Market data:

Institutional Asset Management

Our Philosophy

THALASSA CAPITAL’s asset management philosophy focuses on a research based approach which aims at discovering market anomalies and value arbitrage opportunities. In developing our market opinion and evaluating potential investments, we synthesize a variety of techniques. Our approach includes interpretation of macro-economic developments, bottom-up fundamental research, the use of sentiment indicators, and statistical probability analysis. We start with fundamental analysis to look at the factors that affect supply and demand of a particular asset in order to try and predict the expected future market price for that asset.  The classical view is that fundamentals alone determine price, and that price discovery is a dependent process.  THALASSA CAPITAL, on the other hand, embraces the idea of reflexivity – or that fundamental circumstances change as a result of fluctuations in price.  Consequently, markets gravitate towards “disequilibrium.”  As a result of this belief, we operate via multi-factor modelling rather than merely relying on a static view of the past.

Some of the data we analyse to formulate ex-ante expected return forecasts are:

  • Value factor
  • Size factor
  • Return evidence (momentum)
  • Return reversal
  • Volatility Liquidity levels
  • EPS momentum
  • Corporate actions such as asset growth and net issuance
  • Inflation sensitivity
  • Scenario dependent analysis

Our Solutions

At the institutional level, we specialize in unique strategies based on factor investing. Our process includes reviewing current academic research and implementing independent evaluation or back-testing. After the assessment, we directly invest partners’ capital in the resulting strategies. For institutional clients, we can structure proprietary strategic solutions to accommodate different needs. Our strategies can be managed under different configurations such as Separately Managed Accounts (SMA), Investment Partnerships or International Business Companies. THALASSA CAPITAL can also act as consultant and catalyst for the development of customized family offices. Our years of expertise dealing with the complexities associated with great wealth have allowed our firm to develop a replicable process for the establishment of efficient and extensive management operations for affluent families. We can provide consultation in different areas such as investment management, tax strategies, operational infrastructure, education and governance. For an in depth analysis of our current strategies please click on specific tabs under Institutional.

ETF Models

Exchange Traded Funds (ETF) are the new building blocks of efficient portfolio construction.  The great variety of asset exposures they provide, combined with low expense ratios, make ETFs a great tool for the modern portfolio manager in his/her quest for implementing either passive or active investment strategies.  Good liquidity in most ETFs also helps reduce Market Impact Cost during strategy implementation and rebalancing.  Additionally, available options contracts help manage risk when required.

Our ETF portfolios provide a cost efficient way to gain a diversified exposure to traditional asset classes. Our portfolios are actively managed in accordance with our investing philosophy and offer:

  • sector diversification
  • macro asset allocation
  • implementation of proprietary market timing model
  • foreign exchange hedging

ETF Sector Rotation Models

Why Sector Rotation

An economic system is a complex organism that is constantly affected by a multitude of dynamics; such a system is therefore always changing and each part of the total is influenced differently by the same impulses.

A responsive portfolio aiming to capture this synthesis would have to identify the rhythm of the cycle and the ramifications of this process on the different segments of the economy.  Sector rotation strategies have been built over the years with the intention of capitalizing on this very process of change where different parts of the economy tend to benefit differently from cyclical macro inputs.  The goal of course is to anticipate where the economy is headed and which sector will benefit more or less.

The classic economic cycle is categorized by 2 major phases:

  • Expansion, divided into Early Cyclical and Late Cyclical
  • Contraction, divided into Defensive or Early Recessionary and Late Recessionary
Sector rotation across economic cycles (source: Ishares.com)

biz cycle

In the above diagram (source: Ishares.com) we can see the industries that are set to outperform in each phase.  Investors can utilize different approaches in their attempt to capture sector outperformances. The two more popular approaches are fundamentally driven – as in the ability to forecast with some accuracy where the economy is headed – or momentum driven – as in modeling quantitative strategies based on price persistence.

Why Momentum

Our firm decided to focus its research efforts on the momentum approach.  Such decision was supported by a vast amount of literature and back-testing which showed how a “momentum anomaly” had been present in financial markets for decades across the globe.

Momentum can be structured with many different parameters but essentially is the tendency of stock returns to trend in the same direction.  In a highly efficient market such anomaly should not persist for a long time as rational investors would quickly arbitrage the advantage; however, at THALASSA CAPITAL we believe that markets, while often efficient, do suffer from structural and behavioral imbalances that may limit arbitrage.  Academics Fama and French already institutionalized the size and value anomalies (or the long term outperformance of small caps and value stocks) and in 1993 described momentum as the “premier anomaly.”

The reasons for such a simple edge to persist may vary from the behavioral to the technical; researchers such as Barberis, Stein and Hirshleifer, to name just a few, have attempted to model behavioral theories rooted in investor cognitive biases. Most explanations revolve around the ideas of under-reaction to news, speed of news spreading, institutional ability to reach size, irrational price confirmation needs and so on.

Many studies identified single stock outperformance in momentum models built with intermediate timeframes, defined as 3 to 12 months ranking and holding periods.  Dimson, Marsh and Staunton (2008) produced the seminal work “108 Years of Momentum Profits” where they tested different parameters in UK stocks from 1900 to 2008 and in 17 other countries for some 33 years. Their comprehensive study confirmed previous findings identifying alpha in the 12 month and 6 month horizons.

One striking element in this body of evidence is the concentration of selected individual stocks in same industries each time. Research would seem to prove that the industry effect is a powerful element of price formation in the selection process.  Moskowitz and Grinblatt (1999) validated this idea in their work “Do Industries Explain Momentum?” where they found evidence of industry portfolios exhibiting significant momentum even after controlling for size, book to market equity, individual stock momentum, cross sectional dispersion in mean returns and potential microstructure influences.

Moskowitz and Grinblatt also found that the profitability of industry strategies over intermediate horizons was predominantly driven by long positions.

Methodology

As explained, our model finds solid foundations in the studies performed over the years by different academics, analysts and money managers.  The presence of Alpha in momentum investing transpires under different parameters ensuring a concrete rationale for its very existence. 

In our approach, we took into consideration expected profitability but also slippage and efficiency of execution.  Momentum parameters are usually divided in 3 sections: the ranking, lagging and holding periods.  Alpha resides in the intermediate horizon as far as ranking past performance and for this reason we chose an interval that should be sensitive enough to changes in the economic cycle.  Most studies tested performance by including a lagging period of usually one month; this lag is designed to offset the tendency of stocks to short term mean reversion. We decided to skip the lagging period on the account that it seemed to add little value in an industry driven model.  As far as holding period, the trade-off is between higher expected performance and slippage. Usually the faster the rebalancing the higher the returns but also the higher the slippage and the commission costs. In building our model, we aimed to strike an acceptable balance.

In order to address efficiency of execution we decided to implement sector exchange traded funds.  The variety of ETFs available, the rising liquidity in these instruments and their low expense ratios (and in most cases tax efficiency) made it very attractive to build a model centered on a sample size of 40 exchange traded funds. The attractiveness of sector rotation investing via ETFs was tested by Prof. Accomazzo in two articles: “Active Alpha Investing for the New Normal” (Active Trader Magazine, 2011) and “An Alternative Way to Manage Equity Portfolios” (Graziadio Business Review, Pepperdine University, 2009). 

An additional risk management overlay via options may be added on a discretionary basis depending on market conditions.

 Please request a meeting for a more tailored discussion on an ETF portfolio which is appropriate for your investing needs.

Master Limited Partnerships

Introduction to MLPS

Diversification, high income, tax efficiency, low correlation to traditional asset classes; these four elements would seem to be the pillar of every well designed investment vehicle. Master Limited Partnerships (MLP) have delivered just that for the last decade.  But what is exactly an MLP? They are publicly traded, limited partnerships which own and operate gas and oil pipelines, storage terminals and refineries.  They are structured like partnerships to take advantage of favorable taxation and to create income focused investment vehicles.

MLPs have over the years concentrated in sectors related to energy but unlike their earlier versions of the 1980s which were structured solely for the purpose of exploiting tax loopholes in the oil and drilling area, these new partnerships have become efficient and dynamic utilities. They have acquired cheap assets with predictable cash-flows like pipelines and terminals and became very good at operating them. 

These investment vehicles retain only a mild correlation to the price of oil and gas since they care mainly for its transportation. However, as the economy grows and demand for energy grows with it, the profits of the MLPs increase accordingly.  MLPs also offer protection against inflation in two ways: via their portfolio of real assets and via “inflation-plus pricing,” or in other words their ability to price their services and products at a premium of the PPI rate.

Investment Qualities

Energy Infrastructure MLPs provide a business model similar to Utilities and Real Estate Investment Trusts.  They own and operate real assets and benefit from fairly inelastic long term energy demand growth.  According to the Interstate Natural Gas Association  of America, the need to restructure  the shifting domestic gas landscape will require, over the next twenty years, roughly $200 billion in capital expenditures.  Another source of growth is indicated by analysts in the trend of acquisitions by MLPs of midstream assets.  It is estimated that approximately $200 billion of such assets are housed at private and public corporate structures and they could find their way into MLPs’ portfolios (source: Alerian).

Potential Benefits

The potential benefits of investing in a portfolio of MLPs vary from:

  • Asset Growth
  • Visibility of Cash Flows
  • Income Growth
  • Inflation Hedging
  • Tax Advantages
  • Historical Total Return

Tax Facts

An MLP is a Partnership and not a corporation; for this reason it avoids taxation at the entity level and all income flows proportionally to the partners. Partners are defined as unit-holders and for tax purposes instead of receiving 1099 forms they receive K-1 Schedules.

MLPs make cash distributions (not dividends) and typically at least 70%  is considered tax deferred return of capital which reduces the unit-holder’s (partner) cost basis in the investment.  As long as the unit-holder basis remains above zero, taxes are deferred until the sale of the MLP.  When the cost basis hits zero, distributions are then taxed at a mix of capital gains rates and personal income tax rate.

MLPs can provide flexibility in the process of estate planning; if the units are inherited, after the passing of the original unit-holder, the basis is increased to fair market value on the date of death and prior distributions are not taxed (source: Alerian.).

**This summary is for general information purposes only; it is based on current legislation; it does not take into consideration specific investor's situations. Please consult with your CPA.

Traditional Valuation Metrics

MLPs are usually valued slightly differently than traditional stocks; multiples of Distributable Cash Flows are usually more relevant than traditional P/E ratios.  Our approach weighs highly the Yield Spread over the 10 Year US Treasury and over other income vehicles such as BBB bonds and REITS.

Index Performance

The Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose 39 constituents represent approximately 85% of total float-adjusted market capitalization, is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).  In the last ten years (2007/2017) the index has returned an annualized rate of 6.5%.

Our Investment Approach

Our strategy revolves around the components of the Alerian Index.  Our average number of holdings can fluctuate from as low as 15 to as high as 40 depending on macro and micro analysis.  Our approach is based on a core-satellite model, where our core exposure is implemented via investments in the Majors and our satellite is comprised of specific sub-sectors concentrated exposure. 

Active Risk Management

We also implement an option overlay to tactically respond to overbought/oversold situations.  Total exposure is also increased/decreased based on macro views and valuation metrics.

 

** Our investment approach may not replicate the same returns produced by the index.

 

ValueX

VALUEX: a value approach to domestic equities

Fundamental Concepts 

All financial decisions are dictated by two main parameters: quality and valuations.  Whether an investor is buying a house, a small business or even just a pair of shoes, it is the intertwined relationship of what price is being required to acquire a certain level of quality that defines the transaction.

Often investors dealing with stocks forget this straightforward relationship and let emotional biases drive their analysis.  This behavioral vacuum, along with other structural issues, recurrently create dislocations in markets that could otherwise be mostly efficient.

The value anomaly, or stocks selling at a discount to their intrinsic fair value, has been the subject of much research over the years starting with Benjamin Graham and David Dodd, the fathers of value investing.  Most research indicates that over the long term (often defined as at least five years), a portfolio of good businesses purchased at lower valuations usually outperforms growth and glamour. 

The reason for such outperformance resides in the inherently mean reverting nature of growth.  Most investors have a tendency to extrapolate rates of super growth into time frames that are usually too long.  Spurts of innovation, superior productivity or large profits margins are rarely maintained for long stretches of time.  In this case, most investors tend to pay multiples that do not justify the real future growth of the business.

Identifying value generally depends on relative analysis of different ratios and multiples that can allow an investor to rank different companies.  Graham’s preferred method was to buy businesses at deep discount to their book value even though this approach relied on infrequent opportunities.  Other ratios, over time, became popular tools of value screening such as Return on Equity and Return on Capital Invested. More recent studies by Wesley Gray and Tobias Carlisle showed how a price metric like Earnings Before Interest and Taxes (EBIT) over Total Enterprise Value seems to produce the best screening results.  This would seem intuitive as EBIT/TEV captures quite efficiently that relationship between earnings power and enterprise value which we mentioned earlier.

Other useful metrics for value investors are dividend yield, in its absolute and historical dimension, and financial strength.

 

The Value Process

The process of finding good or fair businesses at enticing valuations can be decomposed into four phases as the research of Doctor Gray has indicated:

-          Avoid weak or opaque balance sheets

-          Screen for quality measured by profitability and margins

-          Screen for Relative Value by using current and historical pricing ratios

-          Check for supporting catalysts or at least signs of potential turning events:

  1. Insider buying
  2. Institutional interest
  3. Short interest
  4. Buybacks

These four phases are modeled into a framework that provides high quality candidates for our value portfolio.  A qualitative additional layer of analysis helps define the ultimate portfolio composition.

Our VALUEX portfolio is comprised of US stocks only, with a minimum market cap of $1.4 billion; our screening framework also excludes ADRs, Mortgage REITS, ETFs and ETNs, CEFs, SPACs.  We equally weight our portfolios and rebalance yearly.

 ******************

Why Value?

It is not often that markets offer real discounts and attractive bargains but when such dislocations occur the astute investor should have a ready framework to successfully arbitrage such opportunities.

As mentioned above, Benjamin Graham and David Dodd were the original bargain hunters in the investing universe and wrote the, still today, most relevant book on the subject, Security Analysis, in 1934 delivering a value framework for picking securities.

Their approach was then successfully implemented by the likes of Warren Buffet – an apprentice of Graham -, Sir John Templeton, Seth Klarman and many othersMany studies were done to test if indeed value was a better approach than other strategies such as growth investing or passive indexing and the evidence seems to confirm a long term hedge of the value approach.

In recent times, finance “enfant terrible” James Montier has written extensively on the subject highlighting how this approach tends to work across international borders and across different sectors.  In his 2008 article, Going Global: Value Investing without Boundaries, he quotes an outperformance of value over glamour of approximately 9% per annum across a group of developed markets.  This outperformance increases when looking at emerging markets, where the performance delta between the cheapest 20% of all stocks and the most expensive reaches a significant 15%.

Montier also tested across different time frames and his results seem to indicate that a longer time horizon is often required to allow markets to arbitrage such value discrepancies.  While value outperformance can be realized as quickly as in one year periods, a five year investment horizon seems to help magnify the value/growth delta to a significant 40%.

Similar results occur also in the work of Fama and French who compiled the benchmark value series in academic finance labeled VMG (Value-minus-Growth).  The two researchers compiled a portfolio of US equities long low Price to Book companies and short stocks with high P/B multiple. The portfolio was rebalanced yearly and tested back to 1926 resulting in a consistent outperformance of value stocks.

 

A Water Strategy

Different consulting outfits have determined that by 2025 two-thirds of the global population will experience water stress.  A shortage situation always breeds investment opportunities; in this case we see potential for different aspects of water infrastructures. Positive prospects will open up in utilities, power generation, desalination of sea water and in manufacturing of pumps, valves, and electronics needed to move the liquid commodity.

The global water market is already a significant part of the global economy with revenues in excess of $500 billion a year. As of 2010, the breakdown of revenues was as such (source: Fortune):

-           $396 billion from Utilities ($226 billion in water services and $170 billion in waste water)

-           $59 billion in bottled water

-           $28 billion in water equipment and services supplied to various businesses

-           $10 billion agricultural irrigation

-           $15 billion filters and various heating and cooling systems.

Many of the inefficiencies of the water market are also a function of mispricing; the following are some example of how much 100 gallons of tap water are priced around the world:

-           Buenos Aires: $0.01

-           Mumbai: $0.04

-           Shanghai: $0.07

-           Mexico City: $0.13

-           Hong Kong: $0.17

-           Moscow: $0.24

-           Las Vegas: $0.32

-           New York: $0.39

-           Tokyo: $0.46

-           Los Angeles: $0.50

-           Phoenix: $0.59

-           London: $0.73

-           Oslo: $1.35

-           Paris: $1.48

-           Copenhagen: $3.03

Water usage varies dramatically from country to country but the trend over the long term is converging; Americans use approximately 150 gallons of water per day, while the Chinese use only 23 gallons but growing.  India, for instance, expects their water needs to double in the next ten years. Globally, 71% of water consumption is dedicated to agriculture, while 16% goes to industry.

“Beating the Coming Water Shortage” a report by Fortune, highlights the average quantities of water required to manufacture simple everyday items:

-           Cup of coffee: 71 gallons

-           Pair of jeans: 2906 gallons

-           A prime steak: 1857 gallons

-           A car: 104,000 gallons.

At THALASSA CAPITAL LLC we are determined to position ourselves ahead of the curve and have built a long term investing framework designed to capture such opportunities.  We utilize a Core-Satellite approach which comprises low cost ETFs at the core and a mix of individual investments in specific niches of water treatment.  This approach allows us to mix traditional utilities with industrial companies and high tech hubs.  We also favor a global approach since, as we mentioned earlier, water scarcity has no boundaries.

 

Please contact our investment team for more information on this portfolio.

Hedge Fund and Private Equity Portfolio Solutions

“Successful investing is anticipating the anticipations of others.”

John Maynard Keynes

 

The madness, or wisdom, of crowds constantly influences the mood of markets clouding their efficiency level and increasing volatility. Well-constructed portfolios will “anticipate” such divergences from expected averages by incorporating tactical elements and alpha driven investments.

It is in the context of achieving higher risk adjusted returns that the inclusion of Alternative Investments finds a role in portfolio construction. Unbridled managers that can find market anomalies or exploit unobserved tactical advantages can provide a much sought after de-correlation to a traditional portfolio and also produce additional positive returns.

The rationale for including in a portfolio absolute return vehicles or at least volatility crushers such as Hedge Funds has been amply documented in academic and practitioners’ literature; however, it is the actual implementation that generally creates issues. As Yogi Berra once said” “In theory there is no difference between theory and practice. In practice there is….” Choosing the right managers and creating a successful portfolio of Hedge Funds has proven elusive for many investors, institutional and not.

The alpha universe of Hedge Funds is ridden with operational and strategic issues that an investor or an allocator must be rightly equipped to handle. For example, it is usually the case that Emerging Managers have higher returns than established outfits as they are more starved for financial and personal success and yet their associated business and operational risk is so high that makes the expected return advantage a chimera.

Analyzing performance properly is also tricky; most investors rely blindly on a simplistic and purely quantitative process with the result of merely chasing performance.

For many investors the real stumbling block is size and investment minimums. By going direct, it may take an allocator north of $150 million to build an efficient exposure, a prohibitive number for many investors. The alternative is utilizing Funds of Funds which unfortunately come with their own set of deficiencies such as two extra layer of fees, static and standardized portfolios, unmanaged liquidity and occasionally grossly mismanaged due diligence.

The THALASSA CAPITAL process seeks to overcome all of these issues and provide a solution that is customized and pro-active. We work with some of the best money managers in the world across multiple strategies.

Our platform allows us to customize portfolios that can meet unique investment and liquidity needs for each clients. We have a $250,000 investment minimum for “Strategy” solutions and a $1 million minimum for fully tailored portfolios with no per fund minimum.

Additionally, we utilize timely and independent third party research on the industry overall and on the specific funds available on our system. Our research process spans from highly quantitative to uniquely qualitative as we believe that proper manager selection needs a comprehensive analytical approach. In our risk management process, we strive to go beyond mere return-based information as we blend these data with scenario dependent analysis and other discretionary techniques. In an active effort to disperse and control hedge fund risk, we include processes such as:

  • Limiting portfolio exposure to specific sectors
  • Implement tactical allocation shifts based on risk changes
  • De-allocations in case of manager’s style drifting
  • Monitoring leverage

A key element to successful alternative investments is dealing with counterparties of the utmost integrity. Our institutional safeguards are the following:

  • Custodian – Bank of New York Mellon
  • Administrator – Trident Trust Company
  • Auditor – Ernst & Young

Through our hedge fund portfolio solutions, our clients can access institutional-quality hedge fund portfolios and invest alongside the world’s largest institutions.

Internet of Things - IoT

 "Any fact becomes important when it's connected to another."

Umberto Eco

 

Our team at THALASSA CAPITAL believes that we might be standing on the verge of one significant and truly transformational wave: CONNECTIVITY.

Connectivity is also referred to as the Internet of Things (IoT) and its pervasive influence seems to be getting traction. 

IoT will be a sweeping change in the way we experience life and the way we manage our health; it will produce radical change in the manner we organize industrial production and distribution and last but not least, it will turbo-charge our ability to gather and, most importantly, process information for a better world.

The ability of the internet to provide an environment and a standard protocol for billions of sensors, actuators and mobile devices to connect and interact with each other will result in an augmented life experience and increased productivity.  As we implement this massive project of connectivity, the role of the internet as the backbone of our social system will go beyond the wildest dreams of their creators.

Sensors that can gather recurrent data, and by ways of connecting into a grid of information, exchange it, process it and implement consequent action will generate a transformational wave.

Industrial applications could achieve a value of up to $3.7 trillion (McKinsey) over the next few years in areas from factory and equipment optimization to worksite safety and improvements in energy utilization.  Total value realized in the entire IoT space could be $11 trillion.

There are nine “habitats” in which the disruptive power of IoT can be unleashed:

  • Smart City
  • Smart Home
  • Wearables
  • Industrial Internet
  • Connected Car
  • Smart Grid
  • Smart Retail
  • Connected Health
  • Smart Supply Chain

THALASSA CAPITAL has built a dynamic portfolio designed to benefit from a successful roll-out of IoT technology.  Our strategy includes a mix of large cap tech stocks and smaller but focused emerging entities.  Our primary interest is in infrastructures and software.

Our approach also aims to replicate the nature of the investment: CONNECTIVITY.  This strategy is built on the “Investment Community Concept.”  Our investors will be part of the Investment Community and we will meet quarterly to share information that will shape and grow our portfolio.

Please call us, should you be interested in becoming part of our IoT community.

Family Office Infrastructure

As socio-economic realities change around the world, the needs of wealthy families and high net worth individuals become more complex and global in nature.  At THALASSA CAPITAL we have built an internationally replicable expertise in setting up a framework of services that can help wealthy individuals and families achieve full integration of their investments, generational education and global administration.

We can help setting up structures that encompass the following areas:

  • Direct investment management
  • Access to world class alternative portfolios held in onshore and offshore structures
  • Generational education modules tailored for successful transfers of wealth across generations
  • Family meeting facilitation and governance system development
  • Integration with international legal teams