Neil Hall
- The AXS Alternative Growth Fund managed by Ajay Dravid and Rufus Rankin outperformed 97% of its peers this year despite not betting on any individual stocks.
- In an exclusive interview with Business Insider, the fund managers explained their differentiated approach and how other investors can profit from it.
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"Picking stocks is hard because it just is."
Ajay Dravid knows exactly what he means by that statement, since fund managers like himself are both shrinking in numbers and failing to consistently outperform their benchmarks.
By eschewing stock-picking, Dravid and his co-portfolio manager Rufus Rankin have catapulted their fund to the top ranks of 2019 performance. Their AXS Alternative Growth Fund has returned 36% this year, outperforming 97% of its peer group according to Bloomberg data.
"Whereas people tend to try and outperform the stock market by picking stocks, we tend to do it by picking strategies - uncorrelated or negatively correlated strategies - which we think will perform well over time," Dravid told Business Insider.
While Dravid and Rankin take a different view from their peers on stock picking, they are in alignment on the importance of outperforming the market. In fact, their fund's survival depends on it because they waive management fees for a year if they fail to beat the S&P 500 on a trailing-three-year basis.
Instead of achieving this outperformance by researching individual stocks or sectors with the greatest upside potential, they adopt a differentiated approach. It can broken down into three main components.
The first is a strategy that trades S&P 500 equity index futures. It is entirely outsourced to traders who demonstrate the potential to produce positive returns over the next 5-10 years. The goal is to only work with traders who can match the performance of the S&P 500 - and potentially produce outsized returns - with comparable risk to the index.
The second leg of their stool involves so-called dynamic hedging programs that are negatively correlated to stocks and help protect the portfolio during equity market drawdowns.
Ironically, the hedges were the fund's best performing strategy in a year that delivered double-digit gains for the broader market. This was possible because there were sufficient pockets of volatility to put the strategy to work.
The third leg of their strategy diversifies the portfolio by investing in fixed-income assets including money-market funds, exchange-traded funds, and Treasuries.
All told, they offer broad exposure to stocks through S&P 500 futures, hedge with trading programs that are negatively correlated, and throw in safe-haven assets for diversification.
In their view, this is a superior approach to stock picking - especially over the long run.
"Trying to tactically time the market and look at what's going to happen in the next six months or a year - or even two or three years - is extremely difficult, and we don't think we are good are doing that," Dravid said.
For this reason, they do not have a positive or negative outlook on what happens to stocks in 2020. And they certainly don't have any preferred stock picks.
Their advice to investors is not to avoid stock picking, however. It is to identify your unique advantages and exploit them to the fullest.
"Your biggest edge is time," Rufus said specifically to younger investors.
He added, "Try to get exposure to a broad cross section of uncorrelated assets and try to be cost-conscious in how you do that."