Jacob Mitchell: ‘I was one of those kids reading the financial pages’

Antipodes CIO on why ‘quantamental’ is much more than an industry buzzword

Most boys spend their school days kicking a football around, hanging out causing trouble or reading books even, but Antipodes Partners chief investment officer Jacob Mitchell whiled away the hours buried in the financial pages of newspapers.

It was from these early days that the self-confessed “market tragic” discovered his love of financial markets. “I was one of those kids who was reading the financial pages,” he says. “In Australia there was a lot of economic reform in the late ’80s. It was a pretty exciting time and there was a great deal of activity in the stock market.”

Mitchell says what gripped him most was working out how the economy and the stock market are linked. This intrigue led him to start thinking about companies from an investing perspective and he soon found himself a trainee analyst at an equity house.

Flavour of the month

That company, Tyndall Australia, was an early adopter of the ‘quantamental’ approach that is so central to Antipodes Partners’ process today. Quantamental is a blend of computer and human decision making that has become a buzzword in the industry.

Working at Tyndall taught Mitchell to be a genuine stockpicker while using a quant valuation framework. He believes this was bold and innovative in the mid-’90s.

“For three years it was a great training ground, and that quantamental approach has stayed with me. I know it is flavour of the month but it’s something I never stopped thinking about.”

Mitchell went on to spend 14 years at Platinum Asset Management, latterly as deputy CIO, where he was instrumental in developing the firm’s quant systems. He describes the firm as “one of the pioneers of liquid alternatives” where he honed his equity long/short skills and learnt about offering hedge fund-style products to retail investors.

Mitchell left Platinum in 2014 to set up Antipodes Partners in Sydney in 2015. He launched three funds in July of the same year that unsurprisingly rely on a quantamental approach: the long-only Antipodes Global Fund – Long; the long/short Antipodes Global Fund; and the Antipodes Asia Fund.

The company has a 20-strong investment team, four of whom are based in the London office, which was opened in September last year. It also launched a Dublin-based Ucits version of the long/short fund in July 2017 and followed this up with the long-only strategy in January this year. Assets have hit $300m across the two funds.

The long parts are identical for both funds that seek to hold 30-60 ‘pragmatic value’ names. Mitchell says this differs from conventional value because it does not anchor on mean reversion, which traditional value tends to do at the expense of overlooking potential disruption to the business and capital market cycles.

“Industries go through a combination of business and capital markets cycles,” he explains. “When the business is going well the market tends to overvalue it and when it’s going poorly, it tends to extrapolate too negatively. The problem with that framework is some industries don’t come back; they genuinely get disrupted.

“I think to do value investing successfully you need to be aware of big structural longer-term changes, and socio and macroeconomic changes.”

He says most value investors have gained a bad name, not just because we have been in a raging growth market but also because they have done a poor job of judging the structural losers.

Looking for clusters

Antipodes’ quant team helps to identify areas where the market is being irrational and broaden the scope of the fundamental stock analysis, all the while taking the emotion out of the process.

“The problem with being an expert is you get too siloed, too deep,” says Mitchell. “Yes, you need to do that but you don’t want to be missing things, and that’s where I think quant can help you be broad.”

The firm looks for between eight and 12 “long cluster” positions that exhibit similarities in their risk profile, including an irrational extrapolation around change, end-market, style and macro characteristics. No cluster is allowed to grow bigger than 15% of the portfolio.

“We think more deeply around what macro and style sensitivities the companies may share. The benefit of that approach is instead of finding 60 individual names, we can deploy the research engine to be more productive, and hence much deeper.”

A recent example in practice was a piece of research that looked at what 5G means for telecoms operators and the companies that supply them. Mitchell says the market has irrationally extrapolated the potential effect of regulation and the capex requirements, making now the best time to deploy capital.

“When that happens, if you’ve done deep-dive analysis, you’ll find multiple companies you can deploy into so that you can build an area of concentration in the portfolio where there is not much risk of you being wrong because of the depth of the analysis and because you’ve been patient.”

US semiconductor and telecommunications equipment company Qualcomm is an example of a stock that is likely to benefit from the roll-out of 5G, according to Mitchell. He believes the market has become irrational about the impact of changes to its business model following recent legal skirmishes with Apple over a licensing model.

“The market seemed to be pricing-in a worst-case scenario. If you park the licensing opportunity, we are on the cusp of mass adoption of 5G – and that is another cycle of spending. You are really at the beginning of a cyclical rebound in Qualcomm’s business and arguably a cycle that could be much longer than 3G or 4G.”

Recent long clusters include software incumbents such as Microsoft, Cisco Systems and Oracle, and mobile connectivity exposures, including Qualcomm. Global cyclicals including General Electric, Siemens, Samsung Electronics and Honda Motor form another cluster.

The company has also increased exposure to natural gas on the belief that it is “the real undervalued asset in energy”. This has been driven by reform of the European emissions scheme and China’s move away from coal towards gas, as well as the rise in popularity of electric vehicles and development of battery technology.

Subsequently, exposures such as Inpex and Range Resources, and energy/infrastructure service providers such as Saipem, TechnipFMC and JGC have been added to the portfolio as one of the long clusters. Another way of playing the energy theme is through energy companies in Europe – EDF is the portfolio’s largest position at 3.5%.

“We’re trying to find clusters that are genuinely different from each other and hopefully behave in a different way, so when correlation goes to one, our portfolio does surprisingly well because we don’t have a lot of built-in correlation.”

Disruptors disrupted

In October last year, Mitchell told Portfolio Adviser about his short position in Tesla, based on a conviction that consumers were not yet ready for the switch to electric vehicles (EVs), its cars were not yet cost-efficient and the firm had a large market capitalisation relative to its production. Does he still feel the same way?

“Tesla has moved into the mass market and is up against every other auto maker in the world. If they choose to, those companies can compete on a brutal basis with Tesla because they can afford to lose money. They can launch full EV models simply to combat Tesla because they’ve got highly profitable incumbent businesses.”

But Mitchell does not count Tesla as the best short in the portfolio. That honour goes to some of the “weaker software challengers” he believes will end up being challenged themselves.

Names include Workday, a financial management and human capital management software vendor, Splunk Technology, which produces software for analysing big data, and digital payment service Square.

“Square is what happens when you get a theme that becomes hot and a company that’s fast-growing because it’s found a new market segment. It’s also an example of markets extrapolating irrationally in a positive way in the sense of believing everything this company touches will turn to gold.”

The problem, as identified by Mitchell, is that other companies are starting to replicate the success of these disruptors. For example, First Data has created a company to compete in the same space as Square.

Mitchell says coming from Australia helps Antipodes’ portfolios be “truly global” because the lack of opportunities on home soil forces the team to scan the globe for ideas.

The long-only portfolio is 28.6% exposed to the US, 21.7% to developed Asia (10.9% Korea and 10.8% Japan), 19% to developing Asia (18.5% China and 0.5% India), 19% to western Europe, just 1.6% to Australia and 0.7% to the rest of the world. It has a 9.4% weighting in cash.

Mitchell says Korea is a significant weighting because he feels corporate governance is changing for the better. As well as Samsung, Hyundai Motors and Korean Telecom Corporation and KB Financial all feature in the portfolio.

“As you’ve seen in Japan, there can be a shift in top-down attitude towards corporate governance,” he says. “It can be quite gradual but I think there’s no doubt that is positive for our Korean exposures.”

Mitchell is critical of those investors who say they’re global when in fact they have a significant home bias. He says, tongue in cheek: “You could argue we don’t have a home market.”

Biography

Jacob Mitchell founded Antipodes Partners in 2015 as managing director and CIO. Prior to this, he spent 14 years at Platinum AM, most recently as deputy CIO and a portfolio manager of the Platinum International Fund. He was also portfolio manager for the Platinum Unhedged Fund and the Platinum Japan Fund. Mitchell has also worked at UBS Warburg Australia and Tyndall Australia.

Wealth manager view: Ben Yearsley, managing director, Shore Financial Planning

With the success of global funds from Fundsmith, Lindsell Train and Baillie Gifford during the past decade, it is now sexy to be a global manager. Many new funds are clones of these, so it is refreshing to see a global fund that is on the other end of the scale, ie a more value-orientated approach. However, there are also many competitors in this space, for example Schroders and Investec.

Ben Yearsley

The two funds Antipodes has launched use the same process but one is long/short and the other is long-only. I’ll remain sceptical on the long/short, first as it has a performance fee and, second, the history of successful long/short funds is fairly short.

Antipodes’ approach seems like a hybrid between Sebastian Lyon’s at Troy, with a big focus on real capital preservation, and the aforementioned Schroders or Investec value approach, combined with Sanditon’s business-cycle investing. They describe themselves as ‘pragmatic value’, which seems like a fair description. After years of growth being in vogue, it could be an opportune time to enter the UK market with a long-only fund

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