Hunting for alpha isn’t just about stock picking, say three portfolio managers.
They spoke on a panel during an Alternative Investment Management Association event in Toronto last week.
Noah Solomon, CEO and portfolio manager at GenFund Management Inc., works off the 200 largest names on the TSX. Typically he holds 80 stocks long and 80 short, all equally weighted. “We’re not stock pickers,” he says. “We generate alpha through portfolio engineering, which is a fancy way of saying that more important than any one company is how [the company] fits with the others in the portfolio.”
He says a perfect stock “would have rapidly growing earnings, a strong balance sheet, growing market share and dirt-cheap multiples. We’re trying to create the perfect stock in portfolio form. This means a portfolio with a better combination of a range of desirable attributes than any normal collection of stocks [would have].”
Zachary George, co-founder and principal at FrontFour Capital Corp., targets companies going through dramatic change.
“We’re looking for specific catalysts and events that will help us realize value,” he says. “On the short side of the book, we’re trying to reduce beta with cash, net short overlays and options. We also use single-name alpha-driving shorts.”
He focuses on North America, with between 10% and 40% in Canada. “We find a lot of underfollowed, poorly covered names here,” he says. “The rest is predominantly in the U.S.”
Noah Blackstein, vice president and portfolio manager at Dynamic Funds/GCIC Ltd., adds alpha through stock selection. He neutralizes beta by shorting the index; short bets on individual stocks also add alpha, he explains.
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Blackstein prefers mid-to-large growth stocks. “The great thing about growth stocks,” he says, “is when they’re done they make terrific shorts. Positions we liked five years ago we might go short on today.”
The hedging aspect of the portfolio is most important to manage, he adds.
Blackstein addressed tailoring investment strategy to client profiles. People in their 30s or 40s should shoot for high percentage returns because they have long time horizons, he says.
“I read a newspaper article the other day that discussed a 28-year-old woman and a 32-year-old man who had conservative portfolios. And I’m thinking, are these people out of their trees? They have 40 years of investing ahead of them—they should be as aggressive as possible today.”
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But it’s different for the ultra-wealthy. “Their main goal is to protect against the downside. So our focus is to get a high-single-digit return with a low drawdown,” he explains.
Blackstein adds the chronic political dysfunction south of the border has long-term implications. “The dim-sum bond market in China, and the [currency] swaps the Chinese are arranging with the Europeans are clear indications that people want to get away from this gong show in Congress. They’re going to transact in euros or renminbis.”