BloombergSen: fighting inequality through crappy returns

BloombergSen is much biglier than I thought: at the beginning of the year, it was managing $2.4 billion. By the end of Q1, that was down to $1.6 billion. It has the backing of Lawrence Bloomberg, the founder of the last of Bay Street’s independent brokerages, First Marathon (sold to National Bank in 2000). He's listed as Founder and Chairman. That probably helps.

Here are a few facts about BloombergSen that I learned:

-The CIO is actually Sanjay Sen (and not son Jonathan Bloomberg, who is listed as CEO)

-10% of the assets (~$160m) are of the partners (primarily, I would presume, the Bloombergs)

-Sanjay and Jonathan worked at Burgundy Asset Management

-They are mostly about US large caps, so the S&P 500 is a good benchmark

-Their CAGR since inception is 5.6% (a period covering February 2008 to the end of Q1).

-over the same period, the S&P 500 did 7.9% annualized (with dividends reinvested, before considering currency impact)

-The FX benefit was about 3% annualized, so the Canadian investor in the US index would gain close to double BloombergSen’s annualized return

-They are down 37% as of Q1

Because they’re true buy and hold types, I would presume they are rebounding in April.

There are some aspects of the firm that I like:

-a single strategy

-low turnover (typically 2-3 companies per year)…the average holding period is seven years

However, they are a little too concentrated at 12-15 holdings. I do not believe they have the acuity to warrant this sort of concentration. A few years ago, they were a victim of Valeant (which might have been a 15% weight or higher around when it imploded). In the long-term, twelve is probably adequate diversification. But in the short-term, it causes needless volatility of returns.

They charge performance fees. Again, I think this is unwarranted. Alpha is razor-thin and likely to degrade even further. Clients who surrender performance fees in good times leave no margin of safety for the bad times.

They’re also at the cheapness-obsessed end of the business investing spectrum:

“We only invest in businesses that are selling for significantly less than our conservative estimate of their intrinsic value.”

Speaking very broadly, the more people emphasize “cheapness”, the more they were in trouble in March (or for the past 10 years for that matter). BloombergSen pointed out at the end of 2019 that their holdings traded at 13x earnings vs 17x for the S&P 500. Firstly, multiples are a superficial construct, even talking about them is silly. As for full discounted cash flow models, in an economy as dynamic as we have in the past twenty years, most valuation exercises are a delusion. I plan to write an essay on this topic this year called The Ayatollahs of Valuation or The Frog-Kissers of Graham and Doddsville, unless I can find a more derisive title. My favorite manager simply says: “don’t overpay”, I think that’s a good formulation. If you think in terms of decades, worrying about superficial cheapness is misguided.

I can’t say I have studied their thinking or holdings very closely and I see nothing that would make me want to take a closer look. I need to see a winning track record of at least 10 years. CIO Sanjay Sen’s background is described as follows:

Sanjay worked for one year with Cumberland Private Wealth Management, where he focused on research and analysis of US equities. He was a private investor from 2002 until 2006. From 1996 to 2002, Sanjay worked at Burgundy Asset Management, where he was the lead analyst on the US Small Cap Value Fund and analyzed Canadian and US companies from diverse industries across all market capitalizations.

He must have had really magical numbers between 2002 and 2006 to convince the Bloombergs to make him the investment mind behind BloombergSen. Even a perfect strategy is dependent on the right jockey to execute it.

And now, here come the drive-by smears. Between this and the returns of Bonnie Bloomberg’s firm, the Bloombergs are in danger of fulfilling the shirtsleeves-to-shirtsleeves prophecy. I think Bonnie’s firm, Triumph Asset Management has been trying various products since 2004. They changed names twice, first to Amadeus Investment Partners and more recently to One Sixty Two Capital. So they’re now reinventing themselves as a quant/data firm (something called “quantamental”). I think that’s quanta-crazy! You might as well believe in Quanta Claus! They’ll try anything! They had a crazy volatile base metals fund once. I get the impression that Bonnie might no longer be associated with them, I am not sure.

BloombergSen has wealthier clients, typical purchases are in the high 6 figures or more. It’s a somewhat lean firm, I could only find 12 employees on LinkedIn. With more than a billion AUM, and a strategy that has some sound elements, the business itself is very salvageable. OPM Wars, the world’s first no-fee restructuring services provider, stands ready to assist.

I am not piling on merely because BloomberSen has had this drawdown. Drawdowns even above 30% are perfectly normal for this type of strategy. It’s the upside I am concerned about. The analysis would have been the same at the end of last year, they were underperforming the S&P 500 since inception while charging performance fees. No big mystery. I don’t see any rational basis to hold any money in this fund.

Clients should ask one simple question at the outset of their relationship with a money manager: By what measure will I know you have failed to deliver? At the minimum, this makes it very easy to leave the manager. I doubt very much they would have said: “we will underperform the S&P 500 over 12 years, delivering less than 6% annualized.”

That this non-value adding firm manages a billion-plus portfolio shows how extraordinarily inefficient the marketplace for money managers is. I told you that AirBnB and Uber were peanuts compared to an organization intent on making the marketplace for money managers efficient. Other industries have a much more efficient star system. You will notice for example, that Michael Jordan’s children don’t play in the NBA.

They have a quote on their website from Benjamin Graham:

“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

This is, of course, an endorsement of passive investing. Clients can’t say they weren’t warned!

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