As we move through this cycle, markets seem to be at the stage where traders are rewarding winners and punishing losers. What this also means is that there are going to be opportunities for stock pickers.
I recently wrote about a swaps-based leveraged long-short fund, and today dive into a non-swap (physical replication) long-short fund from a different issuer.
An Active Future
So far, both funds offered by this issuer are actively managed. Looking at the expense ratio of FFLS can get a little confusing if only because there is a posted gross rate of 240 basis points (bps) or 2.40%, a net rate of 175 bps, and a footnote stating that the maximum fee shareholders will pay will be capped at 124 bps, at least through September 30, 2024. The prospectus shows a Management Fee of 100 bps, estimated Other Expenses of 89 bps, an estimate of 50 bps due to Dividends on Securities Sold Short, and a 1 bps of acquired fund fees, most likely a money market fund they're using to park cash.
I'm not sure about including the effect of dividends on shares sold short as an expense. Even the issuer's footnote spells out that "Short-sale dividends generally reduce the market value of the securities by the amount of the dividend declared, thus increasing the Fund's unrealized gain or reducing the Fund's unrealized loss on the securities sold short." There are borrowing costs associated with selling shares short but there doesn't seem to be an explicit line item for that.
Regardless of what has gone into determining the 124 bps net rate to shareholders, $1,000 invested over a calendar year would result in $12.40 of that principle going to fund fees.
FFLS's strategy involves focusing on U.S.-listed equities, including American Depository Receipts (ADRs), as well as preferred stock and convertible securities. Also eligible are "foreign equity securities listed on foreign exchanges" from "both developed and emerging markets." Although an all-capitalization approach is taken, at least 65% of holdings will fall into the mid-to large-capitalization segments, described as companies with at least a $2 billion market capitalization.
Security selection is powered by the issuer's ability to select companies that it believes are "best positioned to take advantage of or profit from emerging technological or social trends or developments." Companies that have been determined to be well-positioned are dubbed "thematic winners" while those the manager feels are out of touch with current secular trends fall into the "thematic losers" bucket.
The Current FFLS Portfolio
Looking at the current portfolio, it should not be too surprising to see Alphabet (GOOGL) and Tesla (TSLA) as the top-two long holdings. Interestingly, the fund is long Lululemon (LULU) and short Under Armour (UA) , its third largest short, behind #2 Toyota Motor Corp (TM) , and its #1 pick to falter, investment manager Federated Hermes (FHI) .
While some shorts like Coinbase Global (COIN) , and Beyond Meat (BYND) make sense, I was a little surprised to see ChargePoint (CHPT) given the current push for and substantial subsidization of the national charging network buildout. ChargePoint is an Action Alerts PLUS holding and was also recently added to the TheStreet's Stocks Under $10 portfolio.
I was also a little surprised to see Harley Davidson (HOG) as a long position given that company's rangebound recent trading history. It is closer to longer-term lows than it is to highs but not sure I see a clear catalyst here for the company to recapture its glory days.
Wrapping It Up
As I mentioned earlier, I think we are entering a phase of the market where good old-fashioned stock picking is going to present some solid opportunities as opposed to latching onto an index, especially considering how narrow these high index index levels are being supported by their constituents (see my latest article for more about that).
While FFLS seems expensive I'm interested to see how the fund does over the back half of 2023 and will follow up once it has some history under its belt.