The quiet achiever who has returned 102% in just 5 years

Ruthless, risk-taking, dominant and charismatic. These adjectives spring to mind when I think about the portrayal of hedge fund managers in popular culture.

Without a doubt, watching Bobby Axelrod plot out his next big bet in the TV drama Billions series makes for excellent viewing. But there aren't too many Bobbies in the local hedge fund community.

The reality is that short selling is a highly specialised skill, often misunderstood as some form of nefarious activity undertaken by faceless short report promoters.

Josh Clark, Portfolio Manager of the QVG Capital Long Short Fund, is the antithesis of Bobby Axelrod. His demeanour is calm, considered, and calculated, but that hasn't stopped him from doubling his clients' money in the five years since the fund was launched in 2019.

Clark, who sits alongside QVG Founders Tony Waters and Chris Prunty, has been a quiet achiever. However, his performance numbers after five years are impressive, notwithstanding a testing year in 2022. Clark says the critical lesson he has learned is to remain focused on the factors that will determine a business's long-term value.

"I think you have to worship at the altar of mathematics; that's what is driving share prices. I think too often in this industry, it's easy to get caught up in the story," he says.

"If you continually focus on what the maths are telling you and what that means for that business' long-term value, then that can be a north star, and it makes decision-making a lot easier."

Stalwarts and turnarounds

On the long side of the portfolio, Aristocrat Leisure (ASX: ALL) and Xero (ASX: XRO) are examples of stocks that have been doing the heavy lifting for the portfolio on the back of strong results.

Clark says he has recently invested money in an eclectic mix of new ideas that broadly fall into two categories.

"If you want to squeeze the most out of a portfolio, I think you've got to admit to yourself that the Australian market is just not broad enough to have all of your stocks in one type of idea," he says.

Clark describes MMA Offshore (ASX: MRM) and ZIP Co (ASX: ZIP) as turnaround stories. Clark has been short ZIP in the past, which he says has given him a good understanding of the business. He believes the environment for Buy Now Pay Later operators is improving, with revenue growth picking up and customer acquisition costs falling.

Other recent additions to the portfolio are Car Group (ASX:CAR), Light & Wonder (ASX:LNW) and Supply Networks (ASX:SNL), which Clark describes as 'stalwarts'. These stocks have high returns on capital, double-digit revenue growth, sustainable competitive advantage and IP. 

"You probably won't get a lot of multiple expansion out of those three stocks, but I think you will get a market plus return out of the earnings growth," he says.

Short stories

You rarely get much detail on the art and science of short selling. There's not a lot of upside for the manager who can be locked out of investor briefings, which puts them at a disadvantage in the market.

Clark also says that short ideas can often be a source of long ideas, as with EML Payments (ASX:EML). Clark says he has been long, then short, and now long again in EML, and by holding a short position, he saw an opportunity when many long-only investors had moved on and discarded the stock.

"I think we would have been one of the few funds that stayed on top of the story right into the deep dark depths of microcap land, where everyone has had enough and forgotten about the story. We're still paying attention because we're short of that stock, and we need to cover it at some point," he says.

New management, activist investors agitating for change, and a sensible strategy were catalysts for change at EML. Ultimately, Clark covered his short position and later went long the stock.

EML is an example of when shorting works well, however, it doesn't always work out like that and Clark is the first to admit that he has been caught in his fair share of 'short squeezes'. The decision to stick with the position and endure the pain or cover the short depends on what drives the share price higher. Megaport (ASX:MPL) is an example of a successful short that Clark decided to close out on the back of an improved outlook.

"You just want to be as level-headed as you can be and keep it focused on the numbers. So with that particular example, you could see a path to that stock trading that was much higher given the amount of cost they were taking out of that business," he said.

However, sometimes short squeezes can occur for other reasons, such as other short sellers choosing to cover or because borrow (shares made available to short) is being withdrawn from the market. In these circumstances, where the fundamentals haven't changed, Clark says he may choose to endure the pain and remain short.

So, does shorting add value? Clark says for QVG Capital, the answer is a simple yes.

"If I look at what our long short fund has delivered over the past five years, about one-third of the return - that's in an absolute sense, that's real dollars," he said

In addition to the absolute returns, Clark says the short portfolio doesn't get the credit it deserves for allowing the fund to increase or leverage its exposure to long positions.

"It [shorting] also allows us to leverage our longs, and our long book typically runs at about 120%. So if you put $100 of capital into the fund you've got $120 in the longs. So there's an extra $20 available that you wouldn't have had if you weren't short-selling," he explained.

Clark says that if you take this into consideration then shorting would account for about 40% of the fund's overall performance.