22 Dec 2021

Why this well-known shorter won’t short-sell for now

Fund manager Doug Tynan, who shot to prominence after identifying the accounting irregularities that triggered Slater & Gordon’s unforgettable implosion, [https://www.afr.com/companies/professional-services/hedge-fund-vgi-says-there-are-morecockroaches-in-slater–gordons-kitchen-20150629-gi0o47 ] says the central bank-fuelled bull market has made short-selling currently unviable. 

Mr Tynan, who has quietly established GCQ Funds Management where he is chief investment officer, swore off bets against companies over the past year while managing the wealth of a select group of family and friends through his new hedge fund. 

After leaving Sydney-based VGI Partners in mid-2020, [https://www.afr.com/companies/financial-services/doug-tynan-resigns-from-vgi-partners-after12-years-20200622-p554w2] Mr Tynan has set up a portfolio that will throw open its doors to new investors in February, earlier than planned because of the recent approach of several family office groups who wanted to invest in GCQ. 

The move comes at a testing time for active fund managers, who have struggled with lagging performance and the rise of cheap ETFs. Those previously seen to have the Midas touch – such as Hamish Douglass’ Magellan Financial Group – [https://www.afr.com/companies/financial-services/magellan-fund-fee-pressure-mounts-amidclient-crisis-20211221-p59jc6] have faltered amid these challenges. 

Mr Tynan’s current basket of companies includes well-known names such as Visa, Facebook and WD-40 Company along with more obscure stocks such as Israel’s Automated Banking Services and Italian luxury fashion group Brunello Cucinelli. It delivered an impressive adjusted return of 51.1 per cent for the period from the start of January to mid-December this year, against a return of 19.1 per cent for the benchmark MSCI World Index over the same period.

Although rising equity markets worldwide lent a strong hand to this performance, GCQ is aiming for a more sustainable 8 per cent to 12 per cent annual return over the investment cycle. It has also designed the portfolio to weather rising inflation by choosing companies that benefit from this or can raise prices unilaterally. 

Mr Tynan has decided against opportunistic short-selling for the time being, partly because of the unprecedented expansion of cheap money that continues to inflate stock markets. This has been sparked by ballooning central bank balance sheets across the world during the COVID-19 crisis. 

In a letter introducing GCQ to prospective investors [https://www.afr.com/streettalk/fund-manager-doug-tynan-hangs-up-new-shingle-gcq-20211128-p59ct9] on Wednesday afternoon, a copy of which has been seen by AFR Weekend, Mr Tynan said his team had considerable experience shorting companies with questionable accounting practices or structurally flawed operations. 

But he said he had “not undertaken any short selling in 2021 as bull market conditions, fuelled by fiscal and monetary stimulus, have meant that it has been more difficult than usual to identify catalysts for share prices to decline”. 

His bet against Slater & Gordon resulted in a 99 per cent crash in its stock, and another headline-grabbing stoush with Corporate Travel Management [https://www.afr.com/companies/financial-services/vgi-partners-takes-activist-short-bet-againstcorporate-travel-20181028-h176l1] in 2018 resulted in a near-40 per cent decline in that stock. 

Although Corporate Travel Management was hammered by the coronavirus pandemic, its stock has since bounced back from its lows thanks to the broad based rally in equity markets. 

GCQ is launching the GCQ Flagship Fund with a single strategy. The group’s name is an acronym for the fund’s approach: Global (searching for the developed world’s best investments), Concentrated (a small basket of 20 or so holdings) and Quality (finding attractively valued long-term returns). 

Although Mr Tynan is promising to find companies with high prospective returns and competitive advantages, he is also pinning his hopes on stocks that are “less exposed to disruption and extreme downside risk”. 

Common traps 

Part of this involves a bias towards companies in a “monopoly, duopoly or oligopoly” position, with valuable brands or strong pricing power. 

Mr Tynan said the new fund would also avoid common traps, such as trying to time the market – the fund will generally be fully invested all the time – and investing agnostically to the macroeconomic backdrop. This includes giving investors the option of hedging against currency fluctuations or not, unless the Australian dollar is close to historical lows, in which case GCQ will hedge for the potential upside. 

“You should not expect us to talk in any detail about macroeconomics in our letters, or when we speak with you directly,” Mr Tynan said. “We will simply be focused on owning the highest quality companies in the world that will continue to compound through macroeconomic cycles.”

Along with initial hires – head of research Justin Hardwick and chief executive David Symons, who worked with Mr Tynan at VGI Partners – the new operation is looking to build a team of up to a dozen people, to be based at Macquarie Street in Sydney’s CBD. Morgan Stanley private wealth veteran Kathy Wu has also joined. 

Mr Tynan is well known in Australian equity markets, and has had a successful spell managing the money of some of the country’s richest and most private families. 

Having started out as a Brisbane-based auditor, Mr Tynan developed a reputation for picking long-term winners such as Mastercard, WD-40 and Kikkoman at VGI, and building relationships with some of the country’s more sophisticated family offices. 

He was also known for being highly accessible to clients who wanted to discuss their portfolios one-on-one. With this in mind, the minimum investment in GCQ is slated at $2 million; individual managed accounts will have a minimum $25 million buy-in. 

“Too often, we have seen businesses built with culture as an afterthought, leading to organisations that fail to achieve enduring success. This is particularly true of investment firms,” Mr Tynan said. 

The fund has a 1.25 per cent management fee, and a performance cut of 15 per cent above a hurdle constituted of the lower of either 7 per cent or the US cash rate plus 4 per cent. Performance fees for early investors will be waived until the end of June 2023.

Michael Roddan National Correspondent AFR is a Walkley Award-winning national correspondent based in Sydney. He is a former business and economics reporter for The Australian.