Most funds have at least 50 different holdings and many have 100’s. The higher the number of holdings the more likely the fund will perform the same as its benchmark. This is called benchmark-hugging and is prevalent among actively managed funds.
If you want to beat a benchmark, you have to be different from it.
The VECTOR strategy is one of high conviction / high concentration. We work hard to identify suitable investment opportunities and when they are discovered we want to make sure the success of the investment meaningfully impacts on the value of the fund.
In a fund that has 100 different equally sized holdings if one is extraordinarily successful and becomes 10x its initial value the fund only rises by 10%. If a fund has 20 equally sized holdings the company’s growth would lift the fund value by 50%.
Under normal conditions individual equity positions will exceed 4% of the fund value suggesting a maximum of 25 holdings at any time. This adds risk and reduces liquidity but is necessary to outperform.
Trading adds cost but not value. The typical holding period of an investment is in excess of 5 years. General market movements are beyond our control so our focus is on discovering investment opportunities where the market has materially mispriced a company. In due course these anomalies get resolved though it can take many years for this process to work out.
We seek companies that possess a combination of quantitative and qualitative factors.
We will intervene and take board positions if necessary to ensure portfolio company’s strategy and execution is maximised for shareholders.