The fund managers wishing for more volatility

Contrary to most fund managers, Spatium Capital is hoping for more volatility, not less, after short-term mispricings helped its Small Companies fund see returns four times higher than its benchmark in FY22–23.

The Spatium Small Companies Fund holds a long-only diversified fund with an average of 25–40 stocks. But unlike other fund managers, it holds its stocks for around 30–45 days compared to peers which will hold them for months, if not years. 

The quick turnover of holdings means it benefits when markets are volatile. 

Over the last financial year to 30 June, the fund has returned 22.2 per cent versus 5.3 per cent than its ASX Small Ordinaries benchmark. 

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Jesse Moors, co-founder and director of the Melbourne-based firm, told Money Management that the earlier volatility “absolutely has” been a contributing factor in its performance. 

Over the financial year, Spatium Capital traded some $114,133,765 and completed 1,822 trades. It sold 151 companies and acquired 143 new companies. 

“All the pundits were calling for a slow year with minimal lift whereas we’ve done this without taking on more risk and by protecting capital. The message is clear that this approach works in volatile times,” said Moors.

Reflecting on the strong performance, the firm’s primary motivation has always been competition, which in practice often results in better investor outcomes, it said.

“By executing our investment strategy in the manner in which it was designed – no matter how emotional the market conditions may be – we know the portfolio remains well positioned to benefit,” it observed. 

This success during a volatile period means it continues to hope that volatility picks up rather than steadies out. 

Nicholas Quinn, Spatium Capital’s co-founder and director, said: “There’s not enough volatility at the moment. There’s interest rate and inflation risk at its highest level; but after COVID and the war in Ukraine, the market has got used to all the craziness.

“We love high volatility climates because you can buy more at a discount, so it’s been tricky from a turnover perspective to keep buying businesses.”

One area that is seeing volatility in Australia is around monetary policy where interest rate and inflation risk are at high levels, and the managers said the prospect of yet more interest rate hikes is “terrifying” for them.

The Reserve Bank of Australia paused the rate hiking cycle at 4.1 per cent at its last meeting at the start of August, but commentators expect there will be at least one more hike before rates reach their peak.

Quinn continued: “Recession is a horrible thing. It is not a term to be thrown around lightly. It can create generational poverty and disruption. Unless the federal politics starts to match where rates are going, then it doesn’t seem like Australia can avoid a recession at this point in time. But I’d be happy to be wrong.

“It’s terrifying. You can’t just keep hammering more rate rises through.

“You almost want to induce the recession-like job slack without a full-blown recession, and I don’t think the RBA can do that from one single lever [of interest rates].”

RBA governor, Philip Lowe, has just one monetary policy meeting left as he will step down from the role in mid-September and be replaced by Michele Bullock.