Titan’s 13F Replication Strategy In A Fintech Wrapper

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During his recent conversation with Tobias, Clayton Gardner, co-founder of Titan, discussed Titan’s 13F Replication Strategy In A Fintech Wrapper. Here’s an excerpt from the interview:

Tobias Carlisle:
Well, thank you. So Titan. What is it?

Clayton Gardner:
So Titan is mobile investing platform and we’re democratizing hedge funds and all alternate strategies. So for anyone, you can download the app, sign up in two minutes. You can start with as little as $10, and what we do is our first product automatically invests you and manages your money in a portfolio of 20 stocks that are essentially high quality compounders.

Clayton Gardner:
So we use a quantitative, systematic approach to take all 10,000-plus stocks. We look at what the longterm, most fundamental, concentrated hedge funds are investing in across that universe, and then we assemble a 20 stock portfolio with their highest conviction picks and we rebalance that on a quarterly basis. We do our own fundamental diligence to vet them. So it’s a 20 stock best ideas portfolio, tend to be a lot of compounders. As so, that’s our first product.

Tobias Carlisle:
So they go to the website, and then it’s a little bit like Acorns or something like that? From the investment perspective, we’ll talk about the strategy in a moment, but what’s the interface, how does that all work?

Clayton Gardner:
It’s really simple. You can think about us more as an active manager, so if you’ve heard of welfare embetterment platforms where you’re downloading or you’re using a desktop app, you sign up, create an account, and then you deposit funds and you withdraw funds. Right? So it’s very simple. That’s the only action you just take today.

Clayton Gardner:
We’re a mobile platform so you can sign up in a few minutes. You fill out a little bit of information about yourself, create an account, and then deposit funds. You can deposit anywhere from $10 to hundreds of thousands of dollars and within a day or so you get instantly invested in this portfolio of 20 stocks, and we handle everything for you after that.

Tobias Carlisle:
I see, so the strategy is like a 13-F replication. It starts out there, and then you do some additional diligence. So let’s talk about that. Let’s talk about the 13-F replication part of it first. Can you say who you’re tracking?

Clayton Gardner:
So we can’t say who we’re tracking at the fund level, but taking a step back when we were whiteboarding our first product, and I can talk about my background on the buy side, having worked at several different fundamental longterm-focused funds, the idea to do generation process for a lot of these funds starts with, what are the other high conviction hedge funds investing in? Right?

Clayton Gardner:
And so, they tend to be this melting pot of ideas, you’re meeting people at conferences, management meetings. Then you go do your own fundamental work but they all coalesce around some of the same names, especially if they have similar styles.

Clayton Gardner:
So my background was on the fundamental longterm deep research approach, so holding companies for three to five plus years, generally 10 to 20 long, similar number of shorts, and so when we were whiteboarding Titan we said, “We want our first product to look like our core circle of competence.”, which is this high quality concentrated portfolio of compounders.

Clayton Gardner:
In order to construct that portfolio, we said, “Why not use the same approach we used on the buy side?”, so starting with 13-F filings, which most funds above $100 million assets have to report every quarter, what we do is we look at the 13-F filings of funds that fit a few criteria that we believe represent longterm fundamental funds, right?

Clayton Gardner:
So if you look at-

Tobias Carlisle:
What are the criteria? Can you talk about that?

Clayton Gardner:
So if you think about the data that is represented in a 13-F filing, there’s all the long positions a manager owns, including the calls and put options. There’s the market value as of last quarter, the number of shares they own, and there’s the evolution of how that complexion looks each quarter.

Clayton Gardner:
So by doing some data science you can basically figure out what the quarterly turnover is, you can figure out what the concentration with the sizing is, so how much of a manager’s capital is in the top five to 10 picks versus 20 and onward pick. And you can figure out, okay, is this the type of manager that holds a name for three to six months, or three to six years?

Tobias Carlisle:
Right.

Clayton Gardner:
And similarly, you can get a sense, you can almost start to back into, is this a manager that tends to be more fundamental in flavor? If so, the probably are more concentrated, lower turnover. And then, also obviously do our own fundamental bottom’s up work.

Clayton Gardner:
If there’s a fund with five to 10 names, super-chunky position, maybe even a 13-D filed with that position tends to be more activist.

Tobias Carlisle:
Right.

Clayton Gardner:
So we can use these criteria to basically start to segregate funds into different strategy buckets, and our first product focuses exclusively on that fundamental longterm, and does tend to be more GARP in flavor. These are not value funds that are scraping for cigar butts, these are guys who hold these growth compounder positions.

Tobias Carlisle:
That’s a nice word, mate, scraping for cigar butts.

Clayton Gardner:
Well, importantly there is, on average, the positions tend to be owned by five-plus funds, right? The important thing about this strategy is it’s fund-agnostic. So to your earlier question, which funds do we follow? We’re not saying, “Oh, let’s go pick X, Y, and Z funds. For example, let’s go pick a basket of tiger cubs and see what they own.”, because there’s obviously some bias there, right?

Clayton Gardner:
It’s the question of, how do we pick that fund in the first place. There’s probably some historical performance bias, some selection bias, and so what we do is we use a minimum number of funds must own each stock as the leading criteria, and we’re almost agnostic, so there’s some managers that will show up in the basket of funds that we track each quarter that are completely under the radar. They manage three, $400 million.

Tobias Carlisle:
Right.

Clayton Gardner:
And then, there’s the name brand funds managing 10 billion that you would definitely recognize if I told you. And so, what’s nice about this is we’re fund-agnostic so we’re not anchoring ourselves to the given manager who could, for whatever reason, close up shop, become a family office, and all of a sudden we have to redo our strategy.

Clayton Gardner:
So it’s almost a fund of fund approach, if you think about it that way. And obviously, because we’re a startup, so we’re not a fund. We separately manage accounts. We have compliance, legal, everything is as a service, so we’re able to do this. We charge a performance fee and 1% management fee.

Clayton Gardner:
So I think we’re giving folks a lot of beta, and so far, we’ve been giving them some alpha that would resemble what they’d get in a long-only fundamental fund at a fraction of the cost.

Tobias Carlisle:
So it’s like a best ideas fund and you’re agnostic to who goes in there but you’re looking for guys who are doing deep fundamental research and looking to hold for longer periods of time and you’re agnostic to what their style is, but you’re looking for maybe more growth at a reasonable price compounder-type investors. Is that a fair summary?

Clayton Gardner:
No, that’s exactly right. And that’s why there are some ETFs out there that try to do this. I could name a few that are essentially 13-F tracking ETFs. The reason we’re a platform, I could talk about our longer term mission and vision to build several of these funds and build custom portfolios for people, but part of the reason is that there is a qualitative element, right? It is a little bit quantamental in nature.

Clayton Gardner:
We have an in-house research team that’ vetting these, because there certain companies that will pop up that definitely seem to suggest that there’ some style drift within that basket of funds. So, for example, there’s a couple of companies that popped up on our screen that are almost certainly activist names, right?

Clayton Gardner:
And yeah, there’s a lot of longterm concentrated fundamental funds but they’ll hear an idea at a conference and they’ll do their own work and they’ll style drift a bit, and so that’s where our team comes in, so each product we launch, we have one today, has a mandate and it’s our in-house research team’s job to make sure each position that comes up in that screen is matching that mandate.

Tobias Carlisle:
So that’s what your fundamental approach is, it’s to make sure the positions match the mandate rather than doing any diligence yourself, or valuation work yourself. Is that how you’re doing it?

Clayton Gardner:
We do valuation work ourselves and it’s not so much today, in order to initiate a new position. It tends to be more to understand how to rotate into a new position when something happens. So I’ll give you a few tangible examples.

Clayton Gardner:
Historically clients of ours have owned Time Warner, which got acquired by AT&T, right? And it got acquired, I think, in June 2018, so the question naturally is, okay, 13-F filing is not coming out until August. They come out 45 days after quarter end. What are we doing for the two months between the time this ticker gets delisted and gets swallowed by AT&T and the next 13-F scrape.

Clayton Gardner:
So that’s were our team comes in and we’ll look at the next few securities in line and we’ll make a best judgment there. Same thing happened with a company called Altaba, which was a holding company essentially for Alibaba. Similar story.

Clayton Gardner:
So there’s certain acquisitions, spinoffs, divestitures, unique corporate actions that, again, these filings would pick up but on a delay basis and our clients look to us to make sure we’re making those right decisions intra-quarter.

Tobias Carlisle:
So Meb Faber has done some research on 13-F filings and one of the things that he observes is that the biggest position is often the worst performed in the 13-F filings. I’m guessing that you guys are avoiding that by doing some of the additional work and looking a few of the other funds. But have you considered that issue?

Clayton Gardner:
No, well, it’s interesting. One of the things we do is this first strategy is equal weighted. So we have done some work analyzing conviction. I know there’s some firms out there that have done similar studies to understand, are managers adding value by sizing things differently.

Tobias Carlisle:
Right.

Clayton Gardner:
I think, and there’s some data to suggest that the manager’s top 10 holdings do tend to perform better than, let’s say, their 15th or 20th idea. They’re better off investing more into those top few, so that’s actually one of the criteria that goes into our strategy. We actually only look at the top 10 holdings for these managers.

Clayton Gardner:
So we definitely have some conviction weighting, but the way we try to level that out is we do equal weigh all 20 stocks. So we rebalance each quarter, and so that’s how we try to make sure no position is becoming too big. And we back tested it and that’s a weighting that we’re comfortable with, but I definitely have seen some of the stuff that Meb’s mentioned in his book.

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