The American research and investment institution TrimTabs gets its name from Buckminster Fuller, the American systems theorist and visionary who employed an aeronautical term to deliver the message that small adaptations can make big changes.
The firm was the first source of detailed information on mutual fund flows and expanded to offer other data on corporate activity over its 30 year history. In the process of delivering independent research to hedge funds and other investment houses, the firm realised it could apply its own theories to investment and TrimTabs Asset Management was born, and subsequently spun out as an independent asset manager.
Ted Theodore, (pictured) is the portfolio manager of the actively managed TrimTabs Float Shrink ETF (TTFS). The USD200 million ETF invests in the buy-back territory, looking for corporations that are reducing their share count, expecting to profit on the grounds that investors will benefit from holding larger remaining pieces of pie.
The Float part of the name is drawn from the number of shares available and the Shrink part is the buy-back process.
Theodore says: “Where we distinguish ourselves is it isn’t just buy-backs, because there is a big difference between buy-backs and share reduction. Some investors just watch the announcements but we watch the share count. All we care about is how much of the pie do we own?”
On top of that the firm looks at the growth of the company. “We feel more comfortable when times are rough to have a more steady company behind us and then we look at the quality of the company and its balance sheet.”
In the growth part of the portfolio, the challenge that Theodore faces is dealing with what corporations say is going on.
“There is lot of discretion in how people report their results and recognising revenues, treating expenses and there is no consensus on how you deal with intangible assets which is increasingly important as firms become more service orientated.”
Reports don’t give much comfort so Theodore takes the advice of other financial officers on routes to misrepresent earnings.
“The way to avoid trouble is to focus on cash flow,” he says. “We focus on free cash flow which gets us closer to understanding the results of a corporation. We first look at cash flow and then subtract capital expenditure because we are interested in sustainability and end up with growth of "free"cash flow as a key indicator of sustainability and how reliable the company’s growth is. If the company can reduce its share count through free cash flow, it’s all better than taking on debt.”
These factors are filtered through a quantitative process, a set of algorithms that take everything into account and ends up with a composite score.
“We end up with a 100 stocks in the portfolio designed to be equally weighted and five or six companies we want to exchange out and disperse through new stocks.”
The year to date performance of the ETF, against the Russell 3,000 index is close to 300 basis points better, while against the Morningstar Blend Index, the ETF has performed 400-500 basis points ahead. TTFS is rated Five-Star Morningstar.
“Because we equal weight the securities, you tend to be more like a mid-cap index,” Theodore says. “These are products for investors who are looking for a little bit more than a passive exposure, trying to get more of a return and we fit in nicely because we are consistent. Our objective is not to surprise them.”
The portfolio is rebalanced monthly because that’s when the data comes in which means that with lower turnover, there is lower volatility in the portfolio. Investors also get a tax efficient return as the manager can pair gains with losses, avoiding the distribution of net gains.