Trends Watch: Demand for Alternatives

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Manish Mittal, CIO, Kailix Advisors.

What is your outlook for alternative investments?

I have been involved with managing money in various strategies within alternative investments since 1994. I have seen many changes in the marketplace since then, but one trend has remained remarkably constant – the demand for alternatives has risen almost without interruption. I expect this will continue because the appeal of alternatives for sophisticated investors is clear – they offer the ability to add carefully constructed, positive risk-adjusted return investments and portfolios to the outright beta that can now be purchased essentially for free off the shelf. It’s an almost perfect marriage within modern portfolios.

To me, the biggest question that remains to be seen is if the current trends towards superfunds continue or if the marketplace will become more transparent so smaller providers can access the capital in the market on a more level footing going forward.

Where do you see the greatest opportunities and why?

Personally, I see the greatest opportunities in the public markets, particularly in the sub-$10 billion market capitalization range. The smallest companies in the S&P 500 are now over $100 billion in market capitalization and more and more passive investment dollars are moving into the large capitalization ETFs such as the SPY and Invesco QQQ. As active management is displaced by passive money, the greatest area for inefficiency is in smaller companies where fewer investors (and fewer sell-side analysts) are focused. Some of these orphaned companies are not even that small. For example, one of my favorite stocks over the last 12 months has been of a company that is the 3rd largest U.S. producer of natural gas in the country. Despite being a fairly large asset, the company was ignored to the point that during their 2nd quarter earnings call, only three questions were asked and the call barely lasted 25 minutes. As an investor, finding companies that are so ignored can be a very exciting source of opportunity.

I think, in general, the greatest apathy has been towards companies that are smaller and do not fit the current definitions of growth that are popular with investors. This trend is very slowly starting to change but there is a long way to go.

Where do you see the greatest challenges and why?

The greatest challenge I see in general is when you find a management team that is not able to bring itself to do the right things to help the company’s stock price perform the way it can. Most of the time it’s just a question of poor incentives more than anything else and changing their behavior (or changing management) is not easily done (and often you lose a CEO in the process who is actually very well qualified to run the company going forward).

I also think one of the greatest challenges as an investor is convincing your clients to look longer term and stay patient with an investment. Some of my best positions make a large portion of their gains in a very brief period of time during the year. It can really try your patience and make you feel like you might be missing something to have a stock that isn’t vaulting higher along with everyone’s current favorite stocks. Usually it is just a question of constantly reunderwriting your thesis and staying patient. Everyone wants the stocks all the gurus on financial television are talking about, but usually those aren’t the ones that pay off the most in the long run (depending on where you get in.).

What keeps you up at night?

Every investment has its own list of idiosyncratic risks that can rear their heads and damage your thesis at any point in time. You never know when a lawsuit, regulatory action, product recall or competitive threat emerges that you haven’t accounted for. To me, that is just part of the hazard of investing and all you can do is stay on top of those things to react to them as quickly and appropriately as possible (it is also the reason I like to keep the number of positions I have on to less than ten – I am just less likely to miss something if I am more focused). My biggest fear with my investments is always waking up to find out the management has done something unexpected and value-destructive. Often times, those mistakes can completely derail what should have been a profitable investment.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.