The world of investment management has never been more competitive, and so it was refreshing to speak with Andrew Sandoe, Chief Investment Officer for Fidelis Capital. Andrew said unabashedly, that Fidelis (from the Marine Corps motto Semper Fidelis) is an extension of the service orientation espoused in the US military. “At Fidelis, our mission is to offer our investors greater economic opportunity and lower stress by delivering consistently high risk adjusted returns.” Fidelis uses a quantitative value strategy that historically has offered 15 – 20 percent annualized returns with about 18 percent of the risk of the S&P 500. Andrew describes Fidelis’ stock-picking differently, by quoting Mohnish Pabrai: “Heads – we win, tails – we don’t lose much.” This confidence led Fidelis to offer an almost unheard of zero management fee structure, where Fidelis only thrives by delivering profits, above a hurdle rate, to investors.
To achieve these results, Mr. Sandoe focuses on two primary jobs within Fidelis: rigorous portfolio analysis and assembling the top talent in the field. He notes, “My first and primary job is managing the portfolio in a way that maximizes long-term, risk-adjusted returns. As for the team, he adds that he is truly inspired by those on Fidelis’ close-knit team. The founding team came together while pursuing graduate work at MIT. Concurrently with their founding, they began working with three top faculty members, two of whom authored some of the seminal research in the quantitative value space. To this strong academic core, he added team and Board members who had each spent 30+ year careers in applied investment management.
As for the thinking behind Fidelis’ strategy, Mr. Sandoe relies on hard lessons learned during his career as a pilot in the Marines. Through several combat deployments, Mr. Sandoe saw how people functioned under significant stress. He noted that “most people make terrible decisions while under the influence of emotion or duress. This is equally true in the stock market.” This experience was empirically validated in the research of Daniel Kahneman. Recognizing the inherent risk of emotion based decision -making, Fidelis developed a systematic process which strips out human bias and emotion.
Mr. Sandoe and his team began their research in 2012 by proving that value investing was the single best performing investment strategy across US market history. The Achilles’ heel to this method is human bias and emotion, particularly our need for immediate gratification. With this in mind, Fidelis developed a systematic process that corrected for the unhelpful tendencies inherent in human nature. Fidelis’ process allows them to filter the entire investable universe down to an extremely high potential portfolio of stocks.
The filters include eight core tests:
• Value – Cheap stocks relative to the potential returns they could generate.
• High and improving financial quality – Well capitalized, low debt, improving fundamentals.
• Conservative accounting – no earnings or accounting manipulation.
• Value Traps: Is the company cheap for a good reason?
• Insiders: Are the insiders buying back shares in their personal accounts?
• Systemic risk: Is systemic risk supportive of equity gains?
• Momentum: Is the market momentum supportive of equity investment?
• Asymmetric upside: Is there at least 5:1 upside opportunity vs. downside risk?
The result of this process has been consistent outperformance of the indices and happy investors. In any competitive occupation, whether professional sports, investment management or the military, being able to deliver consistently is paramount. The ability to delay gratification in order to achieve a larger reward at a later time is crucial to long-term success. Many investors undermine their investment performance with a short-term orientation, recency bias, and loss aversion (to name a few). Fidelis uses its rulebased approach to avoid these common traps.
In a world where central banks have put a floor under asset prices (via the artificial stimulus of Quantitative Easing “QE”), there has been no need for hedge funds. Since early 2009, markets have moved almost entirely in one direction. However, since QE ended, volatility has returned to the market and hedge funds are once again showing their value. As Seth Klarman (Baupost Group) loves to reference, an investor who earns 16 percent annualized returns over a decade will retire at the end of it with more than a similar investor who earns 20 percent for nine years and then loses 15 percent in a market correction. If markets continue to revalue to reflect a post-QE, rising interest rate, high valuation environment, we can expect that hedge funds will continue to grow as they protect investors from heightened equity risk.
Within this industry, competition will remain fierce. However, when you look at risk-adjusted returns (Sharpe ratios) across hedge fund strategies, one can identify the good stewards of client assets. This industry attracts more than its fair share of snake oil salesman, but a knowledgeable consumer should look at the amount of risk managers are taking in pursuit of compelling gains. The vast majority of managers are simply trying to achieve gains through leverage, and these strategies are ultimately doomed to fail.
A consumer is better served by identifying managers with two or three verifiable edges, who can consistently buy high quality companies at cheap prices, and has the patience to wait while market prices shift to reflect the portfolio’s fundamental health. Investors that stick to these timeless (and empirically proven) methods are likely to be very satisfied.
Fidelis employs timeless value investing principles, but applies them using cutting edge quantitative tools, in order to identify high potential companies that may have been dismissed by the market. Essentially they are front-running market expectations. They acquire companies when markets are convinced that they will languish forever, but only do so after the company’s fundamentals indicate robust health. This has worked well in 2015, a year many said was the most challenging of their careers. We expect that since humans do not change much value investing will continue to deliver strong risk adjusted returns, and will remain as unpopular as ever.
Name: Andrew Sandoe
Company: Fidelis Capital Management