New York, HedgeCo.Net – CMJ Value Holdings was founded in Chicago in 2001 and has over $40 million in assets under management at this time. The company uses an equity long/short approach with slight bias toward the long side. Robert Moore is the President and Chief Investment Officer of the company and we recently had the pleasure of speaking with Robert about his fund and his view on the market.
HedgeCoVest: Thank you for taking the time to speak with us Robert.
Robert Moore: My pleasure. I appreciate being able to share our investment philosophy and strategy.
HedgeCoVest: How would you describe your investment philosophy?
RM: We are a value oriented manager. We do detailed analysis on the cash flows of individual companies as well as the industries as a whole. Once we have done the analysis and established the fair value of the stock, we look for investments with a strong deviation between the fair value and the current stock price. We do this for both long and short positions.
HedgeCoVest: What differentiates your fund from the rest of the hedge fund world?
RM: First and foremost is our experience. I have over 40 years of experience in evaluating US companies. Secondly, our approach is a disciplined one where we are constantly evaluating the stocks in our portfolio as well as stocks we may be looking to add to either the long or short portfolio.
HedgeCoVest: What would you say are the strengths of your strategy?
RM: The academically rigorous standards that we use for evaluating stocks, the market, risk, etcetera. I think another strength from the investors stand point is that nearly all of our gains are long-term capital gains which provides a tax advantage over some of the more active short-term funds.
HedgeCoVest: What are the weaknesses to the approach?
RM: There are times when the investment style is out of favor with the market, but that pretty much goes for any investment approach. There are times when growth investing will be in favor and other times value investing will be the most favorable. Certain sectors are difficult to evaluate properly as the standard deviations for performance are so high. Biotech would be one where the success rate is almost a pass-fail scenario. The social media stocks are difficult to evaluate as well as the cash flow analysis is nearly impossible to assess. As a result we tend to shy away from those sectors.
HedgeCoVest: Is there a type of market where you feel like your strategy outperforms other investment approaches?
RM: When emotions are held in check and investments are made based on analysis and valuations, this is when our strategy really stands out. If the market is emotionally driven, we will tend to underperform the overall market. Whether it is extreme optimism or pessimism, the decisions are based on emotion and that hinders the fair value assessments.
HedgeCoVest: Do you use sentiment analysis in your evaluations at all? We have talked quite a bit about emotions having an impact on your performance, so I am curious.
RM: We don’t use sentiment indicators on individual stocks, but something we do look at is the direction in which the fundamentals are trending. We would rather buy a stock that is priced below its fair value and the cash flows are experiencing a positive trend than one whose cash flows are slowing—even if they are priced below their fair value.
HedgeCoVest: What measures do you take to reduce or eliminate risk?
RM: The short portfolio reduces the risk against an overall market decline. In addition to that, we will adjust the percentages dedicated to the long side and short side based on market conditions and if we feel the market is overvalued as a whole. For instance, we had been net long the max 70% for an extended period, but we just dialed that back to 50% approximately six weeks ago.
HedgeCoVest: Do you have limits on how much exposure is acceptable?
RM: We have a limit of 8% toward an individual stock and that is in the operating documents. We also have a 20% limit on sector exposure. We don’t typically run the exposure up to the 8% level and the top ten holdings usually represent 50% of the portfolio.
HedgeCoVest: How many stocks do you typically keep in the portfolios?
RM: In the long portfolio there are typically 30-40 stocks on average and on the short side it is usually 20-30.
HedgeCoVest: What is the average holding period for the stocks in the portfolio and how much of the portfolio gets rolled over the course of a year?
RM: Because we take a long-term value approach, the average holding period tends to be in the two and half to three year time frame. In the long portfolio, around 30% of the portfolio will be rolled over into new investments. On the short side it is more like 50% being rolled on an annual basis.
HedgeCoVest: Do you think your strategy is completely scalable or could size restrict your ability to trade the strategy at some point?
RM: We have not run in to any issues at this time and we don’t see it being an issue in the near future. Because we focus predominantly on large-cap U.S. stocks, the growth in assets under management would have to change dramatically to have an impact. That being said, size can definitely be a disadvantage in this business.
HedgeCoVest: Being that we are speaking during the holiday season, what is your outlook for 2015?
RM: The way inflation is being kept in check really helps the valuations. With that in mind, we have a pretty positive outlook for 2015 and can see the S&P gaining 10-15% over the course of the year.
HedgeCoVest: What about the economy?
RM: Again, inflation being held in check should keep the economy growing. The growth rate isn’t likely to increase dramatically, but it will remain kind of middle of the road. Oil being down so low helps keep the inflation rate low and it is kind of a perfect scenario.
HedgeCoVest: One last question for you, as a hedge fund manager, what was it about HedgeCoVest that led you to sign up?
RM: There were several factors really. First, I liked the structure with the client having a separate account. That made so much sense. Secondly, the total transparency afforded the client also made sense. Lastly, we saw HedgeCoVest as a way to gain exposure to potential clients and potentially grow our assets under management.
HedgeCoVest: Thank you Robert for taking the time to share your thoughts with us.