Style chameleon

The unconstrained strategy offers flexibility with no minimum or maximum weights per style. “We can concentrate a significant amount of our risk in a particular style when our bottom-up ideas align well with our top-down framework. For instance, in the second half of 2018, as the business cycle deteriorated and central bank liquidity tightened, the strategy held the majority of its net risk in defensive companies. This positioning allowed the fund to generate a positive return in down markets,” explains Portfolio Manager Matthieu Fleck.

The strategy places a strong emphasis on quality businesses. “The unique characteristics of these companies cannot be fully captured in an Excel model and often lead to positive surprises over time. Some of the most rewarding investments occur when we can purchase a quality business that is temporarily out of favour due to cyclical reasons. We make it a point to consider quality businesses when they fall out of favour. These situations can present excellent entry points if we can anticipate a path to an earnings inflection point. This is the concept of time arbitrage and why we focus on earnings over multiple timeframes,” notes Fleck.

As of April 2024, during the time of this interview, the strategy had most of its risk concentrated in the secular growth style. “We recognize that this may seem like consensus positioning, and we actively challenge our stance. However, at present, these companies continue to show the strongest earnings prospects over multiple time frames, and we are comfortable holding substantial exposure across the Artificial Intelligence (AI) value chain. We believe that valuations of our investments still do not fully reflect the impact of AI, which is considered one of the most significant technological breakthroughs of the past century. I recently listened to a podcast with Elon Musk, arguably the greatest inventor of my generation, who stated that AI is the fastest-advancing technology ever seen. While there will be bumps and volatility along the way, and it is crucial to remain disciplined, we also have to stay focused on the long-term megatrend,” explains Fleck.

Broad based attribution

Since the Atlas strategy’s inception in 2014, performance attribution has been broad-based, with an even split among secular growth, cyclicals and defensives. Additionally, returns have been geographically balanced across regions, indicating a significantly greater contribution from Asia and Europe, including the UK, compared to market-cap-weighted indices where US dominance has increased.

Bottom-up and top-down

“Simplistically, two things drive stock performance: earnings and multiples. From an earnings perspective, we need to be ahead of the crowd in identifying inflections, key drivers and secular trends. From a multiples perspective, one of our core philosophies is that top-down forces play a substantial role in determining the multiple the market is willing to pay for a certain asset. This is why we invest significant time and resources in our top-down assessment and how we believe it will evolve. The most rewarding investments are the one’s when you get both the earnings and the multiple right,” explains Fleck 

From a bottom-up perspective, the team focuses on understanding a company’s earnings power over multiple timeframes and analysing what is already priced into the share price. For each investment, a team member prepares a pitchbook that provides an in-depth analysis of the company’s business, environment, earnings drivers and historical performance. “It’s critical to understand a company’s historical performance and how it compares with forward expectations (base-rate theory). We need to challenge all outlier assumptions and clearly recognize when there has been a step change in growth or margins. This approach was particularly important post-pandemic, as the disruptions caused many companies to either over-earn or under-earn,” explains Fleck

From a top-down perspective, the team closely monitors the rate of change and momentum of key macroeconomic conditions and central bank liquidity to identify important inflections and trends. “We look at a whole database of indicators that give us as close to real time perspective as to what is happening in the U.S., Europe and China. We are also looking at the rate of change of many of the classic indicators such as new orders, new orders to inventory, manufacturing data, China new orders,” says Fleck. 

This approach helps to anticipate shifts in the broader economic environment that can impact market dynamics, investor positioning and investment opportunities.

“There are times when the market is heavily dominated by macro, and we have to have a repeatable process in place to form and support our views,” says Fleck. 

Balancing protection and upside 

The strategy aims to protect capital during times of stress and deteriorating macroeconomic environments. Fleck, known for his pragmatic approach and belief in intellectual flexibility, emphasizes the importance of balancing strong convictions with adaptability. “We strive to build strong convictions while remaining flexible in the context of evolving market conditions. It’s crucial to be dynamic in our decision-making and open to all scenarios and outcomes,” he says.

Despite his success, Fleck displays great humility and is the first to point out where he can improve. Fleck and his team embrace a mentality of continuous improvement. “One of the best aspects of investing is the opportunity to constantly learn and improve. For instance, there have been times when our risk-taking was overly cautious, causing us to miss some upside potential. Risk management is not just about protecting the downside; it’s also about being sufficiently invested when the environment is favourable for risk-taking. Major events like the 2008 financial crisis are rare, and it’s important not to let the fear of significant drawdowns paralyze our risk-taking. We have learned to be more balanced in our approach to risk,” says Fleck. 

Atlas ended the first quarter of 2020 roughly flat, despite a significant drawdown in global markets, demonstrating an impressive ability to manage risk. Fleck has a reputation for navigating and managing drawdowns exceptionally well. The strategy tends to flourish and differentiate itself during the most volatile and difficult market environments. “I think it’s a testament to our style, portfolio construction, and ability to remain objective and unemotional during these periods. I welcome market volatility with open arms,” he says. 

Coverage, portfolio construction and correlations

“We don’t seek to cover the entire universe of investments. We operate with an unconstrained approach, allowing us to pivot and concentrate on any idea, in any sector or region we find compelling. Our focus is on maximizing our opportunity set and meticulously evaluating and monitoring the ideas that ultimately make it into our portfolio,” points out Fleck. 

Though team members specialise in certain sectors, they do not run their own books. Fleck is the ultimate decision maker for every idea in the portfolio and for the portfolio construction. “We are constantly having internal discussions about individual ideas, risk/reward analysis, and how one stock interacts with the rest of the portfolio,” he says. 

Improving your odds

“Hedge fund investing is about doing everything possible to improve your odds; we operate in a world of probabilities, not certainties,” says Fleck. The team focuses on several key elements to tilt the odds in their favour over time, namely:

• Efficient Information Gathering and Interpretation: How they interact with management teams, street analysts, and utilize alternative data sources.
• Investigative and Contrarian Mindset: They employ a rigorous and often contrarian approach in their decision-making.
• Limiting Mistakes: Mistakes are part of investing, but it’s important to limit avoidable mistakes to perform over time. Fleck points out the Dr Ramos Loser’s Game study of amateur tennis that found that 80% of points were due to unforced errors and it was most important to avoid mistakes to win.

Technical credibility checks 

Fleck emphasizes the importance of integrating detailed technical analysis and quantitative indicators into the investment process to provide unbiased signals that challenge convictions and positioning. “Technical analysis eliminates emotions, offers insights into market psychology, and helps identify points of exhaustion, inflection points and trends,” explains Fleck. “It allows us to distinguish between trending and non-trending markets and effectively manage both portfolio and position risk. While not necessarily a source of idea generation, technical analysis is an additional tool embedded into our entire process.”

Fleck also acknowledges the predictive power of the market itself: “We listen to the messages from the market, focusing on outperforming and underperforming assets to understand whether the signals from these moves are noise, opportunity, or insightful.”

Global synergies and cross asset signals

As part of their top-down framework, the Atlas team dedicates significant time to understanding the implications and signals from various asset classes, including commodities, credit, currencies, treasuries and crypto markets. The team also leverages Pictet AM’s global footprint and expertise, engaging in idea exchanges with managers across multiple asset classes and countries. “We interact with exceptional credit teams at Pictet AM to discuss the evolution of market spreads for example. Our portfolio managers are true experts in their fields, and we benefit from productive exchanges during our weekly meetings with all portfolio managers and risk takers in macro, credit, equities and multi asset,” enthuses Fleck.

“Pictet AM is a highly collaborative environment where insights at the macro level and insights at the bottom-up level are shared across the firm,” adds Fleck.

Why shorts are different?

The team is highly selective with short positions, which are typically sized much smaller than their longs. “We use strict parameters to avoid getting caught in short squeezes or shorting names with asymmetrical risk to the upside, such as take-out risk,” says Fleck. “We focus on shorting low-quality earnings, accounting irregularities, poor governance, balance sheet issues, changes in the competitive landscape and deflationary pressures on margins or top line.”

Fleck, a chartered accountant, CFA charterholder and Financial Risk Manager (FRM) whose career began in accountancy at PwC, adds, “In a perfect world, we would short a portfolio of bad businesses, but this isn’t feasible as they tend to be quite crowded and prone to violent squeezes”.

Additionally, the team engages in more tactical, shorter-term catalyst-driven shorts that might be held for only a month or two, as they tend to play out quickly.

Historically, Atlas has primarily focused on high-conviction longs and shorts, with very few “pair trades” in the portfolio. However, a notable exception in 2024 has been a tactical short in the luxury sector paired with a long in the same space. Fleck observes, “We have never seen such wide dispersion within the luxury sector’s performance, reflecting an uneven economic recovery and income distribution. The post-Covid era created massive dislocations across many sectors, leading to a new paradigm for equity dispersion,” says Fleck. 

Team

Fleck speaks highly of his team and their winning mindset, work ethic and intense focus on performance. “It’s a tremendous privilege to manage people’s hard-earned savings, and we are grateful to be entrusted with such a significant responsibility,” says Fleck.

Landscape

“From a bottom-up standpoint, we are currently in a period of disruptive innovation and unprecedented change driven by technology. It’s very exciting from an investor’s perspective. This environment creates significant winners and losers, and this dynamic will play out over many years,” says Fleck. “Additionally, companies are now operating in a capital cost environment that is very different from the last 10 to 15 years. Higher costs of capital help distinguish stronger companies from weaker ones, creating a productive environment for long/short stock pickers.”

“From a top-down perspective, there are many conflicting forces, making the range of outcomes broad. This underscores the importance of investing with a top-down framework and maintaining a flexible mindset,” says Fleck.