Barry Norris: My Three-year Epiphany That Led To This Year's Double-digit Gains

The FP Argonaut Absolute Return fund, which Norris has managed since 2009, is up 22.6% year-to-date at time of writing (23 March), having more than doubled the second-best performing fund in the IA Targeted Absolute Return sector over this time frame.

As a point of comparison, the MSCI World and FTSE 100 indices are down 18.1% and 30.4% respectively, according to data from FE fundinfo.

"If you look at my returns year to date, you might just think I made a massive punt on the market going down. But actually we have been up during 80% of the days this year, which means we have been making money on good days as well as bad days," Norris explained.

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The manager said his fund - a long/short portfolio of global equity stocks - currently has a net long exposure of 100% and a 75% short exposure, although the portfolio has made gains of 60% alone from its short stocks, which is why the vehicle has achieved double-digit gains in 2020 so far.

Norris said the ultimate goal is therefore to ensure the portfolio is "uncorrelated to markets, not negatively correlated".

"I do not want to run a product that people think is always going to go up when the market goes down. By nature I am a fairly optimistic person; I do not want to be somebody who is betting on the end of the world all the time," he said.

"That said, I do think there is long alpha and short alpha, and if you can combine the two with a modest net long exposure, then you should beat the market - even a bull market - with a return profile that is not reliant on market beta."

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While the fund is performing well year-to-date, and has achieved strong gains during eight years of the last decade, 2016 was a difficult year for Norris. His fund fell more than 25%, making it the single-worst performing fund in the Investment Association universe.

"That was a very painful time, and there were a number of aspects to this," Norris explained.

"Firstly, a lot of the money that we lost in that year was shorting stocks such as banks and commodities which, since 2016 have hit new lows.

"I concluded that we were right in our analysis of the companies, but we were not prepared to be wrong in the short term.

"Initially I thought I was wrong, but actually I was right about the stocks but wrong about markets. What drove markets that year was a big top-down reflation trade where analysis of individual stocks did not matter very much.

"After that year, I was pretty aware that nobody remembered I returned 80% over the previous three years. I was therefore determined to make good any losses for people that had bought in more recently and really suffered."

2017 was a good year for the fund as it returned 18%. Then in 2018, the fund lost 11.7%. The fund fared well again in 2019 with a 12.8% return, but Norris was determined to make its return profile more consistent and "less lumpy".

He decided the solution was to look beyond stockpicking and focus on portfolio management, as well as to increase diversification and reduce the position sizes in his short book.

"A lot of attention gets paid to what makes a good stock and rightly so, but I had to become a lot better at the portfolio management aspect," Norris said.

"By that, I mean blending the different stocks that we have in the portfolio in order to not only diversify risk, but ensure the volatility and correlation is manageable and produces a more consistent outcome in terms of fund return.

"On the short book, you want to maintain your position size - otherwise you basically keep doubling up on the same bet."

He said this will likely mean the fund will continue to perform well, regardless of sudden downturns or unexpected market movements.

In the current crisis, for example, he pointed out that nobody could have predicted that gold would sell off alongside equities, as investors scrambled to liquidate their investments.

"I implemented this new way of thinking at the start of this year. Because to be honest it probably took me three years to think deeply enough about it and come to the conclusion as to what went wrong," he admitted.

"You can be the cleverest fund manager in terms of thinking ahead and what is fundamentally going to happen, but these liquidity squeezes are much more difficult to plan for.

"It is a trap that we have avoided spectacularly year to date. That is largely a feature of better portfolio management and diversification."