Great Ocean Road Advisors (GORA) is an NYC-based equities-fund concentrating exclusively on the Consumer sector – GORA’s area of expertise where it possesses an informational advantage. GORA applies a thorough, research-driven process to build a concentrated long-short portfolio of Consumer equities invested with a long-term horizon.
Interview with James O’Brien, Founder & Portfolio Manager of Great Ocean Road Advisors (GORA):
Your fund, GORA – Great Ocean Road Advisors, is a NYC-based long-short hedge fund that applies a bottom-up, research-driven investment process to companies belonging to the Consumer sector. Please tell us what are some of the main reasons you decided to focus on and invest specifically in the Consumer sector.
From a business perspective, although Consumer is the largest sector of the economy by a factor of almost 2x, there are proportionally few Consumer dedicated funds. Therefore, GORA is in a rarefied position to provide investors with a Consumer-focused investment vehicle managed by a domain expert.
From an investment perspective, the breadth of categories within Consumer coupled with ever-evolving consumer tastes means the sector creates winners and losers fast. It is filled with beloved brands that have dominant market positions in their categories, which often allows them to achieve consistently outstanding business results. Moreover, the sector is among those with the highest dispersion. This means share price performance is driven by idiosyncratic business results that cause price swings which ultimately rewards our bottom up, research driven investment process.
Finally, what makes Consumer particularly interesting right now is how acutely exposed the sector is to the effects of COVID on spending habits. These effects cause pricing dislocations that translates to great investment opportunities for those adept at investing in the sector.
You mentioned that dislocations between fundamental value and market prices widen during shocks and COVID has caused Consumer sector volatility to spike. How do you as an investor adept at understanding the intrinsic value of affected assets profit from these types of periods?
Volatility is the friend of active managers because periods of heightened volatility create asset dislocations that rarely occur under ordinary market conditions.
COVID’s volatility spike is uniquely impactful to the Consumer sector because of the divergent exposure within the sector to the pandemic’s effects. The investment thematic of buying stay-at-home (furniture, home improvement) and selling away-from-home (travel, restaurants) has defined Consumer investing even for investors who would ordinarily not be involved and therefore have limited ability to measure true long-term value. Such a one-sided approach populated by transient participants makes the opportunity set in Consumer look very attractive to us.
Most hedge funds (about 80%) are generalists. Yet, specialist funds outperform both passive index funds and active funds without specialization.
Less than 3% of funds focus exclusively on the consumer sector- what do you believe is causing this space to be much less competitive & crowded? And what are some of your fund’s competitive advantages?
The most successful long-term investors are those with a clearly defined mousetrap. Ours is the depth of knowledge and familiarity we have with the Consumer verticals we choose to invest in. This creates an informational advantage over other investors that is protected by the years of diligent research required to build this knowledge base.
Traditionally, there has been a skew among sector specialist funds towards Healthcare and Technology – sectors enjoying long-term structural growth which can act as tailwinds to managers. While we don’t dispute these tailwinds, we note that our Consumer verticals enjoy similar long-term growth rates delivered more reliably. Additionally, both winners and losers populate the Consumer space – making the alpha opportunity, for which investors should judge a manager, very strong.
Hedge fund preferences for generalist strategies may be due to managers seeking diversification across sectors. This is unnecessary because the investors these funds serve can achieve diversification by investing across multiple specialist funds and in doing so realize the dual benefit of domain expertise with diversification throughout their portfolios. Illustrating this point, a study from Chen and Hackbarth (Journal of Portfolio Management, 2020) showed replacing a market ETF with a portfolio of sector specialist funds drove a 79% cumulative performance uplift over the period of 1996-2016, net of all fees. The uplift relative to generalist strategies was even greater. Our explanation for sector specialist outperformance is that modern financial markets are simply too competitive for investors seeking to try their hand across many different fields simultaneously to outperform those with a more focused approach.
In May 2018 you seeded a personal portfolio with $1,000,000. By September 2020, the portfolio had accumulated to $1,637,655 – outperforming the S&P500 by 34.6ppts. Please share with us your “secret sauce” about the stories behind some of your case studies, including your portfolio companies DPZ and SHAK.
We believe managers of investor capital should be highly aligned with their investors through personal co-investment. While operating a professional Consumer portfolio as a PM at my prior hedge fund, I invested significant personal capital into the Consumer space and am continuing this through GORA’s Endeavor fund.
The portfolio seeded in 2018 was invested according to the process we’re bringing to GORA: research-driven analysis of companies where we have specialized knowledge, invested under long-term horizons.
Domino’s Pizza (DPZ) is a great example of a well-known Consumer name. It has an excellent business model, customer value and long-term growth trajectory. The investment made there occurred when the market narrative on DPZ was negative due to a slowdown in sales and profitability that our research showed was temporary. We focused our attention on the causes behind the slowdown, namely increased store openings impacting sales per store and building new dough-making plants which acted as a temporary cash-flow drag. Both items caused short-term hits to business performance but served to improve the long-term outlook for DPZ. Myopic investor focus on near-term performance therefore created an opportune moment for us to buy a quality asset at a discounted price that was taking tangible steps to further improve its outlook.
In contrast, Shake Shack (SHAK) is an example of what was a preferred short. Our financial modeling showed labor expense pressure would not abate – a thesis supported by meetings we had with management. The critical sell signal though ultimately arrived from the model I built to track rainfall in SHAK’s biggest markets. There is a distinct and logical correlation between greater rainfall in these highly walkable, urban centers and lower sales. This data point indicated a high likelihood of a sales miss. The dual negative shock of sales and profit weakness drove a quick retracement that we were quick to crystallize.
Every investment decision you make is supported by more than 70 proprietary financial models. Please tell us more about your investment process, including your rigorous financial modeling.
An advantage to beginning your career in sell side research is developing strong modeling skills for your coverage universe. Detailed financial modeling has remained an important piece of the investment process ever since. For every investment I’ve ever made, professionally or personally, there has been a financial model to support it.
Although a key aspect to it, our research process is far more extensive than just financial modeling. We rely on bottom-up primary research into our Consumer companies to reveal inflection points unseen by the wider market. This research can then be tested through financial modeling to determine materiality to the business.
Management engagement is another significant input to the investment process. Here too, financial modeling is complementary by both highlighting topics to question a management team on and acting as a canvas on which to input insights gained from those interactions.
Detailed financial modeling is therefore just one feature of the process but we find it supportive of all other steps within our framework.
How can our investors community learn more about the investment opportunities of your flagship Endeavor Fund?
The best place to start is our website – www.goracap.com – where you can learn more about our team and the investment process.
We can also be reached at inquiries@goracap.com
You can expect to hear more from us. We have chosen a 506(c) offering and plan to use the extra marketing privileges this affords to be more open and transparent with investors and potential investors. We intend to share the research underlying our core portfolio positions contemporaneously to invite dialogue and illustrate our investment process at work.
Founder Professional Bio:
James O’Brien is the founder and Portfolio Manager of Great Ocean Road Advisors (GORA). A dedicated Consumer sector investor, James began his career as an Equity Research Analyst at Credit Suisse before serving as an Analyst at Balyasny Asset Management then leading Verition Fund Management’s Consumer sector exposure as Portfolio Manager.
James studied a Bachelor of Arts (History and International Studies) and a Bachelor of Commerce (Economics and Finance) at the University of Melbourne and is a CFA Charterholder.
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