Hedge funds

Waratah Advisors - Apology & retraction

More Waratah polemics!
OPM 4 min read

As you know, I recently initiated on the Waratah Performance fund with a rating of semi-crappy. Well, the feedback from the cognoscenti is that I went easy on them. That I should have discounted the performance from the early years. Or that there are cheaper, better ETFs that do the same job (low vol ETFs). I also forgot to mention that tax considerations alone could wipe out any outperformance, if there is even outperformance in the first place. All things considered, I agree with my tough crowd. I apologize for letting you down. I retract my rating and leave you know-it-alls to draw your own conclusions. Anyways, I am more of a word guy than a numbers guy. Carefully reading fund communications over the years reveals a lot about how a manager thinks.

I always assumed that Waratah was a Brad Dunkley show, but it turns out his partner Blair Levinsky, a former TD Securities MD, is the majority owner. Anyways, Brad is the CIO. Waratah discloses that the employees contribute $112m of the $1.5 billion AUM. A good chunk of that must be Brad and Blair's money. They initially started Waratah with $25 million of their own money, so things have worked out well for them. Also, 40% of their AUM is institutional - also known as the "smart money".

In 2013, Brad wrote:

"...there are all kinds of publicly traded businesses that we can invest in that benefit from artificially high entry barriers due to environmentalism. For example, we can invest in aggregate quarries, oil sands producers, landfills, gas stations, advertising billboards, oil and gas pipelines, refineries and power plants just to name a few. These types of businesses have a healthy representation across all three Waratah portfolios and include names such as Secure Energy Services Inc. (energy and waste processing and landfills), Susser Holdings Corporation (retail gas stations), Pembina Pipeline Corporation and Marathon Petroleum Corporation (refineries). Here is the first investing insight: invest in assets that are needed by society so long as they are in someone else's backyard.

Waratah now says on its website:

Environmental, Social and Governance (ESG) impacts have become integral to business and a Waratah value.

You will no doubt pick up on the subtle change in language. In an unrelated development, Waratah now offers an ESG fund. I'm not a fan of the ESG trend, which I consider typical phoney-baloney financial industry stuff.

Someone asked: why do they need 34 people. Well, their Waratah Performance fund has 132 positions. Another big strategy of theirs, Waratah One, has over 400 positions. I imagine this is labour-intensive.

Some aspects of Waratah are a mystery. They have a long-only "best ideas" fund, called Waratah Special Opportunities, launched in 2013. That fund is definitely underperforming: compounding at 8.2% vs 10.9% for the blended North American benchmark....with much worse volatility. If their “highest conviction” ideas trail the market by more than 2% a year, where does that leave their lesser ideas? The marketing copy still claims the fund is targeting 10% returns.

This fund "seeks to produce above-market returns" by investing in investment opportunities that are "heavily researched". In other words, it seeks to beat the average by doing what everyone else is doing. Just to drive home the point, they go to the trouble of clarifying that they seek to invest in "undiscovered and/or misunderstood businesses whose securities are trading well below the Investment Manager's internal valuations". Are there still undiscovered businesses in 2020? I hope these undiscovered businesses are at least alerting the TSX as to their existence, otherwise, it's a violation of securities law. This sort of generic, meaningless verbiage is a sign of unrefined thinking masquerading as a strategy. Forgive me for saying so, obviously.

In 2011, Brad told the Financial Post: "We have a passionate belief in stop-losses". That's pretty silly. I used to believe in stop losses too. I'll excuse that as youthful exuberance. He's also quoted as saying "When we move outside of the volatility we're targeting, we take corrective action". Sounds like a foolproof plan. I used to have a similar notion, though I expressed it in less sophisticated language - sell when things get wobbly. When retail investors do it, it's called panic-selling. When someone with a CFA does it, it's called "calibrating the portfolio beta". Ten years of a “buy the dip” market, with V-shaped recoveries should have shown even the most passionate stop-loss believers the ineffectiveness of that approach. More broadly, it showed me how the market always mutates to fool everyone. But Brad still routinely opines on market levels.

One area where Brad has definitely outperformed the S&P 500 is in growth in Twitter followers. Back in November, I gently poked fun at him on Twitter for having only 192 followers (vs 85.1 million for Taylor Swift). Well, Brad seems to have taken that to heart, because he now has 841 followers. Brad describes himself as a "truth-seeking investor" on Twitter. I always try to be fact-based, so I hope nothing I wrote will preclude us from remaining mutual Twitter followers. (I otherwise do not know Brad.)

In my long and arduous experience, almost all relationships can be patched, unless you have done something really drastic, like calling someone's grandma names. In one of his letters, Brad talks about his grandma Elva, by way of illustrating the plight of pensioners in this era of low interest rates. I am sure she's a lovely woman, who deserves better than having to worry about whether she will outlive her money. Maybe Brad can hand some of the millions he has made from Other People's Money to Elva? That would be one way of narrowing the wealth gap - from both sides.

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