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.

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System Capital is a global long-short manager founded in 2022 by well-regarded Portfolio Manager, Lev Margolin. The strategy is well suited to family offices, High-Net-Worth investors, and retail clients.

Typical of Fidante’s affiliate model, Fidante has taken a substantial minority equity stake in System Capital and entered into an exclusive distribution agreement.

The System Capital Long/Short Fund is a global concentrated strategy focused on identifying pricing inefficiencies between the valuation of a business and its business quality. The Fund employs detailed, bottom-up fundamental research to identify companies with strong and growing cashflows over the medium term with a strengthening competitive position.

The Fund’s absolute return focus also means the Fund can benefit from situations where a structural position of a business is weakening and that is not yet reflected in valuation, as well as adjust the Fund’s market exposure (net long) to protect the portfolio from market dislocations. The aim is to achieve consistent absolute returns and greater downside protection for investors.

The partnership will allow System Capital to scale and grow FUM, while strengthening Fidante’s multi-affiliate proposition and suite of investment choices.

Fidante now boasts 20 leading investment managers as part of its multi-affiliate model, spanning fixed income, equities, and various alternative strategies including System Capital.

Commenting on the partnership, Victor Rodriguez, Chief Executive, Funds Management at Challenger said specialist, active managers come to the fore in times of increasing market volatility and uncertainty.

“We are excited to be partnering with System Capital,” Mr Rodriguez said. “We believe Lev Margolin’s expertise in long-short investing, combined with the extensive experience of the System Capital team, presents a unique opportunity for Australian investors looking to take advantage of under and overvalued global stocks.”

“At Fidante, we strongly believe in the value of active management and the distinct advantages specialist, independent managers offer in an increasingly competitive market. We are committed to ensuring investors have access to best-in-class, active fund managers, across a wide and diverse range of products and capabilities,” Mr Rodriguez said.

Why global long-short

Commenting on its investment strategy, Mr Margolin said System Capital is looking to deliver consistent absolute returns in a world experiencing record change and transition.

“Our Fund is not constructed with a specific investment thematic or qualitative overlay. Rather, we look to take advantage of structural winners and losers within specific industries to deliver absolute returns,” Mr Margolin said.

Since inception in October 2022, the Fund has returned 24.3% p.a. (before fees) as at December 2024.

“We see our partnership with Fidante as a natural evolution of our business,” Mr Margolin said. “It brings a new and differentiated investment strategy to the Fidante stable and allows us to grow our investor base.”

“Our business remains majority-owned by our team, and we will continue to reinvest in the growth of the business.”

Fidante is a global investment management business with approximately A$100bn in FUM*. Fidante provides investors with access to best-in-class investment managers. They are one of Australia’s largest active investors, offering compelling strategies across equities, fixed income, and alternative assets, via partnerships with leading investment teams.

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* As at June 2024

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