Waratah Advisors – Profound Apology & Firm Retraction

More Waratah squabbles!

As you are aware, I recently initiated on the Waratah Performance fund with a semi-crappy rating. The cognoscenti have told me that I was too easy on them. That I should have discounted the early years’ performance. Or that there are better, less expensive ETFs that do the same job (low vol ETFs).

Waratah Advisors

I also forgot to mention that tax considerations alone could wipe out any outperformance, assuming there is any at all. All in all, I concur with my tough crowd. I apologize for disappointing you. I withdraw my rating and leave it up to you know-it-alls to draw your own conclusions.

Anyway, I’m more of a word person than a number person. Reading fund communications carefully over time reveals a lot about how a manager thinks.

I always assumed Waratah was a Brad Dunkley production, but it turns out that his business partner Blair Levinsky, a former TD Securities MD, is the majority owner. In any case, Brad is the CIO.

Brad Dunkley

According to Waratah, employees contribute $112 million to the $1.5 billion AUM. A large portion of that must be Brad and Blair’s money. They began Waratah with $25 million of their own money, and things have gone well for them. Furthermore, 40% of their AUM is institutional, also known as “smart money.”

Brad wrote in 2013:

“…there are numerous publicly traded businesses in which we can invest that benefit from artificially high entry barriers imposed by environmentalists.” To name a few, we can invest in aggregate quarries, oil sands producers, landfills, gas stations, advertising billboards, oil and gas pipelines, refineries, and power plants.

Secure Energy Services Inc. (energy and waste processing and landfills), Susser Holdings Corporation (retail gas stations), Pembina Pipeline Corporation, and Marathon Petroleum Corporation are among the companies represented in all three Waratah portfolios (refineries). The first investing insight is to invest in assets that society requires as long as they are in someone else’s backyard.

Waratah’s website now states:

Environmental, social, and governance (ESG) impacts have become an essential component of business and a Waratah value.
You will undoubtedly notice the subtle shift in language. In unrelated news, Waratah now offers an ESG fund. I’m not a fan of the ESG trend, which I see as typical financial industry nonsense.

Pembina Pipeline Corporation

Someone inquired as to why they required 34 people. Their Waratah Performance fund, on the other hand, has 132 positions. Waratah One, another major strategy of theirs, has over 400 positions. I imagine this is time-consuming.

Some aspects of Waratah remain unknown. Waratah Special Opportunities, a long-only “best ideas” fund, was established in 2013. That fund is clearly underperforming, with a compounding rate of 8.2% vs. 10.9% for the blended North American benchmark….and much higher volatility. Where does that leave their “lower conviction” ideas if their “highest conviction” ideas lag the market by more than 2% per year? The fund’s marketing copy still claims a 10% return target.

This fund “seeks to produce above-market returns” by investing in “heavily researched” investment opportunities. In other words, it attempts to outperform the norm by doing what everyone else is doing. They go to the trouble of clarifying that they seek to invest in “undiscovered and/or misunderstood businesses whose securities are trading well below the Investment Manager’s internal valuations” just to drive home the point.

Is it still possible to find undiscovered businesses in 2020? I hope these undiscovered businesses are at least informing the TSX of their existence; otherwise, they are breaking securities law. This type of generic, meaningless jargon is an indication of sloppy thinking masquerading as a strategy. Please forgive me for saying so.

“We have a passionate belief in stop-losses,” Brad told the Financial Post in 2011. That’s ridiculous. I, too, used to believe in stop losses. Please excuse my youthful exuberance. “When we move outside of the volatility we’re targeting, we take corrective action,” he’s also said.

Sounds like a foolproof strategy. I used to have a similar idea, though I expressed it in simpler terms – sell when things get shaky. When retail investors do this, it is known as panic-selling. When a CFA does it, it is referred to as “calibrating the portfolio beta.”

Ten years of a “buy the dip” market with V-shaped recoveries should have demonstrated to even the most ardent stop-loss believers the futility of that strategy. More broadly, it demonstrated how the market constantly mutates to deceive everyone. However, Brad continues to offer his thoughts on market levels on a regular basis.

Brad has clearly outperformed the S&P 500 in terms of Twitter follower growth. I gently mocked him on Twitter in November for having only 192 followers (vs 85.1 million for Taylor Swift). Brad appears to have taken that to heart, as he now has 841 followers. On Twitter, Brad describes himself as a “truth-seeking investor.” I always try to be factual, so I hope nothing I said prevents us from remaining mutual Twitter followers. (I don’t know Brad otherwise.)

Unless you’ve done something really drastic, like calling someone’s grandmother names, almost all relationships can be patched, in my long and arduous experience. Brad mentions his grandmother Elva in one of his letters to illustrate the plight of pensioners in this low-interest-rate era. I’m sure she’s a lovely lady who deserves better than to be concerned about whether she’ll outlive her money.

Maybe Brad can give Elva some of the millions he’s made from Other People’s Money? That would be one way to close the wealth gap on both sides.

Read more work here.

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