In August, we launched Opportunities, focused on owning outstanding under-the-radar companies for our clients. Since then, the Opportunities portfolio has risen +9% vs. the Russell 2000 Index up +1%.
We've received many questions from clients on how to think about Opportunities, and will address the top questions we've received below.
In short: we believe Opportunities serves as an excellent complement to the Flagship portfolio, and displays many of the same attractive risk/reward dynamics that should power high returns for years to come.
Attached is the full memo, along with a 2-minute video summary from our Chief Investment Officer.
Q: What's driving the Opportunities outperformance?
A: Two things. Owning fundamentally strong companies before the crowd catches on and a high slugging percentage across the portfolio.
We believe our Opportunities holdings are simply great businesses with secular tailwinds at their backs (e.g., e-commerce, fintech, SaaS). They tend to go overlooked by institutional investors, many of whom can't even own these stocks because their funds are too big.
As these companies grow in market value, they tend to enter the radars of large investors who can finally own them. We've seen this dynamic play out for many Opportunities companies in recent months.
Represents return for Titan Opportunities (after fees) from inception through 10/26/2020 for a client with an aggressive risk profile. See full disclosures.
The second key contributor is a high "slugging percentage" - or put differently, the dynamic of having winners that win a lot more than losers lose.
So far, 75% of the Opportunities portfolio has increased in market value since the strategy's inception, with the median gainer rising by +17%. By contrast, the median laggard in the portfolio has lost only -7% to date.
While we expect the magnitude of both of these dynamics will fluctuate with short-term price movements, in the long run we believe both will remain sustainable drivers of our outperformance versus the broader market.
Q: Is Opportunities a risky strategy?
A: In our view, no. Don’t confuse “volatility” for “risk.” Similar to Flagship, we see low risk of permanent capital loss in Opportunities.
Most people have the wrong definition of risk. You need distinguish between (1) volatility and (2) true risk.
(1) Volatility is the daily turbulence in stocks' prices. We expect the daily volatility in Opportunities to be greater than what we've seen in Flagship given these are smaller, less liquid equities. Hence the opportunity (pun intended).
(2) True risk is the chance of permanent capital loss. Our Opportunities companies are among the best positioned in the small/mid cap universe in terms of competitive advantages, growth runways, and unit economics. We see low odds that the plane goes down, so to speak, for any of these holdings.
(1) + (2) = We expect slightly greater daily ups and downs for Opportunities than we see with Flagship, but similarly low chances of long-term capital loss.
Q: How much should I invest in Opportunities?
A: This ultimately depends on your investment goals and appetite for volatility.
Are you new to investing or uncomfortable with short-term swings in your stocks? If so, the personalized recommendations in the app are a great start.
Are you less phased by short-term price fluctuations? If so, you can meaningfully dial up your exposure to Opportunities. Some clients choose 50/50 mixes of Opportunities/Flagship; others go even higher.
If you're currently underinvested in Opportunities and have investable assets sitting in cash, we'd recommend deploying those assets into Opportunities until you've met your target allocation. This will allow you to increase your exposure to Opportunities without incurring tax consequences from selling other assets.
After the recent 10%+ correction in the Opportunities portfolio in particular, we believe now is an attractive time for clients to be buying more of the high-quality franchises in this basket. Same goes for Flagship, per our last memo.
We'll continue to monitor the performance of both strategies as we move forward and will keep you apprised of any updates to our recommendations.
Let us know if you have any questions,