Growth Without Destroying the Process
Ballina is a young firm. We have been almost entirely focused internally the last three years. Ensuring that the integral pieces of our process - our initial research screens, understanding of our companies, and portfolio construction, were all in solid shape, was the focus. We are slowly moving our focus to external conversations. Ideally these conversations will lead us to not just grow, but also reflexively gain insight on how to product a better investment process, and by extension, a stronger organization. I had an external conversation the other day that reminded me of what Ballina should avoid if in fact we confront the high-class problem of growth.
The conversation that I had was with a person with deep experience in the research and portfolio management side of the industry. The person brought up securities that Ballina do not own, stocks that are large within the index. Truth be told, I don’t know much about the constitution of our benchmarks (we have two benchmarks for our two strategies). Years ago, I once joked with a colleague that I would be willing to own a piece of gum, a jump rope, and a tennis ball if indeed they were publicly traded securities that were uncorrelated and undervalued. I will always painstakingly lean towards an active, bottom-up process.
What I’ve observed in the past, and I intend to avoid at Ballina, is the situation where Portfolio Managers let the Client Service end of their duties infect the investment process. I know what you are thinking. This is silly. Why would this happen? If you’ve built a firm on the foundation of a repeatable investment process, why would that be disrupted by client service duties? The reason is that we are all, alas, just human, and as clients grow, explaining investment performance becomes a larger responsibility. If you spend more time explaining investment performance than you do scanning your investment screens, or conducting fundamental research, the stronger piece of your toolkit will be in diving through all the nuances of whether we just had a good or bad quarter. A meaningful part of Portfolio Attribution analysis is what is in the benchmark. The more that you analyze the benchmark in pursuit of improving your Client Service skills, the further that you are taking yourself away from the investment process of a bottom up, stock selecting firm such as Ballina. There is no part of our investment process funnel where it indicates that we stop to see if a certain stock impacts our position relative to the benchmark.
As the firm experiences periods of weaker performance relative to the benchmark, there will be times when a more uneventful client presentation is a pleasant prospect. Someone with this mindset walking into a meeting to discuss a new position that does not help to close gaps relative to the benchmark, might find it hard to leave the unpleasant portfolio attribution in the past. We must protect against this.
The following are metrics that Ballina will aim to avoid becoming experts in for the purposes of client reviews:
- Portfolio Attribution by Sector
- Weight by Sector
- Weight in benchmark by Security
What we have issue with is different than having an understanding of where current portfolios stand stylistically. This is helpful for understanding the current portfolio and positioning, and the bets within it, and can be important for portfolio construction. The following are metrics that we believe are conflict free and consistent with our goals as an active, bottom-up manager:
- Expected Volatility
- Factor Analysis – for example, Value, Size and or Quality
A check as to where they Ballina process is lining up by “style” is fine. The results shouldn’t be a surprise to anyone that understands us well. However, an overriding emphasis on the constituents of the benchmark leads to stock discussion meetings where the mindshare is occupied by recent client meetings and calls. Analyzing companies from the bottom up and building diversified portfolios is difficult. It requires analytical capability, and the courage to make calls with conviction. This is why we are hired, and it has to be protected at all costs. One shouldn’t make the investment process all the more difficult by putting it on a spin cycle dependent on what’s working in the benchmark. What we will do is redouble our efforts to analyze the decisions that have been made, and with the benefit of hindsight, what could be improved. This should help us make us better investors over time. If we are fortunate to grow our list of clients, we will aim to keep our energy wrapped around a repeatable active, bottom-up investment process. The portfolios may not have gum, or a jump rope, but we aim to have it prove our worth.
International All-Cap Value returned 4.82% (gross basis) in May 2021 versus 3.07% for the benchmark. Year to date performance was 22.28% (gross) versus 10.67% for the benchmark.
Global Small Cap Value returned 3.16% (gross) in May 2021 versus 1.39% for the benchmark. Year to date performance was 15.61% versus 13.98% for the benchmark.
Top Contributors and Detractors
International All-Cap Value’s top contributor in May was Banco de Sabadell SA. The Spanish Banking stock gained 20.9% as investors reacted positively to improving economic indicators in the EU, as well as anticipating positive news to come from SAB’m imminent strategic plan announcement. The strategy’s top detractor in May was Kasikornbank PCL, which declined 9.9%. May was a very bad month for COVID cases in Thailand, as record numbers were reached.
Global Small Cap Value’s top contributor in May was EZCorp Inc. The stock returned 30.6% in May, as the pawn loan provider reported results that were better than expected, in addition to a very positive outlook. The top detractor in the strategy for May was Joyy Inc. The Chinese Social Media player declined 19%, as new rules were unveiled for live streaming in China. Additionally, results have suffered for some of the company’s growth platforms as new approaches are implemented for advertising.
 Benchmark for Global Small Cap Value comprised of 50% weight iShares Russell 2000 Index (IWM) and 50% weight Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)