Denver, Colorado-based investment manager, Cambiar Investors, with USD5 billion in assets, has recently converted its Aggressive Value Fund into an ETF – CAMX.
“We believe that ETFs are the preferred investment wrapper for a lot of investors going forward,” says Brian Barish, manager of the fund, citing the intra-day liquidity and tax efficiency in the US.
Barish describes Cambiar as a 50-year-old firm that is focused on relative value. “We are not a supermarket, we just do one thing from an investment philosophy point of view – we have a relative value approach applied across the capitalisation spectrum.”
The Aggressive Value fund was incepted as a mutual fund in 2007 and was an all-capitalisations global strategy with a lot of concentration, with USD48 million in assets.
Cambiar has always invested globally so the fund has select non-US blue chip stocks where the investment team believes there is value.
The lengthy process of converting to an ETF had the firm’s legal department ‘tied up in knots for a long time’, Barish says. “We started this process in March 2020 in the depths of the pandemic with everyone locked up at home and we were originally planning to incept some non-transparent active ETFs, cloning some of our other investment strategies.”
While Cambiar initially pursued the semi-transparent route, the firm felt it would take too long to find the market makers who would support that structure. Instead, Cambiar chose to convert an existing fund to a transparent ETF, a process that was much quicker.
“There are lots of wheels spinning in an ETF. There needs to be no friction to creating or redeeming ETF shares, and unfortunately non transparent ETFs lead to some points of friction,” Barish says. With the market makers not prepared to commit capital to the launch, the firm moved away from a non-transparent structure to a transparent ETF. “For transparent products, the commercial runway is quite clear,” Barish says.
This was a leap of faith for an active manager like Cambiar. “Giving up your IP the day you execute is an uncomfortable decision to make,” Barish says. “You work hard to identify stocks that you think are attractive – but this is a large cap strategy. If we buy shares of Google, we are not moving the market.
The firm hopes to launch more ETFs. “ETFs are a better structure and mutual funds are somewhat anachronistic,” Barish says. “We would like to have ETF versions of our other investment strategies. We have commenced our ETF business with the Aggressive Value Fund because it is a distinct and differentiated product versus what’s out there.
The firm continues to review the options available, including the Vanguard solution which allows the creation of an ETF share class of an existing 40 Act mutual fund. The Vanguard solution comes out of patent in 2023 so there may be a new range of hybrid products arriving on the market.
Barish explains that the fund is a concentrated pool of between 20 to 30 stocks. “Most ETFs are passive and hold an index of stocks. That is not what this is,” he says. “This is straight up stock picking – rifle shot bets. Very specific stock picks where we think we have a differentiated view on fundamentals and how they may evolve.”
Barish says: “If you are an index investor you own everything – more of what’s gone up and less of what hasn’t. Active investing is a very different proposition where you only own a modest number of positions.”
He believes that the fund will suit institutional investors. Over the last 10 to 15 years large cap equities have been heavily indexed. “But we have transitioned to a higher interest rate environment. Owning everything is, potentially, not such a great proposition – you may want more concentration in your exposure. Our hypothesis is not that people will stop indexing completely. But they might want to do “core and explore” with concentrated satellite managers. This may be a better way of attaching the opportunity set.”
The other group of investors whom this fund might suit, he believes, are the clients who are individuals or wealth advisers who just like what he describes as a “rifle shot” approach. He notes that it works for Berkshire Hathaway which famously has a concentrated portfolio in which just eight positions dominate.
The firm does not have much retail money at the moment. “We tend to compete based on being an advised choice in an asset allocation pie,” he says. “With the ETF we may be opening up a new flank in terms of our competitive envelope and might be able to compete more for retail investors as people do tend to like our approach. The environment over the last 10 years have seen people falling in love with technology and disruptive stocks. Good companies at good prices might seem pedestrian but I believe it is coming back.”
The name of the fund, ‘Aggressive Value’, might seem slightly provocative, he says, but he wanted to convey that the fund isn’t trying to buy the most speculative stocks out there.
“We aim to buy companies that are good businesses. We like their products, markets, and management, yet they receive little attention because they are a bit unsexy,” Barish says.
“Most investors, when they evaluate a stock’s potential, determine a ‘fair’ valuation estimate and also a ‘blue sky’ scenario where everything that could go right does in fact go right,” Barish says. “Usually, investors anchor to a fair value estimate because that is more likely to occur than the blue sky scenario. What I look for when selecting stocks for the Aggressive Value Fund are stocks and situations where there is a much better chance than normal for the blue-sky scenario actually coming together.”
