Barrage Capital, a group of Montreal Buffett disciples, put on a compelling performance.
I feel like Charles Darwin landing on the Galapagos Islands because I have found something very rare: a mainstream hedge fund that has outperformed the S&P 500 since 2013. Don’t worry, I’ll still find ways to criticize it, but on the surface, Barrage Capital has given compound returns of 16.88% after fees, while the S&P 500 has given compound returns of 16.40% in Canadian dollars, including dividends.
After fees and taxes, clients won’t see any of that alpha, especially since they get taxable capital gain distributions. So, I will keep looking for a hedge fund that really adds value. In any case, nothing can be said for sure until a fund has been around for 15 years, which should be long enough for at least one real bear market.
A few years ago, I learned about Barrage Capital, which is based in Montreal. I liked my first impression of them when I saw that they were doing online marketing. They called themselves “value investors,” and they talked a lot about Warren Buffett. The way they set up their fund was high-end.
They had nice people serving them. Their website was pretty cool. I thought it was a good way to start a business. Many smart investors can’t even put together a half-decent fact sheet about a fund. It almost seems like those two skills don’t go together.
But this group puts on a great show. In fact, look at the team and tell me you’ve ever seen a better-looking group of people, whether they were in finance or in a boy band.
Barrage is also unusual because it has four co-portfolio managers who work together to make decisions. Two of them were boutique managers, and the other two were investors on their own, maybe in real estate. In 2013, the fund was set up. I saw that they had $12 million AUM around 2014.
And now they’re worth around $100 million, but their AUM hasn’t grown much in the past few years. (Their big year of growth was 2016, and they haven’t done much to improve since then.)
Here’s my biggest pet peeve, which may be why their growth has slowed down. “Barrage” is a French word that means “unwarranted performance fee.” Not many people know this. Performance fees are a bad deal, and Barrage Capital doesn’t persuade me otherwise.
During a strong bull market, it wouldn’t bother me much if a manager’s fund lagged behind the benchmark by 50 basis points per year because it was made up of slow, steady-eddy companies. But in this case, Barrage has outperformed by a big margin BEFORE FEES, by investing in some of the hottest names of this bull market.
They really caught the market’s zeitgeist over the past few years, whether by luck or skill. At the moment, the fund looks like a one-way bet on Big Tech, with Alphabet, Facebook, Apple, Amazon, and Tencent in the top 5 spots.
They have a highly concentrated long-only fund with 11 positions. I have seen this number fluctuate between 9 and 15. Alphabet was once worth 20% of the portfolio. In 2020, these kinds of moves might be in style. But I know that Barrage got the tech trend a little bit early. For example, in 2014, they started to buy Apple.
Yet, for all of this “insight” or what seems to be smart risk-taking, the client only sees a tiny edge AFTER FEES, an edge that disappears when taxes are taken into account. And investors will eventually have to pay the price, which will come in the form of a bear market. Do you think that the best performers during a bull market will also be the best performers during a bear market? I don’t think that is how things usually go.
The fund hasn’t always put all of its money into Big Tech. They put 20% of their money in Best Buy a few years ago. They have bought General Motors, AIG, Citigroup, and Bank of America, among other things. They sell American brands that are well-known.
This means that they can hold billions of things. Even though they were good at marketing, I think they made one big mistake. Their performance fee takes away from the most effective way to market, which is to beat the market by a large amount.
If their business doesn’t beat the S&P 500 in a meaningful way, a snarky blogger could point that out. I would never do that myself because I think it’s a lack of class. But it is dangerous. This is an important fact that can’t be changed, at least in the mind of a smart customer. When they work well, funds can be very good for business.
This growth is slowed down by performance fees. I know they like Jeff Bezos, but their fund doesn’t reflect the way he thinks about the long term. Bezos wouldn’t charge performance fees until the year 50, when he has $10 trillion in assets under management (AUM) and it can really pay off! I also wouldn’t invest for things like 20% weights that you might have chosen on your own.
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