Nutshell has cracked it

David Stevenson, 22/12/2021

When it comes to the world of global equities funds, the presence of tech giants such as Adobe, Alphabet, Meta and Microsoft should not come as a surprise, especially for a product dubbed a ‘growth fund’. However, what might come as somewhat of a shock is that a firm that is outperforming not just the benchmark, but household name peers such as Fundsmith, is in fact a small boutique.

Nutshell Asset Management is a one fund firm, with an AUM sub £50 million (around £32 million). However, the Nutshell Growth Fund is a favourite of fund selectors, as shown by its continued dominance of the provider league table supplied by SharingAlpha. The results collated by SharingAlpha are from leading fund selectors, professional fund buyers whose positions grow with each successful fund pick. 

So, what makes Nutshell different from the herd?

While many boutique firms employ a simple buy and hold strategy, aiming for low turnover to display to investors how their high conviction portfolios have been set up right since inception and do not need any tinkering, this is not the Nutshell way.

A look into the lead portfolio manager and chief executive Mark Ellis’s background gives some indication as to how this fund is constructed and perhaps why it has done so well. Mr Ellis comes from a hedge fund background, "so it's all about relative value….a lot different to a traditional fund manager", he says.

Turnover is high not because Mr Ellis is always replacing holdings but he is truly active when it comes to positions. Constantly trimming and adding to positions might not be in a traditional fund manager’s repertoire but from someone having worked in the hedge fund space, Mr Ellis is not just concerned with traditional valuation metrics when it comes to rejigging the portfolio - not to say that valuations don’t play a part in the process.

A point Mr Ellis was keen to point out that despite the high level of turnover (in the truest sense of the word) this does not make the fund expensive. Transaction costs are in low single point basis point territory and, as the vast majority of the holdings are not based in the UK, they escape stamp duty.

The devil’s in the details

Some fund managers have a favoured valuation metric and if a stock exceeds this, the holding is removed and profit is locked in. However, when a portfolio contains many of the world’s highest quality companies, such a technique would lead to an issue of what to replace it with.

Given this conundrum, Mr Ellis is constantly monitoring his portfolio for signs that a position might have become a tad overweight (relative to its fundamentals). While the firm’s promotional material uses the phrase "nimble" to describe their process, it has been decided that "rebalancing" is a more apt term as the firm is not just cutting and adding willy-nilly, it is all part of a grander scheme to keep the alpha flowing.

One example Mr Ellis gives is straight out of a hedge fund play book. The fund has a position in pizza company Domino’s which earned its place in the portfolio using all the usual checks such as price-to-earnings growth, free cash flow yield etc. However, when Bill Ackman, a true hedge fund don, took a position in the company, the share price skyrocketed and thus it was decided to trim it back down during the next "recalibration".

Mark Ellis

However, the story does not stop there as when the dust settled and the company began trading on more favourable valuations, Mr Ellis topped up the position again.

Given the bull market that’s seems to be a constant feature of the US equities market, some firms can outperform by being beta driven, that is holding some of the major constituents by market cap of the S&P 500 and riding the wave with just a couple of tweaks needed to beat the index.  

“In a bull market it is very easy just to outperform by putting high beta stocks in the portfolio,” says Mr Ellis. He added that while some well-known funds that use this technique suffered badly during the recent market drawdown, due to how this fund is constructed it suffered less than half the decline of some of its peers and is now back up to the ‘high watermark’ of a 28.5 percent return year-to-date.

Some of the techniques Mr Ellis uses date back to his time in university when he wrote a paper of momentum trading which was actually published in The Journal of Asset Management. Looking at this specific factor, momentum, has been widened to include other factors smart beta enthusiasts focus on although all use the same type of analysis that went into the original paper.

It’s this focus on fundamentals, as well as a bit of technical analysis to see which way the share price is moving that is the bedrock of the portfolio construction process. Value and growth managers may often buy into a ‘story’ about a company, this is to say that while it might not be making money now, it looks like it will be in 10 years or so, again this is not the Nutshell way.

“That's [story investing] just far too risky for us. I've got 100 percent of my liquid assets in this fund and all my pensions and all my kid’s money in there as well. So I'm well aligned with shareholders", says Mr Ellis in a true demonstration of having "skin in the game".

Nutshell may not be the biggest fund in the world and while shying away from the word "nimble" its size does mean that it can enter and exit positions quickly (although since inception the fund has only owned 42 different companies).

Considering what Mr Ellis describes as a "labour intensive" style of fund management, its management fee of 1.5 percent seems reasonable especially when considering it has beaten the benchmark by double digit percentage points. 

Remember, once the fund hits £100 million the institutions will want to play and while a soft close target was not mentioned, given the performance there’s presumably one pencilled in.

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