This is part one of a four-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.
Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.
Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.
From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.
The Zeke Ashton iinterview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!
Interview with Zeke Ashton of Centaur [Pt. 1]
First off, could you tell our readers a little about the Centaur Value Fund and your investment strategy?
The Centaur Value Fund is a hedge fund that I started back in the summer of 2002. At the time, the markets were coming off one of the biggest speculative bubbles in history, but there was also a lot of value in areas of the market that hadn’t participated in that crazy bull market. Much of the value was in smaller cap companies and in sectors that were considered “old economy”. At the same time, however, there was still a lot of overvalued fluff hanging around that one could bet against. So in retrospect it was a great opportunity set for an investing style that was flexible and focused on the gap between stock prices and underlying business value. Value investing as a style had become pretty out of favor at the time given how wildly speculative the market became in the late 1990s, and a lot of the older generation of value investors had largely been discredited by early 2000. Even Warren Buffett was being widely criticized for his unwillingness to buy tech stocks. And of course there were also very few short sellers that had survived the late ‘90s, so there wasn’t as much competition and the market was much more conducive to short selling than it has been in recent years. So we entered the fray with the Centaur Value Fund at a good time for a value-oriented strategy that could go both long and short.
The basic strategy for our hedge fund is pretty straightforward. We look to own a portfolio of stocks that we think represent good value, and then we also look to short or otherwise bet against a handful of stocks that we think are trading for prices far in excess of what we believe the underlying businesses are worth. On the long side, we are looking for the ingredients you’d expect from fundamental, value-oriented investors: good businesses, strong balance sheets, good management, and then very importantly, a stock price that doesn’t fully reflect all those qualities. On the short side, we largely think of the things we like to see in a good long idea and then flip it around. In other words, we are looking for bad businesses, poor management, weak balance sheets, or egregiously overvalued stocks, though not all those ingredients are necessary for a good short idea. One might think of our ideal short candidate as something like a photo negative of value, or what we often call “anti-value.” So that’s really the basic strategy: long value, short anti-value.
We are always long-biased, such that our long exposure is typically at least three times our short exposure. For example, it has been typical for us in the past to have 95-100% market exposure on the long side and 20-25% exposure on the short side. Such a portfolio, assuming the underlying stock selection is decent, should allow the fund to make decent money in strong markets, protect capital better than average in down markets, and gives us a chance to do reasonably well in the occasional stretches where the market wiggles around but doesn’t really go anywhere.
The attraction of such a strategy is that if well executed, it should generate equity-like returns over a full market cycle and not really encounter a market environment in which it performs terribly. Most importantly to us, we want to reduce the chances for any kind of catastrophic loss to as low to zero as we can. We would define catastrophic in this sense as a percentage loss that is too big to recover within a reasonable period of time. In investing it is really important to avoid those losses that erase three or four years’ worth of compounding.
Like any investment strategy, there are disadvantages to our approach as well. The first is that any long / short, value-based portfolio is unlikely to put up really amazing returns in any given year. This is because in a big up year for the market, the short positions and hedges are likely to be a drag on performance. In a big down year, the short book will likely help us, but since we are long-biased we will probably still lose some money – but hopefully way less than the market. And certainly we are likely to trail the broad market averages in the last stages of an extended bull market as stock prices reach lofty valuations and we struggle to stay fully invested on the long side. Many people don’t truly understand that taking actions that reduce the risk of large percentage losses also tends to curtail the possible upside. But if we do our jobs well we should be able to compound capital at a steady, reliable pace, and we should have the ability to get really heavily invested at the bottom of the cycle when other investors are tapped out both financially and emotionally. That’s when the best risk-adjusted returns are usually available to those who are able to wade in to the market and buy assets cheaply from distressed sellers.
I’d also like to mention that we offer a somewhat more conventional value-based investment strategy in a mutual fund called the Centaur Total Return Fund (TILDX), which we’ve managed since 2005. We do not short individual securities in the mutual fund, and though we can use index puts and other instruments to hedge market risk we tend to do less of it in the mutual fund. Since we do not have a short portfolio to act as a market hedge, we try to be somewhat more defensive in the positioning of the long portfolio. We have in the past emphasized current income in the mutual fund, and we incorporate covered call selling as an added component in order to generate extra income. We have discovered that selling covered calls, when done intelligently and selectively, can help reduce portfolio volatility without the risks of shorting individual stocks. Otherwise, the general goals are the same, though we understand