Tue, 18/04/2017 - 12:28
Altavista Investment Management is a London-based manager focused on producing risk adjusted returns for long-term investors. The firm employs a fundamental long/short approach to investment in global and, separately, Indian equities.
Altavista is led by Arun Agarwal (pictured) and Vinod Nair, both engineering alumni of The Indian Institute of Technology Kharagpur, some 140km west of Kolkata, and former colleagues at McKinsey & Company, Mumbai. The pair says that their fundamentals based investment approach and process discipline is strongly influenced by their training and experience at McKinsey.
After McKinsey, Agarwal spent time with Merrill Lynch and Q Investments and Nair worked at Alliance Bernstein before the pair joined forces to establish Altavista.
“The foundations of the business were laid in 2007 when the relationships with key investors began to develop,” explains Agarwal. “Ironically, we started up just at the beginning of one of the biggest crises ever to hit the world financial markets.
“It was in providing advice and generating performance during these very difficult times that cemented the trust-based relationship and led directly to the establishment of the current funds with those same investors,” Agarwal continues.
At present the firm offers two funds: The Altavista Global Equity Fund (AGEF), a long-short hedge fund with USD209 million in assets under management, and the Altavista Capital India Fund (AVCIF), an Indian equity long-short hedge with USD50 million in assets
AGEF invests in listed equities across the world and across sectors; AVCIF is concentrated on India. “It’s important to note that, like AGEF, AVCIF follows a genuine long-short strategy,” says Vinod Nair. “This makes the fund something of a niche product with very few competitors, since most India funds tend to be long only.”
AGEF was launched in January 2010 and the AVCIF in March 2011. Both funds have grown steadily and delivered risk adjusted returns with a firm focus on capital preservation.
Asked to explain Altavista’s investment strategy in greater detail, Nair explains: “Our investment approach is fundamental driven, based on bottom-up analysis and long-term orientated.
“We only invest in businesses we understand or can learn,” he continues. “Altavista is focused on buying high quality businesses at reasonable prices where there is a short-term dislocation and shorting expensive, poor quality businesses. We base our investment in these solely on facts and are usually contrarian in our views.
“We are conservative in nature and orientated towards capital preservation,” Agarwal continues. “We focus on absolute rather than relative returns and would rather stay in cash than chase poor investment opportunities.”
“We are alpha seekers not asset gatherers, looking to partner with investors who share our philosophy,” Nair adds. “We see ourselves as ‘shepherds’ of capital who undertake responsibility for capital allocation and preservation with consistency and absolute integrity.”
According to Agarwal and Nair, alpha is generated through superior stock selection. They explain that for all the positions in the portfolio, the investment team has to answer three questions: “Is this a good company/industry to own? Are we getting a bargain, and why and how does the value get unlocked?”
Reflecting on the two founders’ shared experience at McKinsey, Agarwal explains that investment management at Altavista is disciplined and process orientated. “We rely on proprietary screens and industry knowledge and follow a structured, multi-stage process to winnow a broad list down to the selected businesses that make it into the portfolio,” he says. “For all the investments in the portfolio, we develop financial forecasts (four-plus years) and have clear valuation models that quantify the upside.”
The result is a concentrated portfolio of high conviction businesses (the top 10 long positions typically account for 50-70 per cent of the AUM) and has a three to five year investment horizon for longs and some 12 months for shorts.
“Position sizing is a function of the risk adjusted returns expected from each stock,” adds Nair. “The maximum position size is dictated by a combination of our risk rules, the extent of the downside risk and our familiarity with the business in question. We initiate a position at a minimum 5 per cent pa alpha and scale up or down, depending on the alpha potential.”
“We are disciplined in selling positions where the residual returns are too low (eg. if our price target has been achieved and there is no remaining embedded alpha left) or if our investment thesis is invalidated.”
Nair goes on to point out that: “we invest significant time in ongoing monitoring of our positions. We spend a disproportionate amount of our research time worrying about our current holdings rather than hunting for new ideas. In our experience, this helps to increase our conviction in existing investments, and scaling them up. Also this process is often the best source of new ideas.”
Agarwal adds that he and Nair are supported in this work by “a team of six talented investment analysts, which works in parallel with a very experienced operations team who ensure that all aspects of operations, finance, compliance and infrastructure are well managed.”
Altavista’s global equity fund AGEF has delivered ITD returns of 7.2 per cent pa with an average net exposure of 31 per cent and volatility of 6.0 per cent pa This may be contrasted against the fund’s peer group, as represented by the HFRIEHI Index which achieved returns of 4.4 per cent pa with 7.2 per cent volatility pa in the same period.
That said, Altavista prefers to analyse performance between alpha and beta factors. Agarwal and Nair explained that AGEF’s 7.2 per cent performance can be disaggregated into 465 bps pa of alpha and 255 bps pa of beta.
Commenting on the track record, Agarwal says: “We are particularly proud of our performance in 2011 and 2015 when AGEF returned 8.1 per cent and 12.7 per cent respectively when the MSCI World was down 7.4 per cent and 2.4 per cent. We were recognised for our 2015 performance by Eurohedge with the award for the Best Global Equity Fund under USD500 million.”
“Our India Fund, the AVCIF, has recorded ITD returns net in US dollars of 8.4 per cent pa with an average net exposure of 41 per cent and volatility of 13 per cent,” Agarwal continues. “In the same period the Indian equity market index (the ‘Nifty’) delivered 2.0 per cent pa with volatility of 23 per cent. The ITD performance of 8.4 per cent pa can be disaggregated into 9.6 per cent pa alpha and 4.4 per cent pa beta while currency depreciation subtracted 5.4 per cent pa.”
The Altavista Capital India Fund is US Dollar denominated while the invested securities are priced in Indian Rupees. This means there is inevitably a ‘currency headwind’ caused by the declining value of the INR relative to the USD over the period. Without this headwind, the ITD net returns would be 14 per cent pa.
“We were especially pleased with the AVCIF performance in 2011 and 2014 when the fund was down 5 per cent and up 31 per cent respectively compared to the Nifty dollar returns of -31 per cent and +30 per cent,” says Nair. “We provided significant down side protection in 2011 and generated full market returns in 2014 with an average net exposure of 42 per cent. Altavista was recognised for its 2014 performance by a Eurekahedge nomination for the Best India Hedge Fund.”
Looking forward, Altavista believes that AGEF is positioned to benefit from a number of structural growth opportunities such as internet advertising, ecommerce, increasing relevance of broadband, private sector banking in India, emerging market consumption, decline in the market for cameras, and declining movie theatre attendance in the USA.
“In addition,” says Agarwal, “we have also taken advantage of valuation dislocations to pursue long opportunities offered by the recent sell off (and recovery) in Mexico post Trump and in UK retailers post Brexit. Similarly, high valuations in low growth consumer stocks in the USA and Japan offer very interesting short opportunities, as investors are hiding in these stocks as dividend proxies”.
“As regards the Altavista Capital India Fund,” Agarwal continues, “we consider India to be a compelling growth opportunity with a long runway. We are bullish on the potential effects of the recent demonetisation exercise undertaken by the Modi government (and encouraged by the support for the government demonstrated in the Feb/March Uttar Pradesh elections). We think that the result of this and other steps being taken by the government to increase the tax to GDP ratio in India will eventually lead to stronger, sustainable growth in the economy.”
Altavista feels that its funds and strategy should suit long-term investors looking for good risk-adjusted, alpha-generated returns with capital preservation, given that, as Nair points out, “such investors should be prepared to accept lower than headline market returns during strong bull market periods balanced with significant outperformance and capital preservation during market corrections.”
“Our strongest performance tends to be in weak markets,” adds Agarwal, “our strategy and positioning tends to be contrarian and as such provides a useful counterpoint to more momentum-driven investments as part of a diversified investment portfolio.”
Agarwal and Nair conclude that in their experience, the Altavista funds are particularly suited to the risk/return objectives of family offices and alpha-focused asset allocators.