Crux Capital Management

About investing

The investment objective of the fund is to maximise absolute returns over the long term. As long-term investors, we are unconcerned with volatility in the short term and enthusiastic about the positive opportunities it provides in the long term.

We have a simple but well-defined and internally self-consistent investment process. We are consistent in its implementation, stick to it scrupulously and do not change it in mid-stream when it periodically underperforms; this invites whiplash. This does not mean we can't make rational decisions to migrate to styles that are more suited to prevailing circumstances.

In markets there are weighing tools that have proven unambiguously successful over longer periods and consequently make long-term investment both more successful and less risky than short-term speculation. In addition, compounding is one of the few factors we have influence over, and that is also a dependable, safe and predictable way of maximising wealth over long periods.

The use of the tools available to hedge funds can enhance this fundamental approach, generating additional alpha, reducing portfolio volatility and lowering correlations.

Given the appalling inaccuracy of forecasting we tend to avoid doing this or listening to others' attempts to do so. We try to find stocks that will thrive regardless of the economic cycle, so we don't worry too much about the economy. We cannot predict the economy any better than we can predict the stock market.

We do, however, pay close attention to the behavioural aspects of investing.

Fundamental valuation is straightforward, although not necessarily easy. Timing is far more difficult. We spend a large proportion of our efforts on setting estimates and bounds on when we expect fundamentals to change and how long the transition could take. A large return that is too long in coming or is spread over too long a period is diluted away. All returns are, after all, annualised.

Working only on fundamentals, however, tends to ensure that one is always too early, both in buying and in selling. We therefore incorporate a momentum methodology to improve timing. This can, however, lead to leaving some money on the table at turning points.

We are highly risk-aware. Risk for us is the probability of being wrong, i.e. of a bad outcome relative to the intention of an investment, which usually means the possibility of a permanent loss of capital. Every investment we make is tested against the criterion "if we are wrong, how much could it lose?". We always incorporate the risk of loss in our return calculations. Our expected return is the weighted probability of possible gains and losses. We protect the portfolio against known events of uncertain outcome; there will be enough unknown events that will test us. We also regularly monitor the portfolio’s factor exposures to ensure that it does not contain risks of which we are unaware.

Risk diversification, through portfolio construction and optimisation, is an important component of our risk management. This is one of the few free lunches in investing, and one we take maximum advantage of. A rational, methodical and consistent process of asset allocation and portfolio optimisation provides incremental performance far in excess of its cost of implementation and permits relatively concentrated portfolios.