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Morningstar loses faith in Tribeca's long/short equity strategy

Emma Rapaport  |  17 Apr 2019Text size  Decrease  Increase  |  
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Morningstar fund analysts have downgraded Tribeca Investment Partners' long/short equity strategy from Neutral to Negative following the unexpected resignation of portfolio manager Sean Fenton.

In a research note, associate director Alexander Prineas described Fenton's 5 April departure as "disappointing", saying that it leaves the Tribeca Alpha Plus fund in a "vulnerable" position.

Prineas said concerns about Fenton's departure were exacerbated when quantitative analyst Peter Moore resigned three days later.

"Fenton developed the quantitative model behind this strategy, and Moore was integral in maintaining it," Prineas says.

"While the model is quite static, this leaves a gap in expertise Tribeca will need to fill. Meanwhile, the staff numbers on the fundamental research side were never large and will now be more strained."

Fenton resigned after leading the strategy since its 2006 inception, and Investor Strategy News is reporting he is keen on setting up on his own. He sold his shares in Tribeca last year.

Jun Bei Liu, who joined the shop in 2005 and was elevated to co-manager in June 2018, has now been promoted to lead portfolio manager. Liu’s background is in fundamental company research.

Prineas says his negative view of the fund doesn't rest on Lui but on the risk the situation could become disorderly.

"Fenton’s sudden departure is disappointing, because former co-manager, and now sole portfolio manager, Jun Bei Liu is an able investor, who could have been well placed to take the lead in a more gradual handover," Prineas says.

A negative fund rating is applied to funds that have at least one flaw likely to significantly hamper future performance and is considered by analysts an inferior offering in relation to its peers.

The resignations come amid a performance lull for the fund, which Prineas says can exacerbate client dissatisfaction.

"This specialised approach holds sizable long and short positions, which could be vulnerable if outflows occur," he says.

"The $155 million retail client book is dwarfed by an institutional client book of several hundred million dollars, and institutions can redeem large sums with limited notice."

The fund boasts top-quartile performance to 31 March 2019, measured over periods of 10 years or more. However, Prineas says it is marked by volatility, and pockets of significant over-or underperformance.

The Tribeca Alpha Plus fund returned -11.22 per cent in the year to December 2018, weighed down by long positions in Telstra and shorts in global logistics software company WiseTech. As a comparison, the Australia Equity Large Blend category returned -5.54 per cent.

Prineas says the fact the strategy is roughly 8 per cent below its performance fee hurdle may in part have motivated Fenton to exit.

The fund was ranked in the top 3 per cent of its category peers for five-year performance, with an average annual return of 10.47 per cent.

Tribeca’s typical short exposure, at about 45 per cent, is larger than some rivals who limit shorts to 30 per cent. In September 2018, the fund held a chunky 4.89 per cent short position in telco TPG, and 4.23 per cent short in Domino’s Pizza Enterprises.

Prineas says Tribeca may be forced to unwind short and long positions to fund redemptions.

"Knowing this, Tribeca has already reined in some positions, so even without redemptions, the process here is evolving under pressure," he says.

Prineas says the fund's investment team may regroup, making this a solid strategy in the long run. 

However, he says the upside for investors who stay is not worth the downside risk.

is a reporter for Morningstar.com.au

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