Into Orbit: a new quant-orientated small-cap boutique

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A small group from IFM Investors, formerly involved with the management of IFM’s Australian small-cap and global equities strategies, has formed its own Melbourne-based boutique, Blue Orbit Asset Management.

They have partnered with Costa Asset Management, a family office formed by the founders of Costa Group, who have provided working capital, some seed funding and office space to the new business under the leadership of Adam Randall, an experienced quantitative investment manager.

Randall has been joined by Megan Talmage, who was responsible for the global equity portfolios at IFM, and Julie Andrews, who was IFM’s business development director for institutional equities. Blue Orbit’s non-executive chairman is Damien Green, who is a former Australia country head for Morgan Stanley Investment Management.

“When we first sat down to discuss starting this business, we focused on culture and values,” Randall says. “We all have great experience working closely with institutional clients. We would prefer to only have a handful of investors in our funds, having fewer, but deeper relationships.”

Randall said that many of the super funds and their advisors have been very supportive, offering help and advice. The fee structure has also been very well received, he says. Diversity of thought is also important to them. The four founders have very different degrees and different post-graduate qualifications. They have also installed a gender equality policy that covers each of the portfolio management team, senior management and the board.

Randall and Talmage have a lot of experience managing quantitative strategies. In 2007 at VFMC Randall was trading the Research Affiliates ‘RAFI’ strategy, as well as several quantitative funds. In 2012 he joined Andrew Francis at Realindex as a portfolio manager and then head of research. “But I was living in Geelong and commuting to Sydney, so when the opportunity arose to build a new small-cap strategy at IFM in Melbourne [in 2014]I took it,” he says. He then left in 2017 to start work on Blue Orbit. “By March last year we had three of us working full time on it.” Talmage started her career as an equities trader at Patersons Securities in Perth, trading small and micro-cap stocks. She then moved across to quantitative investment at IOOF’s QuantPlus, managing domestic and global quant strategies, before joining Randall and Andrews at IFM. Andrews is an experienced marketer, establishing institutional businesses in Australia, Blue Orbit being her third.

The first product is a standard wholesale unregistered unit trust which will target institutional investors and other family offices as investors,“We see ourselves as quite different from traditional small-cap managers,” Randall says. “We end up with a range of tilts. We have been running a paper portfolio now for two years and it looks like we will be able add about 7 per cent alpha, based on those two years, with a 4 per cent tracking error.”

Randall agrees that in the small-cap space most active managers beat the index, however, he says that to provide “meaningful” outperformance is not so easy. The quant tilts come from multiple alpha signals which are blended in portfolio construction for a diversified portfolio which works across different market cycles. The main three long-term signals are quality, defensive and trend following. Then there are several shorter-term signals.

Blue Orbit is hopeful of launching a second small-cap strategy, for global ex-Australia stocks, towards the end of next year. It will have a similar process to the Australian fund.

– G.B.

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