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Alternative Market Briefing

U.S. stock-picking fund beats the odds

Monday, October 11, 2021

Randy Baron
B. G., Opalesque Geneva:

The goal of the active manager is to outperform the overall market. Not all of them did so in 2020 when the S&P 500 ended the year up more than 18%.

2020 was tumultuous for financial markets. The torrent of liquidity depressed interest rates and pushed up asset prices nearly everywhere investors looked. According to the S&P Dow Jones SPIVA® U.S. Scorecard report, a semi-annual research series that compares active fund managers in the U.S. against their benchmarks, the positive market performance broadly translated into good absolute returns for active fund managers. But while the turmoil and disruption caused by the pandemic should have offered numerous opportunities for outperformance, 60% of large-cap equity funds lagged the S&P 500; 45% of small-cap funds underperformed the S&P SmallCap 600; and almost 51% of mid-cap funds underperformed the S&P MidCap 400.

The main active management strategy is stock-picking. One U.S.-based stock-picking investment firm, Pinnacle Associates, was among the benchmark outperformers in 2020. Pinnacle Associates International Small Cap, L.P. returned +37%, according to documentation seen by Opalesque. PIPEs (private investment in public equity) contributed one-quarter of the performance then. The fund was up 65% (gross) YTD as of August 31st, 2021. It has annualised 9% since February 2000 and in Q1 2019, the strategy ranked among the top ten players in its universe.

It is managed by Randy Baron. He has 25 years of investment experience, joined Pinnacle in 2012, and is responsible for all of the firm's global strategies. He is also responsible for its turnaround strategy, which subscribes to the thesis that sometimes high-quality businesses fall temporarily out of favour. In Q2 2020, he was ranked No.1 manager globally among international small-cap funds.

Baron will present in the Small Managers BIG ALPHA Episode 4 webinar on October 21st.

Pinnacle Associates was founded in 1984 and is an employee-owned RIA with approximately $7.6bn in AuM. The firm's focus has traditionally been on fundamental, bottom-up stock-picking, with a particular emphasis on the small/mid-cap space. It does not do shorting, hedging nor does it use derivatives.

The International Small Cap strategy exemplifies these tenets, as the management team identifies potential investments in publicly traded equities anywhere in the world with an initial market cap of less than $5bn.

"We try to identify companies or industries that have the potential to be disruptors and establish a dominant market position in their respective fields," Pinnacle director John D. Black explains to Opalesque. "The team sources potential investment ideas via a broad array of media and industry contacts, and then spends a significant amount of time (over the span of months or years) getting comfortable with the companies' financials and, more importantly, the management team."

The managers believe that they invest so much effort upfront finding companies with superior financials, a talented and ethical management team, and some sort of "catalyst" to fuel future growth that the long term risk of significant capital degradation is negligible; while the potential for exponential returns is significant.

While this approach may lead to short term volatility, Pinnacle is a long term investor with a typical holding period of 3-5 years and, because they are benchmark-aware but not constrained, they are willing to accept short term volatility in return for exponential long term growth.

"While we look for ideas across the globe," he adds, "we tend to focus on countries and geographies that offer robust financial accounting norms as well as a cultural background that allow us to get comfortable with the risk profile of any potential investment. For example, we are significantly underweight Asia due to the difficulty in obtaining GAAP-like financial statements in many of these markets, as well as the inaccessibility of company managements."

A stock pick is when an analyst or investor uses a systematic form of analysis to conclude that a particular stock will make a good investment and, therefore, should be added to their portfolio. This is also known as active management. The position can be either long or short and will depend on the analyst or investor's outlook for the particular stock's price.

Next webinar:

Small Managers - BIG ALPHA Episode 4
When: Thursday, October 21st at 10:30 am ET - 4:30 pm CEST - 3:30 pm BST - 10:30 pm ET
Free registration:

With larger quantities of capital chasing the same Alpha strategies and continuing to erode Alpha, savvy investors are turning to smaller and/or emerging managers as they look for alternative sources of return.

We are proud to present Episode 4 of this groundbreaking webinar series with the following carefully screened panel of investment managers:
- Heeten Dosch, Doshi Capital Management
- Craig Reeves, Prestige Funds
- Randy Baron, Pinnacle Associates
- Andreas Schweitzer, Arjan Capital

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