Q: How has the GMG Defensive Beta Fund evolved?
A : The investment landscape around 2007 and prior to that presented the investor public with little choice of instruments such as Exchange Traded Funds and notes offering exposures to commodities, currencies or emerging market debt. While these instruments are more accessible and available today, they were simply not around at the time.
It was very difficult to implement investment strategies for individual investors. That was why we set up Montebello Partners, LLC, the investment advisor to the fund, to address those needs and opportunities.
The company wanted to offer a mutual fund that not only had its core investments in large cap stocks, but also provided an overlay of commodities, currencies and risk management tools that were not available to individual investors.
The GMG Defensive Beta Fund, which was launched on August 14, 2009, is a fully diversified fund that can invest in commodities, equities and currencies with the mandate to go long or short.
William Krivicich is the lead portfolio manager, while Richard T. Kersting, Gary M. Goldberg and I all serve as co-portfolio managers.
Q: What are the underlying principles of your investment philosophy?
A : We do not believe in taking high investment risks and leveraging funds to generate potential high returns for most investors. Instead, we prefer to take a defensive approach by having a broad basket of stocks to limit volatility while still participating in the growth of these companies. Our measured approach is designed to protect our clients’ principal as much as it grows it.
Q: Could you briefly explain your “alpha variance” process?
A : We have developed our “alpha variance” process that basically addresses the three steps of investing: where, when and what. We start with a global asset allocation, a traditional top down approach to investing, with a subsequent tactical overlay that helps us determine when to invest as well as what to invest in. This technical analysis also helps us determine when to add or reduce various positions.
The first step in the process is where to invest. Here, we focus on the regions and markets around the world. Where we decide to invest is driven by our views on the evolving global macroeconomic scenario and where investment themes take us, which may be driven by the demographic or consumer spending or commodities cycle.
The second step revolves around what to invest in. Once we decide where we want to invest, we focus in selecting securities, stocks or bonds or commodities. Our fundamental investment approach helps us in selecting securities based on valuation and growth criteria that we prefer. Our selection of stocks is driven by the long-term viability of a business model and our views on the earnings growth sustainability.
In the end, after we have selected stocks we like to invest for the long term, it is time for us to consider the timing when to enter the market. As part of our process, the timing of the purchase is no less important than the selection of stocks. We generally look at granular metrics like market momentum and how investors view a specific stock.
Our “alpha variance” process is defensive and designed to help limit losses rather than simply capture gains. We hope that our process will help capture most of the upside and avoid most of the downside.
Q: What is your investment process?
A : The first step is to build a global asset allocation. We have top-down considerations with macro analysis, sector analysis, thematic projections and then general risk management overlays that we utilize. We do not want to have more than 25% in any one sector or asset class.
The second step to that is the bottom-up consideration. On the equity side, we focus on the strength of the balance sheet. Generally speaking, we search for companies that have a well-diversified business and multiple revenue streams, profit margins and exposure to emerging markets in Asia and Latin America.
Additionally, we prefer companies whose operating and net margins are leading the industry. At the same time we tend to avoid companies that are capturing market share or growing by dropping the price or margins. In our view, such a course of action could lead to the destruction of the business model.
On the fixed income side, we look at credit analysis, bond duration and apply standard analysis in selecting securities from companies that have the balance sheet to repay the debt.
We also look at correlation and how all these different investments in asset classes react to each other.
After we have selected the regions, sectors and stocks, we will apply appropriate weights to each sector and each holding.
We prefer stocks that have sustainable growth in earnings and revenues and our intention is to hold them for several years. Our defensive approach helps us not only in selecting companies but also deciding the timing of purchase based on our technical analysis.
Q: What drives your bullish approach?
A : We differentiate between long and short term. For example, in early November we were still bullish on equities and felt there was a fair amount of upside because we thought that markets had overpriced the risk of a global recession on a slowdown in China.
But on the same token, the technical factors that we are monitoring indicated that the market was heading to a pause and somewhat of a pullback. So, we did not commit additional capital through new assets coming in and remained overweight in cash.