Fri, 17/03/2006 - 06:59
Neil A Levy outlines Highpoint's investment processes and thinking on emerging healthcare and convergence opportunities.
HW: What is the background to your fund?
NL: Highpoint Domestic Partners, LP is a long/short equity hedge fund. The fund was launched Aug 2005 after its principal/portfolio manager spun-out from a larger established hedge fund where he managed a carve-out portfolio under the same strategy. Highpoint Capital Advisors, LLC is the General Partner and the firm total assets under management are currently USD 12 million.
Our service providers include: Spicer Jeffries, LLP (accounting firm), CCS Financial, Inc. (Administrator), Michael C. Scher, Esq. (Lawyer), Calyon Sec. (formerly Credit Lyonnaise)/VanthedgePoint Sec. (Prime Brokers), Susquehanna Financial Group (Executing Broker).
HW: What is your distribution/targeted client base?
NL: Highpoint Domestic has focused much of its marketing efforts on the individual High Net Worth investor. In addition to being listed on numerous websites and databases we have found many of the investment and hedge fund industry conferences to be invaluable sources of contacts and referrals of potential investors.
My past experiences as a portfolio manager for a large well-established hedge fund has allowed Highpoint to market effectively to the institutional investor as well. The institutional investor is typically more compliance conscious, and an emerging fund such as Highpoint at its current size is unable to adequately provide the heavy infrastructure that the institutional investor may require. We have recently made some changes to both our infrastructure and administrative functions that will allow us to more successfully market to this investor base.
HW: Describe your investment process?
NL: Highpoint Capital Advisors, LLC through its Domestic Partnership, LP employs a long/short equity strategy which focuses on identifying strong companies whose stock prices are unreflective of the underlying strength of the company. Highpoint utilizes a bottoms-up investments style that is heavily dependant upon fundamental and financial statement analysis to identify companies with compelling value propositions, growth opportunities, earnings quality, and/or strong balance sheets.
HW: How do you generate ideas?
NL: Ideas are mostly generated internally through our focus on fundamental and financial analysis. We may use a broad screening process to limit our universe of US equities to a manageable number, and then delve further by researching each individual company. Our ongoing readings of business periodicals, industry magazines, websites, etc. have helped to generate many ideas and our original analysis has sometimes led us to related themes, industries, or companies.
We look to receive street research in order to understand what the overall 'street' may be thinking. We find this an important endeavor because it is important to learn both the consensus views and the contrarian views so we may make an educated investment decision.
HW: Describe your risk management process.
NL: Highpoint has a low-risk profile and has provided its investors with strong, consistent returns as a result of its ongoing commitment to managing and reducing risk. Risk is reduced numerous ways including a focus on holding a limited number of long and short positions, thereby allowing Highpoint to thoroughly know its investments. Risk is also reduced through the monitoring of sector and industry exposures. Illustrative of this commitment to risk management is our maximum drawdown of less than 7.5% and an annual volatility of less than 9%.
HW: What benchmarks do you use?
NL: Highpoint Capital is an absolute fund and we are fully committed to growing our investors' monies. We like to say that 'relative performance doesn't put food on the table.' However, it is important to remain benchmark aware and as a long/short equity hedge fund, focused on small and mid cap names we will look at the S&P500 and the Russell 2000 as indicators.
HW: How has the fund performed?
NL: Although the fund launched in Aug. 2005 and has performed well during this period of time, I have been managing a separate account since October 2001 and have been extremely happy with the strong & consistent performance, and low risk profile that our investors have enjoyed in the face of some difficult market environments during the past five years. We are strong believers in the powers of compounding and have thrived in these oscillating, trend less markets by remaining disciplined in hitting those 'singles and doubles.'
HW: What opportunities are you currently examining?
NL: We believe the adage that it is 'a market of stocks and not a stock market.' Even though it is necessary to understand and have an opinion on the overall economy that companies must operate in, Highpoint Capital will remain focused on its bottoms-up investment style, which is strongly reliant upon fundamental and financial statement analysis.
As for specific opportunities we continue or investment in Johnson & Johnson (JNJ), which provides us with exposures to pharmaceuticals, biotechnology, and medical technology with the insulation of a healthy dividend.
We find the entire healthcare sector intriguing not just for its 'defensive' nature but more importantly for the tremendous demographic shift that is sure to bolster demand for healthcare in the future. In addition to JNJ, we hold investments in orthopedics and other medical technology companies.
Another investment theme is the convergence of media and technology and what has been dubbed the 'digital wave.' Did you know that Google's market capitalization is many many times larger than all the major newspaper publishing companies put together, and the recent purchase activity in the media industry with McClatchy's purchase of Knight-Ridder and New York Times purchase of About.com highlights this blending of traditional and new media companies. In addition to our investments in both digital media companies as well as traditional media companies we have an investment in the interactive entertainment field through Activision (ATVI). The continued entertainment value of video games as a replacement for TV and movies, the next generation of consoles having just begun to hit the market, as well as the strong balance sheet, earnings power, and line-up of video games makes it an attractive investment.
Symantec (SYMC) is the leader in the internet security field and is one of our technology investments. Although the market has questioned SYMC's recent acquisition of a data storage company, internet security and data storage are two of the most important items for any IT department in a corporation. The large cash balances that many corporations have accumulated and will need to invest in their businesses, along with SYMC's strong balance sheet with over USD 4.00 in cash and virtually no debt, and earnings expectations of approx USD 1.15 in its next fiscal year make SYMC an appealing security to own. Microsoft's entrance into the internet security space has been very disruptive, but MSFT has acted logically and priced its product competitively More importantly, most viruses and worms are written specifically to exploit bugs in Microsoft's operating system and we believe this makes MSFT a target. Microsoft's entrance with an inferior product would lift a tremendous weight that has pressured SYMC and others in the internet security space.
HW: What outlook/impact will current trends have on your portfolio?
NL: I believe that the gloomy portrayal in the news of the US economy despite its strong performance in 2005, continued consumer confidence, and a strong labour market have led to lowered expectations of stock market returns heading into 2006. These lowered expectations coupled with the low borrowing costs for corporations (long-term rates are essentially the same as they were when the Fed began tightening) and the growing cash accounts many corporations have accumulated lead us to be optimistic as we head into 2006.
We have tempered our bullish view due to a number of risks. Two thirds of Americans own their homes and 60% of US households own stocks, it are these facts that highlight the risk of rising interest rates and a slowing housing market on the U.S. consumer and his/her ability to continue to spend.
HW: How do you differentiate yourself from other managers?
NL: I began my career in public accounting and was involved with auditing many large hedge funds. Being on the 'other side of the desk' provides Highpoint with the strong operational background that many new hedge funds lack. My portfolio management experience and the mentoring that I have received by a seasoned portfolio manager, who acts as an advisor to Highpoint and has continued his hedge fund's investment in the fund, provides me with experiences and perspectives that many managers do not have.
HW: Are you looking at launching additional products?
NL: Highpoint Capital plans to launch an international fund with the same investment strategy in order to offer our appealing strong and consistent return, low-risk product to the international investor community.
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