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2023 was a complete reversal from 2022 in performance for most long only strategies with the notable geographic exception of China. Hedge funds did their job generally and a good number posted exceptional returns. On a market cap weighted basis, the “magnificent seven” were up 70% for the year – while the remaining stocks generated an 8% total return. The equal weighted S&P 500 underperformed the cap weighted index by an astounding 12.4% (the big got bigger).

• If you bought the top 100 performing stocks in the S&P 500 on an equal weighted basis on Jan 2nd last year and held them through the year, you would have been up 68.6%, and beaten the S&P 500 total return by over 40%.


• If you concentrated and picked the top 10 performing stocks on Jan 2nd, and again held them all year, you would have generated a total return of 150.3%, and demolished the “magnificent seven” by more than 80%.


• 8 of the 11 S&P industry sectors were positive, a huge turnaround from 2022 when 10 of 11 were negative. Last year’s hero, energy, generated the second worst sector returns in 2023.


• If you picked the 100 worst performing stocks for the year, you would have to mark your portfolio down 16.1%.


• If you only owned the worst 10 S&P 500 stocks for the year, you would have finished the year down 39.8%.

In 2023, the growth stock train got back on track, in particular anything to do with artificial intelligence.

2024? Do presidential elections influence the stock market? On the one hand, in the fourth year of a president’s term, the market has been up in 20 of the last 24. On the other, you can't always count on future returns to match past ones. Despite some consistent patterns, election years are no exception.

We would love to hear from you.

Best wishes to all for a happy, healthy and prosperous 2024!

J. Douglas Newsome, CFA

Managing Director, Director of Research

Perkins Fund Marketing LLC

As we start 2024, it is important to give some thought and structure to how you approach conferences, especially the 1:1 speed dating formats. Most have 30-minute meeting slots so how you optimize your time slots is imperative.

Here are some best practices to follow to generate the most ROI from your meetings with investors.

Preparation:

1. Know your investor: Conferences typically provide some limited background as a start. Bolster this information with a review of LinkedIn and any investor databases you may have access to. Do not forget mutual contacts and any common interests, background, etc.


2. Save the trees: Investors are taking 15 or more meetings. They do not want to bring back 15+ presentation decks. Bring a one-pager and possibly a few exhibits to add color to the conversation - but not to hand out.


3. Practice your pitch: a 30-minute meeting is really an 8-10 minute, concise introduction to your strategy. You will have a few minutes to allow the investor to speak at the beginning and time after to ask questions.


4. Divide the pitch: The presentation should be made in chapters including: team (people), philosophy/opportunity, process, portfolio, performance and risk management. You must also be sure to tell the investor how they can invest – on or off-shore, minimum size, etc. as well as how they can (or cannot) redeem.

The “Big” Event:

1. Why are you there? Introduce your fund and strategy and start a relationship. Period.


2. Make it repeatable. If your investor cannot repeat three points about you, your fund will get lost in the shuffle. Remember that investors will conduct 15+ meetings and they will only remember 5-6 of them.Focus on what you want the investor to know about you and then what you want them to remember.Why this strategy/opportunity? Why us? and Why Now?

8 Do’s:

• Take notes on all the questions asked and your follow-up’s


• Offer a coffee or water or snack for the investor and have mints at the table


• Have physical tear sheets and QR code tear sheets available


• Be enthusiastic – if you don’t care, the investor won’t care


• Ask the investor questions during the meeting to better understand their concerns and interests


• Ask for a “60-second” intro from the investor (unless you know them well)


• Ask the investor how much they know about or their experience they have with the asset class or strategy


• At the conclusion of the meeting ask about the best way/time to follow-up

5 Do Not’s:

• Read from slides


• Speak fast or in vague terms


• Interrupt or cut off investor questions or comments


• Avoid answering challenging questions


• Keep the investor past the meeting end time (unless they ask)

Follow-up:

1. Send a thank you follow-up note that references the meeting and any follow-up questions that came about. Do this within days of the event.


2. Add the investors to the distribution list for performance and other updates.


3. Take every opportunity to share your expertise and educate the investor on developments in your market / asset class with regular insights.


4. Ask the investor for feedback. Do not hesitate to ask what the investor’s initial thoughts are on both the strategy and the approach. The investor may have enjoyed the meeting but has zero budget or plans to invest.

Don’t forget to practice.

Happy hunting!

Best regards,

J. Douglas Newsome, CFA

Managing Director, Director of Research

Perkins Fund Marketing LLC

2022 S&P 500 Hindsight

2022 was a lost year for most long only strategies with notable and significant sector and geographic exceptions. Hedge funds overall generated alpha and a good number posted very good returns. Violent swings and a wide dispersion of returns was once again the norm. The total market value of the S&P was $40.36 trillion to begin 2022 and finished the year at $32.13 trillion.

• If you bought the top 100 performing stocks in the S&P 500 on an equal weighted basis on Jan 1^st last year and held them through the year, you would have been up 33.5%, and beaten the S&P 500 total return by over 50%.


• If you concentrated and picked the top 10 performing stocks on Jan 1st, and again held them all year, you would have generated a total return of 87.3%, more than 100% greater than the S&P.


• 10 of the 11 S&P industry sectors were negative. However, if you had gone all-in on energy stocks, the S&P 500 Energy Sector Index .SPNY generated a 59% return.


• If instead you picked the 100 worst performing stocks for the year, you would have to mark your portfolio down 44.7%.


• If you were in the worst 10 S&P 500 stocks for the year, you would have finished the year down 65.5%. To contrast, Bitcoin (BTC) lost 65.2% in 2022.

The data in this table was generated from the S&P website at www.spindices.com and Refinitiv, www.refinitiv.com. The calculations from this data were performed internally.  Perkins Fund Marketing LLC deems these sources to be reliable, but they are not in any way guaranteed and should not be considered as any form of an investment recommendation.

In 2022, investors who had ridden the growth stock train got derailed. Old fashioned value stock pickers got some revenge and the energy sector had a huge year.

2023 is off to a promising start. As always, we welcome the opportunity to speak with you.

Best wishes to all.

J. Douglas Newsome, CFA
Managing Director, Director of Research
Perkins Fund Marketing LLC

What is “Institutional Quality”?

From single family offices on up through to large public pension plans and even sovereign wealth funds, investors (allocators) are much more likely to engage with investment managers who have some degree of institutional pedigree, polish, credibility, and professionalism. Investors do this as a way to “de-risk” their initial investment allocation and to make the process of tracking the investment more manageable.  Since it is not always clear to those raising capital what it means to have an “institutional quality”, we thought it would be helpful to list a few key elements.

The following are Ten Signs of institutional quality that investors actively or subconsciously look for in an investment manager:

1. Firm leaders are well-spoken, dress appropriately, responsive and clear in their messaging.  Meetings and calls are interactive, properly paced, and respectful.


2. The manager can comfortably field tough questions and does not display angst discussing their investment process, philosophy, team, and challenging periods in their track record.


3. The manager’s investment strategy is described in a concise fashion such that the allocator can repeat it to his/her colleagues.


4. Follow-up after calls and meetings from the placement agent and/or manager are gently persistent, informational, and help to develop a relationship.


5. An institutional quality manager will deliver performance that meets or exceeds expectations and when they do not, the manager is transparent as to the reasoning and steps to correct going forward.


6. Certain strategies lend themselves to a need for NDAs. The manager must be comfortable sharing enough information so that a potential investor can determine whether they even want to go through the NDA process.


7. Following all steps from initial call/email through to signing subscription docs, the manager is one step ahead and is in a position to provide a teaser, a presentation deck, performance attribution, data room, any/all docs, etc.


8. Marketing materials must be polished, professional, error free, and cannot contain unserious, amateurish graphics.


9. The senior team members have experience, relevant track records, and well-written bios.


10. Senior team members must be polite, kind, and pleasant to work with and should not shy away from being direct and candid.  During due diligence and negotiations, the senior firm members must not get too heated or impulsive.

For the S&P 500, 1H2022 was the worst in 50 years. For fixed income, 1H2022 was the worst on record. Long only growth strategies suffered. Hedge funds, on average, provided meaningful alpha.

More miserable than the 1st half of 2020, almost 80% of the S&P component stocks were negative. In fact, only 110 of the S&P 500 stocks were positive year-to-date, including dividends. The median stock slightly outperformed the S&P 500 for the period.

Thankfully, there was dispersion and some sectors, strategies and managers excelled if not absolutely, certainly generating meaningful alpha for their investors.

• If you bought the top 100 performing stocks in the S&P 500 on an equal weighted basis on Jan. 1st this year and held them until June 30th, you would have been up 15.5%, and beaten the S&P 500 total return by 35.5%.


• If you concentrated and picked the top 10 performing stocks on Jan. 1st, and again held them for the 1st half, you would have generated a total return of 45.2%, 65.2% greater than the S&P for the half.


• If instead you somehow picked the 100 worst performing stocks for the 1st half, you would have had to mark your portfolio down by 41.1%.


• If you held the 10 lousiest performing stocks for the 1st half, you would have had to mark your portfolio down 60.7%.

* The data in this table was generated from the S&P website at www.spindices.com and Refinitiv, www.refinitiv.com. The calculations from this data were performed internally. Perkins Fund Marketing LLC deems these sources to be reliable, but they are not in any way guaranteed and should not be considered as any form of an investment recommendation.

While the average hedge fund was down -3.2% in 1H2022 according to the PivotalPath Composite Index, the average hedge fund solidly outperformed the S&P’s -20.0% and provided significant alpha relative to the majority of long only indices and index funds.  Value stocks have now outperformed Growth for the trailing one and two-year periods.

We would welcome your thoughts on which asset classes, strategies and managers may provide alpha for the next cycle.

Best wishes to all,

Doug
______
J. Douglas Newsome, CFA
Managing Director, Director of Research
Perkins Fund Marketing LLC

 

12 July 2021 Douglas Newsome

 

Pre-investor Outreach / Targeting Investors

The first and the foremost step of the outreach process is to understand the investor’s needs, risk-taking capacity, tax status and values.  Are your missions aligned?

Does the investor require significant handholding before/during/after an investment?

Does the investor have a “partnership mindset” with its active managers?

Since virtually no investor allocates to all asset classes, allocators need to see if at a high level, it is something they would even look at.

While some investors have quite broad mandates, others are solely focused on one or two strategies – say early stage venture or multi-family housing or L/S equity hedge funds or private credit, etc.

Don’t bring a hedge fund to a VC fund of funds – unless you are pitching the very high net worth owner of the VC FOF.

If you have a “new asset class” investment, you will have much more spade work and will need to work with investors that have a more open mindset.

Prior to or during the first call or meeting

Allocation Potential – When you speak with a potential investor, in their minds they will be thinking: “do we have sufficient room to allocate at this time? Do we have to sell/replace something?   Can I spend time looking at your opportunity?”

There are several types of allocation scenarios – let me mention four important ones.

1. Inventory Investment Consultants/platforms have curated lists of managers that they have vetted and approved for their clients. Their end-clients will then choose among the list. Ultimately, a few managers will typically garner an outsized portion of the commitments.


2. Strategic Investment An allocator may be committing capital for reasons beyond typical risk/return/liquidity parameters. Cleantech/renewable energy, ESG and crypto are examples.


3. Replacement Investment An allocator likes a sector/strategy/horse but would like to change the manager/jockey.


4. Expansion Investment An allocator has either had success or believes there is an improving outlook and will look to add a manager within an asset class.

FIRST CALL / MEETING AND BEYOND

Investment [Manager] Diligence – the investor needs to process a lot of information to get to a “yes” – the following are seven questions (of many):

1. Who are the People? who, what, where, when, why and how they do what they do?
   
   
   
   1. In raising capital, the team is more important than the track record. Period. Since “people are responsible for the results” spin-outs from brand names are easier to raise capital than geniuses without pedigree.
   
   
   
   


2. What is the Opportunity? what people want goes in and out of fashion. Convert arbitrage was the rage for 15 yrs. Private credit was nowhere early on. Crypto was backwater until recently.


3. What is your Investment Philosophy? An investment philosophy is a set of beliefs and principles that guide an investor's decision-making process. (Not a narrow set of rules or laws, but rather a  set of guidelines and strategies that take into account one's goals, risk tolerance, time horizon, and expectations.)


4. What is your Process? How does an investment get into the portfolio or out? Who has input? Who has the final say?


5. Is this a Partnership? what is the alignment? Is it heads I win/tails you lose? As an aside: ETFs are not partnerships – they are low cost supplier agreements.


6. Are your Fees in line with the current market? If a fund’s fees are not in line with the current market, some investors may not spend their time to even review the opportunity.


7. Can we breakdown your historical results? Without getting into the why’s for these questions, just know that how people analyze historical track records ranges from very high level to meticulous measurements of the minutiae.
   
   
   
   1. Historical performance usually forms the guidelines for future benchmarking
   
   
   
   

GETTING SERIOUS

Investment Committee / Corner Office Eight Committee Process Questions (out of many):

1. How close is your contact to the money?


2. How often does the committee meet?


3. Do they typically rubber stamp or do they turn down lots of investments?


4. Are the committee members knowledgeable investors? Are they driven by political issues?


5. Does the investment have broad support from the organization?


6. Is it a new CIO? Is anyone using political capital ie. pushing extra hard to get the ok?  Or, is this an investment from a long line of typical allocations?


7. Does the allocation/investment conform to all policies?


8. Does a consultant have to sign off?

Operational Due Diligence – This may be done prior to a committee or after. A small sample of the items which may be included within the scope of an ODD is outlined below:

1. valuation techniques, and related processes/controls and disclosures


2. business continuity and disaster recovery planning


3. fraud risk and other irregularities


4. background and reference checks of the principals


5. liquidity mechanisms (“lock-ins” and “gates”)


6. security of assets – which is obviously a focus with crypto currencies


7. full legal review


8. review of the controls and processes of the main outsourced service providers

 

Closing Thought

Client Support / Service – stay in front.  This is relationship building for your next opportunity.

 

Best wishes to all.

Douglas Newsome, CFA
Managing Director, Director of Research
Perkins Fund Marketing LLC

2020 was probably the most unusual year in the market in my 35-year career. Violent swings and a wide dispersion of returns was the norm. In the first half, 70% of the S&P component stocks were negative yet roughly 64% turned out positive, including dividends, for the full year. From the index perspective, by far the biggest news was Tesla joining the S&P 500 – as a top 10 holding based on market cap.

• If you bought the top 100 performing stocks in the S&P 500 on an equal weighted basis on Jan 1^st last year and held them through the year, you would have been up 60.4%, and beaten the S&P 500 total return by 42.0%.


• If you concentrated and picked the top 10 performing stocks on Jan 1st, and again held them all year, you would have generated a total return of 136.2%, 117.8% greater than the S&P.


• If we include Tesla performance for the full year, the top 100 stock return would have grown to 67.5% while the top 10 stock portfolio would have generated an astronomical gain of 201.0%


• If instead you picked the 100 worst performing stocks for the year, you would have to mark your portfolio down 25.5%.


• If you were in the worst 10 stocks for the year, you would have to mark your portfolio down 50.7%.

The S&P 500 Index is a market capitalization-weighted index of common stocks of large capitalization companies. The data in this table was generated from the S&P website at www.spindices.com and Refinitiv, www.refinitiv.com. The calculations from this data were performed internally. Perkins Fund Marketing LLC believes that such information is accurate and that the sources from which it has been obtained are reliable. The Firm cannot guarantee the accuracy of such information and has not independently verified the assumptions upon which such information is based. The commentary should not be considered as any form of an investment recommendation. Past performance does not guarantee future results. Future returns will likely vary, and investment results will fluctuate.

In 2020, some investors were rewarded for their patience as they saw their investments perform poorly over a few brutal months of the first half only to come roaring back and finish the year strong. Other investors were rewarded for taking quick action to move away from COVID ravaged businesses and lean into more opportunistic holdings.

With 2020 truly behind us, we look forward to 2021 and welcome the opportunity to speak with you.

Best wishes to all and stay safe.

J. Douglas Newsome, CFA

Managing Director, Director of Research

Perkins Fund Marketing LLC