Marlowe Partners has annualized over 30% net between January 2019 and August 2021 – after optimizing their approach in 2018 – and annualized double-digit net returns since its founding in 2014. Co-CIOs, David Steinberg and Eric Udoff, have known each other since they studied at university, interned at investment banks and hedge funds, and shared tales of their early personal investing strategies.
Marlowe is in some respects an ‘old school’ New York-based long/short equity strategy: the founders cut their teeth with industry legends Soros and Tepper, run a concentrated book, do deep dive fundamental research, and hold stocks for multi-year periods. In other ways, Marlowe is modern and global in outlook: distinguished by an awareness of behavioral finance and ESG, some low-key corporate engagement, a broad mandate that has identified ideas in the UK and Spain, as well as in the US, and a comprehensive recruitment process that has attracted analysts from private equity firms.
Former employers were important mentors and influences on philosophy and process. Growing up in the same town as David Tepper in New Jersey, Udoff interned at Appaloosa, and joined the firm in 2006 as one of three analysts working closely with Tepper and two senior partners. In a small team, he had a broad remit, spending two thirds of his time on equities and one third on credit while opportunistically shifting the sector focus around industries including metals and mining, autos and industrials. “I was very fortunate to start out at Appaloosa and to learn from Dave Tepper and the other senior partners. That experience laid the foundations for how I think about investing. Dave really taught me humility and the right questions to ask when looking at a new investment,” says Udoff.
David Steinberg, who grew up in Montreal, Canada (on Marlowe Street) drew inspiration from George Soros and several senior fund managers at Soros Fund Management who gave him the freedom to develop his approach and apply his work ethic: “Working at Soros was a bit of a dream come true, as I had read many of George’s books. I had a more unconventional background, and Soros embraced this and gave me the freedom to operate as a “generalist” investor and focus on concentrated research working with Murat Ozbaydar. When Scott Bessent was CIO he fully embraced the original Soros ethos of “micro informing the macro” and giving us the latitude to make highly concentrated investments,” says Steinberg.
Working at Soros was a bit of a dream come true... I had a more unconventional background, and Soros embraced this and gave me the freedom to operate as a ‘generalist’ investor.
David Steinberg, Co-Founder, Managing Partner and Co-CIO, Marlowe Partners
Marlowe carries out deep fundamental research following a thorough and systematic process, which includes qualitative and quantitative elements. Rigorous financial accounting analysis naturally requires good disclosure, so Marlowe avoids opaque companies and is wary of some emerging markets due to governance and disclosure issues. “The intention of our process is to minimize mistakes by answering the same key questions for all investments. This forces an objective discussion and helps us recognize patterns for both good and bad investments,” says Udoff.
Marlowe has a flat structure: the three analysts are partners, and the co-CIOs also spend a significant amount of time working on analysis. The firm culture is all about research and understanding companies with a level of intimacy that would not be possible with 50 investments. “Sizing appropriately is an ongoing focus and we try to balance making our best ideas really count with managing risk,” says Udoff.
Marlowe Partners has annualized over 30% net between January 2019 and August 2021
“Our concentrated investment approach percolates into all elements of the firm, as the top five names can make up 70% of the long book and typically have been held for an average of over two years. This style of long-biased investing requires a certain temperament with a lot of patience that is closer to private equity than public investing. We need accounting and finance experience, but opinions on financial markets can be hard to untrain,” says Steinberg.
Most of the long book is invested in secular growth stories. Where there is cyclicality, Marlowe is looking for an entry point where it believes stocks are unfairly oversold. Marlowe believes this most often occurs due to misunderstanding of companies’ business models, or overreaction to noisy data points, or an earnings miss that might be due to temporary or exceptional factors. “Most of our holdings have secular growth stories, but not all have limited cyclicality. Some have great long-term growth trajectories that will sometimes have business cycles along the way. It has been important for us to take that longer-term point-of-view when investing in this group and not get too focused on trying to predict the next down cycle,” says Steinberg. “Buying the dip” has become a meme at the overall equity market level. Marlowe is not making macro calls but is often buying into an ephemeral setback in a company’s growth path.
Marlowe often finds mis-pricings in new public companies – both IPOs and spin-offs – undergoing secular or management changes, or perhaps those that missed earnings estimates. “In general, being able to sort through complexity or being willing to take a long-term view has been an important factor in our best investments. The mispricing probably arises from some combination of human nature, misaligned incentives, and more complicated situations that take longer to figure out. When there is a large sell-off, it is human nature for fear to kick in,” says Udoff. These scenarios are often categorized as “special situations” by event-driven equity investors, though Marlowe often invests without any hard or soft event catalyst. These situations can create a buying opportunity, which might simply be a “complexity premium” but could also be caused by the various human biases identified by behavioral finance that make other investors simply panic, place excessive weightings on extrapolating the most recent data points and fail to factor in disruptive change.
The broader animal health theme has contributed around one third of Marlowe’s performance since 2014. “Our understanding of the humanization of pets and our conviction on the growth trend built up over time. During this process we spoke to many vets, monitored consumer behavior, and even visited a dog food factory as we made several investments in the industry. Pets have moved from the back yard, to the living room, to people’s beds,” said Steinberg. People are becoming pet parents, getting more pets and spend more money on them, creating what Marlowe believes to be a recession-proof secular growth sector that can be played from several angles: drug makers, pet food makers, veterinary clinic operators and retail stores. “Spending has increased as pets have become more important members of the family. Since the pandemic hit, the pet population is growing faster as well. These fundamental drivers create strong growth trends in the animal health industry,” says Udoff. The Covid crisis has provided an opportunity to buy into an operator of veterinary clinics that was initially oversold on fears that lockdowns would reduce its sales.
The intention of our process is to minimize mistakes by answering the same key questions for all investments. This forces an objective discussion and helps us recognize patterns for both good and bad investments.
Eric Udoff, Co-Founder, Managing Partner and Co-CIO, Marlowe Partners
Outdoor living is another growth trend, which Marlowe has mapped onto a golf company and a swimming pool company, which was also thrown out with the bathwater after the pandemic hit. “The initial knee jerk market reaction to Covid was completely wrong. Investors sold down the stock when in fact people stuck at home had more time and money to spend on installing or upgrading swimming pool equipment, from chlorine to salt or from analog to digital,” says Udoff. Outdoor activities like swimming in pools and golfing have clearly boomed since the pandemic hit. Marlowe took advantage of the initial mispricing, Udoff says, “we already knew the company well and had a small investment. In the early days of the pandemic, the stock declined by nearly half as concerns mounted that customers would cut back spending and that pool professionals couldn’t service customers because of the lockdown. However, our research indicated that people increasingly wanted to open their pools early and a wait list was forming for new construction.” Marlowe’s thesis was later proven out as the pool industry quickly recovered. Other current sectors of focus for Marlowe include travel, semiconductors, video games, and music.
Though most of Marlowe’s long stocks are structural growers, they could show a variety of style and factor exposures: “It can be helpful to understand narratives to better assess why a stock is moving and if your hypothesis is right. Our investment framework isn’t designed to make decisions based on factors. We make concentrated investments when a stock becomes overly discounted, and we tend to invest in companies with strong secular growth trends. Definitions sometimes are confusing and buying a secular growth company at a very cheap price can arguably be growth, value, and quality all at the same time,” says Steinberg. Covid was for a time the most influential factor. “We often discuss Covid-resilient and re-opening stocks and think of it a bit differently than style factors. We grouped stocks this way because this is how we believed the fundamentals would play out. For a while, Covid became the most important variable to estimate earnings for many companies, so our analysis centered around it. Dividing the portfolio into potentially Covid-resilient and re-opening groups helped us better assess the investments and the risks,” says Udoff.
Aggregate market valuations are of little concern when Marlowe only seeks ten or so best ideas in highly idiosyncratic companies. In the early years, Marlowe was somewhat cautious in holding cash and portfolio hedges such as S&P 500 put options to dampen down volatility. This changed in 2018 when excess cash was deployed into longs, and tail hedges were taken off. Marlowe eschews macro hedging partly because they do not feel they have any competitive edge in market timing. They are open minded about unique short ideas that should be alpha shorts – profit centers. Sometimes alpha shorts could also double up as a hedge for sector exposure on the long book. “We short when it is supported by an idiosyncratic view, but not for broader macro hedging. For example, in recent years we were short an index tied to commercial real estate loans. We had a view that most of the loans in the index made to low quality shopping malls were going to default and realize substantial losses. Additionally, we had long real estate exposure and it acted as an interesting hedge. This is the type of thing that makes sense for us,” says Steinberg.
“Since inception, we developed our process, team, and structured the business for the long term. We think our investment approach aligns best with a wide range of long-term equity investors including family offices, endowments, foundations and other institutional investors,” says Steinberg. Marlowe’s fees are intended to align their interests with investors: the management fee percentage declines as assets grow.
ESG is relevant both to the firm and to its investments, though they’re not considered an ESG fund: “ESG is an increasingly important consideration in the investing world. At Marlowe, our business is carbon neutral. When looking at investments, we’ve found that considering an ESG framework helps us avoid significant risks,” says Steinberg. Engagement with companies covers both financial and non-financial matters: “We often develop relationships with management teams and boards as a natural result of our approach and investing at times of misunderstanding. We speak with management and boards regularly in our largest investments, any advice is normally on communication and capital allocation policies. We have also lent our support to ESG initiatives,” Udoff adds.
As of August 2021, Marlowe is naturally looking through the short-term concerns about new Covid virus variants and focusing on longer-term trends. For instance, Marlowe anticipates a recovery in travel spending out to 2022 and 2023 and has identified a potentially undervalued name in the space.