Lev Margolin
Investing in structural disruption can help deliver portfolio diversification, overcome market unpredictability, and boost returns, according to global long-short manager System Capital.
Marking System Capital’s third anniversary, Founder and Portfolio Manager Lev Margolin, said understanding how structural shifts will reshape companies and sectors is key to outperformance, irrespective of whether markets continue to drive higher.
It is an approach that has delivered, with the System Capital strategy returning 20% p.a. (before fees) since inception*. The System Capital Long Short Fund (the Fund) also recently received a ‘Recommended’ rating by Zenith Investment Partners.
Bottom-up, fundamental analysis is crucial to identifying structural tailwinds, changing industry dynamics, and broadening the investment circle of confidence.
“To identify businesses that will be structurally stronger in five years, you must analyse their fundamentals and trajectory. This includes suppliers, customers, regulators, and social license. It’s a disciplined, repeatable process that helps keep us focused.”
This process reveals both structural winners and losers. By combining long and short positions within the same industries, investors can maximise exposure to companies driving disruption, while profiting from those falling behind.
“Our process reveals long-term winners and those at risk of disruption and changing industry dynamics. Incorporating short positions – about 20% of our portfolio – adds both protection and opportunity for investors.”
Technology, information services, media, infrastructure, and industrials are all set to see strong structural changes over the coming five years.
“Focusing on these sectors allows the Fund to target attractive returns, good diversification, and a durable advantage outside of the AI super cycle. It also alleviates any portfolio biases towards the US and Australian markets, with Europe offering significant structural opportunity.”
Valuation concerns drive appetite for alternatives
Recent research from Fidante revealed valuations were the primary concern for advisers. Almost 40 percent of advisers noted valuation concerns in Australian equities, while valuations overtook Trump as the primary concern in global markets (30%).
This search for alpha has driven demand for alternatives, with 77 percent of advisers allocating up to 10 percent of client assets to alternatives. Yet, liquidity concerns deterred almost 40 percent of advisers from investing in the opportunity.
“It’s a common misconception that alternatives mean sacrificing liquidity in portfolios. Absolute return strategies, like our long-short approach, provide daily liquidity allowing investors maximum flexibility.
“A focus on structural disruption can also reveal quality companies at the right price. With a long bias, we can take advantage of structural decline while using market dislocations to reinvest at attractive valuations at a time that suits us.
“Amidst stretched valuations, persistent economic uncertainty, and deafening market noise, it’s a strategy that has allowed us to deliver consistent performance and position for the long-term,” Mr Margolin said.