Investing in Wellington's fund despite manager's poor track record
Elena Chirkova
Jul 11, 2024On May 1, the GEIST fund managed by Movchan's Group made investments in the Bay Pond fund managed by the renowned and one of the oldest management companies, Wellington Management Company, which was established in 1929 and now manages $1.2 trillion. We usually do not disclose the names of funds, but its history is so interesting that we decided to write about it.
The fund was established in 1994, making it one of the oldest existing hedge funds in the world. The fund was created and has since been led by Nick Adams. Before leading his own fund, Nick Adams was a financial sector analyst at Wellington. He was well-acquainted with and, one might say, friends with Julian Robertson — an outstanding investor. Robertson tried to lure Adams away, and he almost succeeded. Adams's problems at Wellington were that the company prided itself on all its funds being long only. This meant that Adams couldn't implement his ideas about which stocks to short. However, this could easily be done at Robertson's Tiger Management. And Adams left. He was absent from work for exactly one day. The next day, a call came from Wellington, and Adams was offered to create a fund under his management, whose investment declaration would allow both long and short positions; they even helped raise money. And Robertson became an investor in Adams's fund and kept his money there for many years.
Since its inception in February 1994 and up to February 2024 (when we made the decision), the fund has earned investors an average of 13.5% per annum. This is a very good return, especially considering the time interval (which is 30 years!), as the longer the interval, the harder it is to show excess returns compared to the market. Over this interval, the S&P 500 with dividends brought investors 8.5%. Thus, Adams outperformed the index by 5 percentage points per year. This gap is gigantic. Meanwhile, the fund operates with financial sector securities, which perform much worse than the S&P 500 index and grew at a rate of only 6.3% per year (data excluding dividend yield — industry indices with dividends are not calculated).
We have made many investments in funds, but only for this one do I have an epigraph: a beaten one is worth two unbeaten. In 2017, the fund was going through tough times. On May 4, 2017, the Wall Street Journal published an article titled How a Hedge-Fund Ace Chased Silicon Valley Riches—and Embarrassed Himself. The reason was Adams's losses from investments in two private companies — Powa Technologies Group PLC and Mozido Inc.
Powa developed the PowaTag smartphone app, which allowed users to make instant purchases by scanning barcodes on advertisements. Additionally, its portfolio included the mPowa mobile payment acceptance app. The company was actively growing, signing agreements with large firms and conducting international expansion.
By 2014, Mozido was producing software that allowed users to send and receive money using mobile devices, primarily for those without bank accounts. The company's potential market was huge: estimates in the mid-2010s suggested there were about two billion such people worldwide. In 2014, Mozido acquired a majority stake in CorFire, which specialized in point-of-sale payment acceptance and had strong market positions.
In the mid-2010s, investors flocked to the fintech sector, attracted by the prospect that companies would either disrupt or complement the traditional banking, financial, and payment business. However, both businesses in which Adams invested did not take off. More about what happened to the companies, we discuss in a separate text.
Why Bay Pond's unsuccessful investments did not affect our decision to invest. For several reasons:
- We considered Adams's ideas sound from the outset, at the time of decision-making. The list of investors in these startups was impressive and included financial world gurus, which means they also considered the ideas promising. Making a mistake in such a company is not a sin.
- These investments, taking write-offs into account, did not lead to a dramatic drop in annual returns.
- We were impressed by how quickly the fund recovered and returned to positive returns — instantly. After showing a minus 6.19% in 2016, by January 2017, the fund earned 6.29%, and for the entire year — almost 25%.
- The fund added a ban on investments in illiquid securities to its investment declaration — and no longer does so.
- To Wellington's credit, the company refunded investors' fees in recognition of mistakes (the article does not disclose for which period), meaning the actual losses were even less than 6.19%, possibly much less.
The newspaper began criticizing Adams as a person. Journalists found an investor who told them that Adams does not answer questions directly. If asked about the valuation of the largest US banks, he might talk about how terrible the Fed's policy is. They also latched onto the fact that Adams kept a mini pig with the extravagant name Mona Lisa and even persuaded the Boston Ritz-Carlton, where he lived and which does not allow guests with animals, to allow his pet to stay on the grounds that his pig was a therapy pig. They also sniffed out that Adams had two homes — in Spanish style in Palm Beach, Florida, and near Philadelphia. And he changed wives! Why are we talking about this in such detail? Because this set of facts indicates that they found nothing compromising about Adams. Is it a big deal to talk about Fed policy when asked about bank valuations! Is it a big deal to have two homes for someone who earned $26 million in a good year!
We believe in Nick Adamson and Wellington and consider it an honor for us that they agreed to accept the GEIST fund managed by Movchan’s Group as their investors.
