A duo of former corporate lawyers who have become money managers in Canada are sounding the alarm over the rally in most asset classes after their fund outperformed most of its peers this year.
LM Asset Management, a value-driven fund based in Vancouver, achieved its only fund return of 53% in the first half of 2021, largely due to investments in commodity producers like Antero Resources Corp. was due. In comparison, the HFRI Equity Hedge Fundamental Value Index, which aggregates asset managers looking for opportunities based on discounted valuations, returned 17% as of June 30.
LM Asset’s cumulative net return has been around 265% since its inception in July 2017, according to a recent Bloomberg investor presentation. It remains a small fund with approximately $ 80 million ($ 64 million) in assets under management.
“We fear that the markets will be foamy and we want to continue investing as it is important to protect the purchasing power of our capital in the face of significant price inflation in many asset classes – but at the same time we want to remain” defensive, “said Chief Investment Officer Daniel Lau recently in an interview.
LM chief executive and co-founder Lau and Christine Man are former attorneys who previously worked in the Vancouver office of McMillan LLP, where Lau served as a securities M&A attorney and Man as a partner in corporate tax law.
The duo believe most asset classes are overvalued and intend to proceed cautiously over the next 12 months and continue to hold 20% of their holdings in cash to use in the event of a major market sell-off, while keeping their investments in undervalued companies to protect the Purchasing power of the fund, said Lau.
One of the key performance drivers for the fund was Denver Colorado-based natural gas producer Antero Resources, which LM identified as an opportunistic bet in October 2019, Lau said. Antero stock has risen more than 400% since then and the fund has trimmed some of its position. The fund also invested in other energy producers as well as in base and precious metals companies.
Fly up
LM’s fund outperformed in commodities betting this year
Bloomberg
Commodities, from oil to copper, reached record high prices this year, driven by strong demand and pandemic supply shocks. The Bloomberg Commodities Spot Index, a measure of 22 commodity prices, is more than 50% above the low seen in March 2020 when the pandemic first broke out and 20% this year.
“Our investment thesis was not based on inflation but on the ‘supply narrative’ where in the current environment there is simply not enough supply to meet demand. For this reason, we believe that the commodities sector still offers significant advantages, ”the duo wrote in a letter to their investors.
READ: Commodities Roar Back, Making Traders and Hedge Funds Billions
Despite its successful bets on commodity producers, LM is a “non-sector” generalist fund, Man said. It also has investments in utilities, renewable energy and consumer goods manufacturers, she added.
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