In launching Kalakau Avenue, three common questions arose:
- Why allocate to Kalakau Avenue when there are more established funds following a similar strategy; why not do something more differentiated?
- Why wouldn’t investors just do this themselves?
- Can you really outperform in well-covered stocks?
Why allocate to Kalakau Avenue when there are more established funds following a similar strategy; why not do something more differentiated?
There are some great funds that invest in a concentrated way in high-quality companies with great long-term track records. In fact, some are managers that I have learned from and been inspired by throughout my career, and would absolutely recommend for investment. The starting point for Kalakau Avenue’s strategy was not how it differentiated from these more established funds or how it might resonate with allocators — I wasn’t building a product to sell. Rather, it is the expression of my personal investment philosophy and how I want to invest and compound my own capital over the long-term. I simply wouldn’t be comfortable investing my capital in any other way. That said, while there are similarities with some more established funds, we have our own unique expression of what makes a high-quality company (discussed more in our Business Quality Framework).
Why wouldn’t investors just do this themselves?
In some cases, we do recommend that investors do this themselves. It removes the principal-agent issue and lowers the overall fee load. However, these are only secondary reasons to pursue a direct investment approach. The primary consideration is whether an organisation has a great investment and research process with solid long-term decision-making and governance foundations. Investing is hard work and there are no shortcuts. If you are going to do this yourself, do it properly and hold yourself to the same standard to which you hold your managers.
Can you really outperform in well-covered stocks?
Sources of alpha can be grouped into four broad buckets — informational, analytical, operational, and behavioural (more on this topic here). It is true that the stocks we typically invest in are well-covered by research analysts. As such, it is unlikely that we can develop an informational edge. From an analytical standpoint, despite the information being available, many investors simply do not do the work or go the extra mile to understand something. However, there remains many smart, talented investors who do. While we back our analytical work, predicating our investment success on continuously outsmarting the market is unwise — great analytical work should be considered “table stakes”. We also don’t engage in operational value-creation initiatives seen in activist or private equity strategies. Therefore, the key source of value-add for us must be behavioural.
We have been very intentional in the design of our investment process, culture, and business operations to ensure our decision-making process is as long-term and as rational as possible. It starts with having like-minded and equally long-term capital partners. We then keep our expense base extremely low so that we are not dependent on raising capital to stay in business. This dependency would cause us to focus too much on short-term returns. Our investment process and culture are designed to preserve this long-term mindset and highlight irrationalities in our decision-making.