Opalesque Interview August 27th 2019
B. G., Opalesque Geneva:
Eschler Asset Management LLP’s founder Theron de Ris, who launched a small long/short deep value hedge fund seven years ago while working full time, tells Opalesque about his fund’s evolution since his April 2013 interview with New Managers.
“I spent the first several years managing capital for friends and family and building a track record (alongside a day job at Indus Capital),” de Ris says. “Since 2017, I’ve been managing the fund full-time out of the same office in Savile Row, London. We are now a full-time team of three, myself as portfolio manager, a COO and a director of marketing. We have a dozen investors in the fund, which is now CIMA registered, and we are now (finally!) opening to outside capital. Last but not least, we’ve secured working capital for the management company and have a couple of years of operating expenses in the bank.”
The Recovery Fund launched in October 2012 with $2.2m in AuM split between his own savings and two external backers. Now the fund is bigger and he is targeting $15m by year-end 2019.
The original fund is now in a B share class, with the same fee characteristics: 0% for management, 25% for incentive above a 6% hurdle, and a minimum subscription of $5m. A new A share class charges 1% for management and 15% for performance above a 3% hurdle.
Running a fund is not all Eschler AM does. As the firm is authorised as an AIFM (Alternative Investment Fund Manager), it has been able to help some independent advisors get off the ground. As they are regulated by Eschler, this allows them a faster, more cost-effective route to market than getting their companies authorised directly.
“We work with five managers and will be onboarding a few more,” says de Ris. “Our revenue comes from a flat monthly fee, not from stakes in their business. This side business has really helped us get up the regulatory learning curve.”
The Recovery fund has annualised under 7% net of fees since inception. De Ris believes he can achieve 10%+ over a cycle, given the fund’s large exposure to depressed stocks.
The strategy itself has not changed: it is long-biased, concentrated, opportunity-driven, combining top-down industry bets with bottom-up security selection. In terms of exposures, the fund has had large exposures to precious metals equities since 2013 and in the past two or three years, it has increased its focus on several other out-of-favour industries, such as uranium, energy (oil services) and base metals. “So now about three quarters of the fund is in these neglected areas which are closer to cyclical lows than highs.”
De Ris had always been interested in gold and gold shares but the shares had always appeared overpriced. So when gold collapsed in 2013, he started investing in the industry.
“In hindsight,” he says, “I was two years too early. But I was finding unusual value in the industry (gold shares trading at a fraction of their NAV) and by the time it bottomed in late 2015 I was fully positioned. In my study of the industry, one aspect I found intriguing was that historically it has been one of the few industries that can actually go up when the S&P goes into a large bear market. The precondition is low starting valuation, such as in the early 1970s, early 2000s-and, arguably, today.”
He started investing in silver equities in the past couple of years and has increased the exposure this year. “Silver is very low relative to gold but tends to play rapid catch up during gold bull markets.”
Stocks vs. gold and silver
This chart from longtermtrends compares the performance of the S&P 500 (red), the Dow Jones (blue), Gold (yellow), and Silver (grey) over the past ten years.
De Ris has observed that, during the cyclical bear market in gold and silver in 2018, the money that did move into the industry went into larger, more liquid companies, the blue-chip miners and royalty and streaming companies (the latter have an attractive business model without the operational exposure that mining companies have). This trend continued into the beginning of this year to the extent that a valuation disconnect has opened up, and remains, between the small and mid-cap shares and the large caps and royalty and streaming companies.
“So there’s a big opportunity in the small and mid-cap companies that have been left behind,” he explains. “The best of these will ultimately be consolidated by the large miners seeking to replenish their falling reserves and production.” Hence, he increased his exposure in this area in May.
He has kept the short book small. It is made up of companies that are either potential frauds or in industries entering a cyclical downturn. And it has been profitable in the past five years.
“Half the long book is currently in gold and silver shares and the top ten positions in the fund take up about 60% of the fund,” he concludes. “The vast majority of the cumulative P&L over the past five years has come from longs in gold, uranium and energy-related industrials, while silver and non-resource areas have detracted.”