Emanuel Datt is the Principal and Founder of Datt Capital, a small fund that’s been going for 18 months. Emanuel has been investing himself since 2015, five years, and he started bringing in external money 18 months ago and setup Datt Capital, an interesting character, a small fund but an interesting approach. It's what you might call a barbell approach between fixed interest on one hand including mortgage debt and quite risky equities on the other hand, so quite interesting.
Emanuel, I was reading a blog post that you put up on March the 3rd. Now, I’m not trying to catch you out with this or anything but you said in the blog post you’re beginning to see green shoots out of the chaos and you’ve got a positive sense regarding the medium-term market outlook, where upon the market promptly fell like a stone during the rest of March of course, and seems to have bottomed about a week ago.
Emotionally, there must have been a bit of a roller coaster for you. You started to think that things were turning around, but then they didn’t, but now they have! How do you feel about things now?
Alan, I like to consider myself an optimist, so I always try and look on the bright side of things. This turmoil that we have in society even though it’s not really turmoil, it’s just precautionary measures, I consider it’s still a very temporary state of affairs. After a certain time period we hope that life will be back to normal for everyone out there and accordingly, we sort of think over the short to medium-term, markets will do the same.
Have you been buying?
We have been dipping our toes in of late. We actually went into this situation almost fully invested. Over this time we’ve sort of dialled back on the risk to the point we’re all sitting at about 20 per cent cash whilst capturing less downside than the broader market. The key catalyst for us was, once state borders were closed in Australia, which to us was an entirely unprecedented event, that’s something that told us that this is different this time.
When you saw that, I mean as you say, it was a pretty unbelievable event. How did you respond to that, what did that make you do?
It made us change our view because while state borders were open, there was still a level of normalisation within broader society of self. Effectively, we felt that our own portfolio itself was not correctly positioned considering the circumstances and hence, why we cut back the risk. Sometimes it’s a time to make money and sometimes it’s a time not to lose money.
So, the closing of state borders made you think that things were going to get worse?
For a short period, yes.
What sort of things do you invest in? You call your fund an absolute return fund, but it’s long-only. It’s not long-short absolute return, is it? How do you achieve absolute returns when you’re long only?
We take a multi-asset approach to our asset allocation. Our investable asset classes are equities, fixed interest, private debts, derivatives and cash. Effectively, we allocate our assets flexibly across those asset classes.
What was roughly your asset allocation towards the end of February? I mean, just going into the downturn.
At February month-end, we were about 40 per cent allocated to private debt. A little over 50 per cent in equities and about 8 per cent in cash.
Has that changed now? How are your debt holdings going?
Our debt holdings are going very well. They are typically first mortgage securities secured directly against real property assets. Everything is in good order, they’re typically sort of higher yielding opportunities at very low LVR, which are special situations. We’re very comfortable with the risk profile within that asset class itself.
Even if there’s a deep recession?
Yeah, if there’s a deep recession we think that asset class is well-insulated, given the low LVR.
Also, in your February report, you listed your equity exposures as Afterpay, Adriatic Metals, Alice Queen, Alkane Resources, Argonaut Resources, Valmec and Yandal Resources – so not exactly blue chips, Emanuel?
No, no. The way that we look at these opportunities is that we typically like to invest our equity ... in higher returning equities rather than blue chips, given our strategy in terms of asset allocation – it’s pretty similar to a barbel strategy. As we mentioned before, we have quite a substantial allocation to lower risk private debt assets, but if we counterbalance that, we’re able to take riskier equity exposures. That makes up the overall portfolio return.
How do you choose the equities to invest in? What’s your criteria?
Typically, we’re investing on the basis of a catalyst being realised and we also select our investments with a macro overlay. Any equity position really has macro embedded in it. For example, late last year we were invested in a company called Echo Resources and our thesis around that was we wanted to be long gold and we wanted to be long the US Dollar. They were just about to push the button on restarting production in Western Australia when Northern Star lobbed in a bid. That was quite a good situation for us, we made a very nice return on that position and the other opportunities in the portfolio may have similar sort of catalysts ahead of them.
Apart from Afterpay, they seem to be little resource stocks. Are they all going to make it? I mean, are they all burning cash or what? How confident are you that they’ll be right?
Well, we don’t necessarily think that every position will work for us, of course. But we expect the ones that do work out for us to more than make up for the ones that do fail or are not successful.
Right, and so has that changed over the past month, are you still in all those stocks? Have you identified any more opportunities?
Yes, we have. We’ve actually added to our portfolio, we’ve been seeing a lot of opportunities that have just been taking a beating because of liquidity, required probably from the seller end. We’re finding a lot of value in the real estate sector for example. We’ve recently purchased one returning a double-digit yield at over a 40 per cent discount to NTA and a large portion of that is actually in cash, so it seems like a pretty conservative investment and that’s one such opportunity that we’d be looking to buy.
Can you tell us what that stock is?
I can’t at the moment because I’m still entering in to my position, sorry.
Oh, you’re not set yet?
No, not yet. It’s a little bit illiquid, but we like the fundamentals behind it so we try to get as much as we can while it’s undiscovered.
How are you thinking about the immediate future for the market as a whole? I mean, as you say, it’s not as if you’re fully invested, so it’s not as if you’ve got a lot of cash to employ, have you?
Well, we’re sitting at about a 20 per cent cash weighting. I think that’s a lot more than a lot of equity funds have generally and that is I guess a pretty typical cash weighting for us. We typically are generally cash heavy. We’ve recognised that holding cash itself, there’s an optionality element to holding cash which we always take advantage of. We’re slowly getting back into the market and finding good equity opportunities that have been beaten down. I think the broader market in the short-term, there’s going to be volatility in the immediate short-term, but I believe that once the lockdowns do start to de-escalate, that’s when the market will sort of see, I guess, a brighter picture for the future and start to recover accordingly.
The market as a whole has gone up by more than 20 per cent since March the 23rd about a week ago, do you think it’s possible that that was the bottom?
It could be, but I believe that the confidence in the market itself, I think the rally off the bottom given the size of that move, 20 per cent off the bottom, it could be just a debt cap bounce or it could be something sustainable, it’s hard to say at this point. I think it would pay to be cautious at least for the next two weeks until the situation does start to become more clear.
Emanuel, what are your fees?
We charge a 1 per cent management fee and we take 20 per cent allocation above our hurdle rate which is the RBA cash rate plus 5 per cent. Effectively, for us to be paid a performance fee, the investor returns have to be above the RBA cash rate plus 5 per cent.
So, 5.5 per cent at the moment?
Yes, that’s correct. It’s actually set at the start of the financial year and it carried through the whole year with the performance fee being paid once annually after the end of the financial year.
Have you been consistently getting performance fees? Another way of saying to you, what’s been your return since you started?
We have been open for about 18 months – our inception date was August 2018 – and as of February this year, our annualised return has been about 6 per cent per annum, that’s including a little bit of the market downturn, but we expect to do much better over time as the market recovers.
I suppose the fact that you’ve got a benchmark that isn’t the market, it’s an RBA cash rate plus 5 per cent, that makes it an absolute return fund?
Correct, and we thought it was the fairest way to treat our investors. You see so many equity managers that link themselves to the ASX 200 and while it may be appropriate for them to be paid performance fees for negative return, that’s not the way I like to operate. I thought that was quite a fair way of treating our investors because that’s the way that I’d want to be treated by any investment manager out there that was managing our own money.
Great to talk to you, Emanuel, thanks.
No worries, Alan, it was a pleasure.
That was Emanuel Datt, the Principal of Datt Capital.
Source Link: https://www.eurekareport.com.au/investment-news/a-barbell-approach-to-investing/147156