A quantitative investor, hedge fund manager Derek Webb is indifferent about the state of the market. Nor does he care to make forecasts.
"The beauty of what we do is not about guessing what's going to happen," says Webb, manager ofWebb Canadian Performance and co-founder of San Francisco-based Webb Asset Management. "What I do know is that the world changes more than anyone thinks. Although our portfolio has a kind of end-of-the-world, 'Mad Max' feel to it, and is focused in a few areas, it will start to capture change very quickly." A 25-year industry veteran, Webb employs a variety of tools to either go long or short on about 70 Canadian and U.S. stocks. In particular, he uses an earnings-driven model that derives data from Computerized Portfolio Management Services Inc. (CPMS).
When selecting stocks from a universe of 6,000 names, Webb looks for four variables: accelerating earnings growth, accelerating revisions by analysts in Canada and the U.S., earnings surprises and relative share price strength. The latter characteristic is particularly important as it singles out stocks that have been outperforming the market for the past nine to 12 months and are likely to continue doing so.
"To use an analogy, we're not hopping on a train sitting in the freight yard, but one that is actually moving," says Webb. "It's risky, sure, but there is also a strong probability that the stock will keep moving."
That approach is delivering positive absolute returns for the fund, which has a $25,000 minimum investment and was launched in May 2006. It returned 11.7% for the 12 months ended June 30, and has a two-year annualized return of 12.4%.
Webb can hold between 25 and 40 names on the long side, and 20 to 40 on the short. Currently, there are 40 long positions and 30 short. In terms of exposure, there is 139% on the long side, plus 40% on the short. The latter is achieved through leverage. The net long exposure is 99%.
Among the stocks on the long side that have been winning picks is Potash Corp. of Saskatchewan ( POT/TSX). "As grain prices had been rising farmers could afford to use more fertilizer to boost output," says Webb, adding that rising demand saw potash prices go up 33%.
Acquired a year ago, the stock has more than doubled as potash prices have kept climbing. "When a trend is set in motion, things continue to improve, until they stop," Webb says
Since variables can change without warning, Webb does not set price targets. "The model monitors change. When the earnings growth rate starts to decelerate, it [the model] will kick it out of the portfolio."
On the short side, Webb has favoured Loblaw Cos. Ltd. ( L/TSX) almost since the fund's inception, and has watched its share price drop 40%. "Loblaw was always known as a great Canadian success story. But stocks don't trade on stories; they trade on earnings."
Webb limits long holdings to about 3% of the fund's assets. To minimize risk, the limit is 1% for short positions. Portfolio turnover has been high, at 300% in 2007, although that is a reflection of last year's volatility.
A native of New Rochelle, N.Y., Webb graduated in 1983 from Dartmouth College, where he earned a bachelor of arts in economics and history. He went to Wall Street and until 1990 worked as a bond trader at firms such as Brown Brothers Harriman and Salomon Brothers. "I enjoyed the math. But there was so little payback for so much work," he recalls. "It made no sense."
Determined to transfer his skills to the equity world, where the potential rewards are greater, Webb went to the Wharton School of Business and earned an MBA in 1992. Then he joined San Francisco-based GT Global, where he had the freedom to apply his quantitative investing skills in managing U.S. and Canadian equity funds.
In 1997, when the firm was purchased by what is now Invesco Ltd., Webb began managing a global fund, which evolved into AIM Global Theme Class and later becameAIM Global Growth Class. He also managed the former AIM Canada Income Class.
Webb left the firm in June 2000 and agreed to manage the new Landmark series of funds for CI Investments. But Webb parted company with CI four years later and took some time to travel. In 2005, he set up Webb Asset Management, along with Ken McCord, a former AIM Trimark executive.
To date, the firm has attracted about $75 million in assets, with about half in the hedge fund. Webb also manages two new funds,Webb Enhanced Growth andWebb Enhanced Income, which use short selling, but to a lesser extent.
Looking ahead, Webb is unperturbed by market volatility, and is sticking to his time-tested system. "I don't know if oil is going to US$200 a barrel, nor does anyone else," says Webb. "Our model will steer us where to go. We just invest on the numbers."
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