ben Rundle, Hayborough Investment Partners
• Michael Frazis, Frazis Capital Partners
• Emanuel Datt, Datt Capital
• Heath Behncke, Holon Global Investments
• Omkar Joshi, Opal Capital

If you know of a newly launched fund that you think should be covered in this series - or if you are a portfolio manager who has recently launched a fund yourself - send us an email at content@livewiremarkets.com.

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