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Consistency from long/short investing

Neil Robson, head of global equities at Columbia Threadneedle Investments, explains the rationale behind long/short investing.
Neil Robson, Columbia Threadneedle Investments

Why is a flexible long/short strategy important in global equities right now?

The global extended alpha strategy allows us to express both positive and negative views about companies. As a large organisation, we are able to meet with companies around the world and are able to see both positive and negative outcomes and this strategy gives us the flexibility to express those views in our portfolio positioning. It is particularly important right now because we have some of the fastest change in the corporate world that we’ve seen in the last 50 years. The launch of internet giants and the impact that is having on businesses around the world is creating as many losers as it is winners. This strategy gives us a chance to profit from the emergence of those losers.

How does this flexible strategy work?

A global extended alpha strategy is able to take short positions which help fund the long positions, allowing us to invest even more — an extra 30% into the stocks we like. As long as there’s a positive spread between that extra 30% long and that 30% short, we’re actually embedding more value by design into this product in terms of stock selection alpha. Quite simply, if we manage to get a 5% spread between those incremental longs and shorts, that’s worth between 100 to 150 basis points of incremental alpha in this strategy.

With a globally-diversified strategy, is your investment approach mostly bottom-up or is there a macro overlay?

The macro influences around the world will have an impact on our global extended alpha strategy. However, this strategy is primarily driven by bottom-up stock selection and research, which defines our consistent process. What drives our philosophy is good businesses with competitive moats generating high returns on invested capital, with the ability to generate free cash flow they can reinvest in businesses – this allows them to compound growth faster than the marketplace.

What are some of the dominant themes that you’re witnessing and how are you finding opportunities in those themes?

Our philosophy is one of looking for businesses with competitive advantage. One of the greatest sources of competitive advantage in the modern world is innovation because it can give you a unique position in the marketplace, and may result in lower costs than your peers and market share will move towards that.

As for themes that we believe are enduring, one of the most obvious for us is the movement towards the cloud. This is a trend that should endure for a decade or more and we are taking advantage of it within markets. The large internet giants of the world (the five businesses in the US and two in China) together comprise about 8.5% of world market cap¹ – it would be the second largest market in the world. Those seven businesses this year should grow revenues north of $200bn and grow profitability north of $40bn² – the sheer scale of this alone is really important for client returns.

On the other side of the landscape, on the short side, what is happening in retail or the automotive industry should provide us with opportunities to profit from declining profitability in certain industries. Those themes aside, industry-by-industry we find many attractive situations both on the long and the short side.

¹Statista, 20/7/2018.

²Columbia Threadneedle Investments, 20/7/2018.

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