Many years ago, Joyce Meng asked herself: how would someone design a hedge fund if they had no pre-conceived idea how a hedge fund was supposed to look?
Her FACT Capital is both the product of that curiosity, and the proof that the existing Wall Street model could be wildly improved upon.
FACT (fairness, alignment, compounding, transparency) marked the two-year anniversary of its long-short strategy in September, meaning it catapulted almost straight from inception into the COVID-19 crisis. Having returned 61.4 per cent after fees since September 2019 to the end of October 2021, Meng does not dispute it was hard work to earn her numbers.
This year, while Wall Street has broken records, about 40 per cent of FACT’s book is in China, where a policy push for common prosperity has dissuaded some foreign investors of a more skittish nature. Another 40 per cent is in US stocks and the rest of the world represents about 20 per cent.
All up, it only carries about 20 long exposures, which is how it managed to outperform with not just a preference for high conviction ideas, but hyper-specificity on every level in its preferred areas of technology, consumer and health care.
“Our approach to investing is very micro thematic in nature,” says Meng, speaking from New York ahead of her first appearance at the Sohn Hearts & Minds investment conference on Friday.
There is not a lot of value, she argues, in themes, when everything is a theme: disruption, ageing, luxury. A rising tide may lift all boats, as the saying goes, but micro themes will thrive even in low tide.
“You want to find the best house in the best neighbourhood,” she says. A theme is “useless”.
A FACT micro theme could be venture capital-backed biopharma companies that drive more outsourcing to contract research organisations and contract development and manufacturing organisations. Another is growth in Chinese cybersecurity investment. About 10 micro themes are represented in the 20 longs.
A micro theme may only capture five to 15 companies. One of her largest positions is the Nasdaq-traded ICON plc, an Irish drug and medical device development outsourcer which is up 42 per cent this year.
FACT bought in around February when it acquired PRA Health Sciences for $US12 billion when there were some doubts about the merits of the deal.
It previously owned clinical research outsourcer PPD, which was acquired by Thermo Fisher Scientific in April for $US17.4 billion in cash. From there it rotated into ICON, having already done its homework on the business. And in China, it owns the Hong Kong-listed WuXi Biologics (at least a three-bagger for the fund having backed it since inception).
With transparency in mind, her investors can log-in to FACT and see not just performance and positions, but the entire research library behind every idea, including the 100 channel checks that might sit behind a stock.
Team profit share is 20 to 25 per cent a person, made possible because of FACT’s small size.
“Our number one most important cultural value is intellectual honesty. And intellectual honesty is very specific,” Meng says.
That extends to how FACT allocates its time, by defining the scope of the stocks that it follows, enabling Meng and FACT’s analysts to make fewer but higher quality decisions and eliminate the risk of loss.
Nobody pitches internally, and the long-short strategy cannot claim a performance fee unless it generates 33 per cent over three years (meaning 10 per cent a year for three successive periods).
When it comes to arriving at a potential idea, it must first survive an exhaustive checklist that keeps the size of the portfolio necessarily tight.
“You really can focus on your time, which is your most precious resource, on areas where the hit rate on individual stock goes up because the broader neighbourhood is just seeing such strong, strong opportunities,” she says.
Growth, a favourable market structure, and strong capital allocation are the fundamentals of a good business in Meng’s mind.
FACT has about 210 companies that meet its quality growth, market structure and capital allocation criteria on file. From there, it will need a 10-year cash flow profile, “just to really understand the runway” and ensure the valuation stacks up.
Next, it needs positive earnings revisions because “stocks don’t work if earnings estimates are getting cut, if people are lowering expectations – even if it’s a good business”.
Exceptional companies can keep growing into their earnings, getting cheaper every year. She cites how WuXi added a vaccine platform to its capabilities. “Maybe TAM (total addressable market) goes up, maybe revenues go up, maybe they enter new business lines, maybe they’ve done very smart M&A.”
Those are the fruits of smart capital allocation.
On the other hand, if a stock is in a downgrade cycle it simply means the stock is more expensive than it appears at face value. Finally, when it comes to sizing, the manager evaluates forecast stability and cyclicality.
“I call models moodles. Sometimes, you could change the outcome so much, depending on your mood. So, if you have a company where there’s an incredibly wide distribution around your point estimate, it becomes very hard to have conviction.”
Meng believes that a good business is a forecastable business, so FACT does not expend much energy or capital in commodity producers. “How am I supposed to know what commodity prices, interest rates, look like three years from now? Exactly. So, no, we like forecastable businesses.”
Meng’s short portfolio might examine where FACT’s revenue estimates differ to consensus, the presence of insider selling, competitive intensity, and always, potential catalysts. She will never short on valuation grounds.
“This is a tough business, it’s incredibly humbling. We’re so grateful for this opportunity to invest. And I love this job. I feel so privileged to be able to do it. But ... we have to earn the privilege to run our LPs’ capital.”
On the topic of regulatory risk, FACT has been particularly sensitive to the political climate in China. "For investing in China, paying attention to regulation is incredibly important. One of our team members is based in Asia, all three of us are Mandarin speakers, we care very much on trying to find aligned areas of interest with the government, and we’ve lived through many regulatory cycles.
“Our view is that China is never as good as people think it is, and then it’s also never as bad as people think it is.”
With her investor’s instinct, China is too large to ignore on account of size, market depth, research and innovation, and it tends to be a helpful macroeconomic counterpoint to the US cycle. Next year, the US Federal Reserve will be tightening, while China could see looser policy and moderate stimulus.
Another micro theme the strategy has pursued is the onshoring of Chinese luxury consumption. Hainan for example, an island in southernmost China, is often compared to Hawaii for its marriage of coastline with luxury shopping. FACT owns China Tourism Duty Free, which has a monopolistic grip on the Chinese market, but whose share price has been beholden to the health of the travel industry.
Returning to the concept of intellectual honesty, when a position goes wrong, Meng says the outcome should be, “I made a mistake, let’s cut risk”. But that’s not always possible in an environment where investments are made by committee, or egos rule, she says.
“We only care about what the portfolio does, we’re only going to grow and be successful if every single one of our ideas is top notch.”
Meng is also the co-founder of Givology; as a Rhodes scholar, she wanted to “give back” in college, but didn’t have deep pockets. The platform has been innovative in its own right and similar to FACT in its selection of deliberate and purposeful causes.
FACT is based near Rockefeller Centre, home of New York City’s best Christmas tree. “We love it during the season.” She agrees, New York is back.
The Sohn Hearts & Minds conference will take place on Friday.
This article was originally posted by The AFR here.
Licensed by Copyright Agency. You must not copy this work without permission.
Regal Funds Management has upended its short selling approach to combat the pressures of a rising bull market, focusing instead on share price blips that have included so-called meme stock GameStop, according to chief investment officer Phil King.
An experienced investor with a track record of short selling, King will be the only fund manager on the day tipping a short stock at the annual Australian Sohn Conference on Friday.
Cooper Investors’ Qiao Ma says that despite cordless power tools provider Techtronic Industries being an industrials company, it’s really a technology company at heart.
Peter Cooper, the founder of Cooper Investors, HM1 Core Fund Manager, shares his learnings from Charlie Munger.
Fund manager, Qiao Ma has tipped Hong Kong based global power tools and outdoor equipment company Techtronic Industries at the Sohn Hearts & Minds conference on Friday.
Hamish Corlett is the only stock picker in the history of the Sohn Hearts & Minds Investment Conference to pitch exactly the same company twice.
Jay Kahn of Flight Deck Capital has pitched Nikkei-listed Bengo4 as his stock pick for this year’s Sohn Hearts & Minds conference, following the recent acceptance of the electronic signature in Japan due to the Covid-19 pandemic.
There is no bigger or unsolved problem than taxes which remains consuming, complicated and error prone. Businesses still manage their taxes with a combination of pen and paper and excel and the complexities are only increasing. Babak Poushanchi says Avalara, based in Seattle, is solving the problem.
Firetrail Investments’ Eleanor Swanson has tipped ASX listed telco software company, Megaport, as the best stock for 2022 at the annual Sohn Hearts & Minds Conference.
Beeneet Kothari of Tekne Capital Management has chosen Delivery Hero as his stock pick at the Sohn Hearts & Minds conference, saying it is the best way to play the innovation and last-mile logistics trend.
Yen Liow, managing partner of Aravt Global has pitched Gitlab, a founder-led software business that is focused on DevOps at the Sohn Hearts & Minds Conference. Liow stumbled upon the company while researching Atlassian, which itself generated 20 times the return on capital since its IPO.
Regal Funds Management co founder, Phil King is recommending that investors sell shares in travel company Flight Centre, arguing that the stock has rebounded too strongly since its lows of last year with the company still facing headwinds with the shift to online travel bookings.
Munro Partners’ Nick Griffin has pitched Nasdaq-listed Onsemi as his stock pick at this year’s Sohn Hearts & Minds conference, labelling it the ‘hidden hero’ of the path to decarbonisation.
Builders Unions', Markus Bihler pitched Wise at the sixth annual Sohn Hearts & Minds Conference. Over the next five years, the fund manager expects the target share price to hit 30 pounds by 2027, a 27 per cent five year annualised return.
FACT Capitals' Joyce Meng pitched Beauty Health Company at the sixth annual Sohn Hearts and Minds Conference. Meng is forecasting 30 per cent durable and organic growth driven by accelerating equipment placements and a price target of $40 a share for 40 per cent upside.
Berkshire Hathaway vice chairman Charlie Munger, a longtime partner of Warren Buffett, has made his first appearance at the sixth annual Sohn conference in Australia on Friday.
Jay Kahn’s Flight Deck fund seeks out stocks in “roads least travelled”, and Kahn reckons it has unearthed a “multi-bagger”: Bengo4, which he describes as Japan’s DocuSign.
Firetrail’s Eleanor Swanson believes Megaport is currently one of the best stories on the sharemarket, and has the potential to join the ranks of Australian-founded technology companies such as Atlassian and Afterpay.
It’s an “age of instant gratification”, according to Tekne Capital Management’s Beeneet Kothari, and he is picking restaurant delivery group Delivery Hero to ride the innovation in last-mile logistics in the $US1 trillion takeaway food sector.
Spotify’s market-leading position in the future of audio will catapult the business to among the so-called FAANG stocks alongside the likes of Apple and Amazon, powering revenue growth and its share price, according to Hamish Corlett, co-founder of TDM Growth Partners.
Fresh from picking last year’s 180 per cent gainer Nasdaq-listed Bill.com and other big winners such as DocuSign three years ago, Babak Poushanchi is back at Sohn in 2021 with another stock pick. This year the Cota Capital founder and tech-focused investor has named Seattle-based tax software business Avalara as his top pick.
Regal’s Phil King says he’s the only Australian hedge fund manager brave enough or silly enough to return to Sohn Hearts & Minds to pitch a short stock during one of the biggest bull markets of all time.
Griffin expects the car market will be 50 per cent electric by 2030. He likes Onsemi in particular because of its management, and the fact it is being priced as an industrial semiconductor producer.
Joyce Meng of Fact Capital says investors should take advantage of growing skincare spends.
Berkshire Hathaway’s veteran 97-year-old investor Charlie Mungert warns that he views today’s markets as wildly overvalued in places.
Atreides Management’s Gavin Baker has picked cryptocurrency exchange Coinbase Global at the Sohn conference, believing in its growth opportunities as more people embrace the crypto world.
Yen Liow, founder and portfolio manager of Aravt Global, has a bullish take on Nasdaq-listed software development company GitLab, which he expects to soar in the coming years.
Eley Griffiths small-cap portfolio manager David Allingham has picked Ian Macoun’s multi-boutique funds management group Pinnacle Investment Management as his top stock pick for the Sohn Conference 2021.
Builders Union’s Markus Bihler has picked the freshly listed London-based fintech Wise as his top pick at the 2021 Sohn Hearts & Minds Conference.
Moderna will know in just over a week how effective its COVID-19 vaccine is against the omicron strain, according to the company’s co-founder Robert Langer, who presented at the sixth annnual Sohn Hearts and Minds Conference.
Charlie Munger, the 97-year-old investor and polymath who has been the trusted sidekick of Warren Buffett for decades shared his thoughts on markets, investing and geopolitics in a wide-ranging interview broadcast as part of the Sohn Hearts & Minds Investment Conference.
From e-signatures to last-mile logistics and facials, the annual conference showed that waves of disruption continue to break in different ways across different sectors
Investment legend Charlie Munger says the current climate on global markets is crazier than the dot-com bubble two decades ago, as he savaged the boom in cryptocurrencies as insane and backed China’s ban on the digital assets.
Regal Funds Management’s Phil King says it’s a tough market for short sellers but it didn’t stop him from nominating a prominent one at Sohn Hearts and Minds today: FlightCentre.
Moderna’s co-founder expects the biotech’s vaccine will be at least somewhat effective against the Omicron variant, but says his company can quickly pump out variant-specific boosters for new strains when needed.
Pinnacle Investment Management is a multi-boutique fund manager that owns stakes in 16 Australian fund managers across Australia of between 23 to 49 per cent. It is led by CEO Ian Macoun who is said to be famous for picking star portfolio managers.
Gavin Baker, managing partner and CIO of Atreides Management, a $4.5bn crossover firm based in Massachusetts, recommends investors hold Coinbase, a platform for investing in cryptocurrency.
Moderna co-founder Robert Langer has suggested the vaccine maker will know within days if its mRNA Covid-19 vaccine is effective against the new variant, Omicron, as he predicted future mutations and the likelihood of the virus becoming “something life flu” that will require regular vaccine boosters.
Moderna co-founder Robert Langer has said he’s confident the company’s vaccine will be effective against the omicron strain of COVID-19, but not as effective as it is against the original variant. “But that doesn’t mean it won’t be effective,” said Mr Langer.
Fund Manager Mark Nelson of Caledonia to interview Berkshire Hathaway's Charlie Munger at the sixth annual Sohn Hearts and Minds Conference.
Eleanor Swanson of Firetrail Investments sat down with Equity Mates Media ahead of this year's conference. Eleanor shares the story of her first investment, breaks down the small cap landscape and shares some of the best companies that she's come across during her time in the markets.
For all that heavyweight finance names Michael Walsh, David Paradice, Matthew Grounds and Gary Weiss have in common professionally, one thing they can’t seem to find consensus on is music.
Babak Poushanchi, one of the legends of the Sohn Hearts & Minds conference, has opened up about his approach to riding the disruptive technology boom.
Conference Manager Joyce Meng's FACT Capital is proof that the existing Wall Street model could be wildly improved upon.
Cota Capital’s Babak Poushanchi emerged the top picker from the 2020 Sohn Hearts & Minds Conference, with his pick, bill.com, share price up more than 200 per cent.
Yen Liow of Aravt Global sat down with Equity Mates Media ahead of this year's conference. Yen shares the story of his first investment, Aravt's investment philosophy, his thoughts on the future of the payments industry and why he's excited to be a part of the Hearts & Minds family.
Hearts and Minds Investments Limited (ASX:HM1)'s Chief Investment Officer Rory Lucas and founding Hearts & Minds supporter Phil King of Regal Funds Management recently spoke with the hosts of You're In Good Company, an Equity Mates Media podcast.
Returning Conference Manager Beeneet Kothari talks 'quick commerce', a topic at the heart of his stock pick for the 2021 Sohn Hearts & Minds Conference.
Returning Conference Manager Nick Griffin of Munro Partners attempts to capitalise on the climate change thematic that it has declared as the biggest investment opportunity since the internet.
New Conference Manager Eleanor Swanson was instrumental in convincing the investment team at Firetrail Investments to buy into AfterPay.
As a rising star within Firetrail Investment Management, Eleanor Swanson was instrumental in getting the firm to back Afterpay when it was trading at just $20, winning over the senior investment managers.
Eley Griffiths Group portfolio manager David Allingham says the Sohn Hearts and Minds Conference is the Australian investment management industry’s answer to the Woodstock Festival.
Returning Conference Manager Qiao Ma is planning to tip a Hong Kong-based consumer brand player when she fronts the annual Sohn Hearts & Minds conference next month.
Returning Conference Manager Beeneet Kothari sat down with Equity Mates to discuss his first investment, views on China and Cryptocurrency, and why he loves being involved in the Sohn Hearts & Minds Conference.
The payments sector has entered a golden era, says Avart Global’s Yen Liow, who hails from Melbourne.
The powerful technology that has enabled mRNA vaccines to save millions of lives during the coronavirus pandemic has much broader potential, according Bob Langer, one of the co-founders of Moderna.
Professor Robert Langer, the billionaire co-founder of vaccine maker Moderna says that early investors in the biotech startup should share the credit for the development of the company’s coronavirus vaccine.
Moderna co-founder Robert Langer says vaccine development for a range of diseases – not just Covid-19 – will be one of the biggest trends among biotechnology in coming years.
Beeneet Kothari admits it’s been a ‘bloodbath’ for Chinese tech stocks this year, but there are two good reasons he thinks the sentiment will shift.
Warren Buffett’s right-hand man Charlie Munger is the headline act at Sohn Hearts and Minds this year and the 97-year-old investment legend is expected to offer forthright views on global financial markets which are now at a critical juncture.
Charlie Munger, Warren Buffett's trusted man, to headline Sohn Hearts & Minds 2021 Conference.
Charlie Munger, who will headline this year’s Sohn Hearts & Minds Conference, places one quality above all else: patience.
Charlie Munger, American billionaire investor and vice-chairman of Berkshire Hathaway to headline Sohn Hearts & Minds 2021 Conference.