Consumer investment specialists
Focus
GORA invests in a narrow subset of consumer industries representing roughly 5% of the total value of the S&P 500.
-
Domain expertise is created by focusing on one narrow area of the investment world. Those that do so are called Specialists and through their expertise are able to identify opportunities others cannot. Specialists avoid the negative consequences of knowledge gaps outside their domain by limiting investments to the area they are a Specialist in. Specialists are always Playing At Home.
That Specialists deliver superior returns is true intuitively, empirically and anecdotally. Chen and Hackbarth (2020) show replacing a low-cost market ETF with a sector-weighted portfolio of actively-managed Specialist funds drove a 3.3% annual performance uplift, net of all fees, over 18 years. Compounded that equates to a 79% return advantage from using investors with a narrow focus.
Anecdotal evidence of the Specialist Advantage is clear by following the money. In 2010, there were 3 sector specialist funds among the 50 largest global hedge funds. By 2020, this had grown to 11.
The Specialization Advantage is especially strong for GORA due to a bias among Specialists for sectors such as Healthcare, Technology and Financials. GORA does not compete with these funds. Competition in Consumer is lower.
Conviction and Duration
GORA is among the 0.4% of global funds with conviction, measured by having at least one 5% position. Our concentrated portfolio is invested on multi-year horizons.
-
Capital has gravitated to short-term strategies with time horizons measured in months, weeks and days. NYSE data shows holding periods have decreased every decade since the 1960s and are now a small fraction compared to the start of the 21st century.
Large institutional managers who are either fearful of temporary periods of underperformance or lacking conviction in their abilities to outperform, build portfolios that mirror major benchmark indices.
Both dynamics enhance the opportunity for investors focused on concentrated fundamental investing while armed with a long-term horizon.Cremers and Pareek (2015) demonstrate this opportunity by showing only mutual funds with both long-term horizons and high active share (difference between portfolio and index) reliably outperform benchmarks. Presciently, the authors comment that the combination of long-term investing with high active share is becoming rare.
“Diversification may preserve wealth, but concentration builds it.” - Warren Buffett
A portfolio others can’t create
GORA's largest positions are in companies other investors have not even heard of. Many are outside the S&P 500 - they belong to the 90% of listed companies most funds can't invest in.
-
Investors wanting to maximize returns should invest in small funds and leave large funds to those less interested in performance. This is true across all asset classes, geographies and time scales.
Three explanations for small fund outperformance are:
1. Incentives between manager and investor are more aligned at small funds because small funds earn a greater mix of compensation from performance. At GORA, we earn 100% of our compensation from performance.
2. Liquidity constraints on large funds do not apply to small funds and so allow small fund portfolios to reflect their best ideas.
3. Motivation to succeed is greater at small firms because the staff own it. At large funds, staff ownership is negligible.
Alignment of interests
GORA’s portfolio manager has more than $1m invested in the Endeavor Fund, and 100% of his investable assets. Both sit within the top-15% of US fund manager ownership, a strong alignment with investors given our fund size is in the smallest-10%.
-
That fund managers, on average, underperform is one of the most widely known facts in investing. However, like many statistics of averages, it can be misleading. When filtered only for funds where there is a material personal investment by the manager, the inference of underperformance is immediately reversed.
Capital Group (2017) show 80% of funds belonging to the top quartile of manager co-investment and low-fees outperformed their benchmark, net of fees. Average annual outperformance was 1.9%.
Gupta and Sachdeva (2019) show each standard deviation increase in manager co-investment boosts performance 1.4-1.7% pa.
Finally, Kinnel (2015) demonstrates that for every asset class and geography, manager ownership of $1m+ improves performance.
“If you do not take risks for your opinion, you are nothing.”
— Nicholas Nassim Taleb
-
Prior to GORA, James led a portfolio of Consumer investments at Verition Fund Management and launched a Consumer team as an Analyst at Balyasny Asset Management. He began his career at Credit Suisse as a Consumer Research Associate, working across Sydney, Melbourne and New York.
James studied a Bachelor of Arts (History and International Studies) and a Bachelor of Commerce (Economics and Finance) at the University of Melbourne. He is a CFA Charterholder.
-
Hanh brings over a decade of experience in the investment advisory space with a focus on operations and compliance. As a former compliance consultant, she’s advised several of the world’s leading investment managers. She is also the founder and CEO of Complect, a SaaS platform providing tech enabled compliance program management solutions to investment advisers.
Hanh studied a Bachelor of Arts (Foreign Affairs) at the University of Virginia.