Interview #92 : Chris Abbott (1035 Capital Management)
Interview #92 : Chris Abbott (1035 Capital Management)
Fundamental business improvements that should drive future stock return
For this issue we have the pleasure of interviewing Chris Abbott, Founder and CIO of 1035 Capital Management.
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Hi Chris, thanks so much for taking the time out to do this interview.
Can you please tell readers about your background, and how you got involved in investing?
My older brother first sparked my interest in investing when I was about 16 years old. I'm originally from Vancouver, Canada, a city known for many things, one of them being, the home of the TSX-Venture Exchange.
Perhaps it's fitting that my first investment was in a junior mining company, which is what that exchange is known for, based on a tip from one of my brother's friends.
Though that tip didn't pan out as hoped, it ignited a passion in me to understand why some people can make millions in the stock market, while my first foray resulted in a loss. This curiosity set me on a path of learning how to invest, a journey that has now spanned more than 20 years.
As a good Canadian, I earned a scholarship to play college hockey in St. Louis. During my time in school, I took the opportunity to delve deeper into the world of investing.
I pursued an undergraduate degree with a dual major in Finance and Economics, followed by a Master of Science in Finance, and became a CFA charterholder. My master's studies provided the opportunity to intern in investment management, with Argent Capital Management, which became my entry point into the buy-side.
After graduation, I was offered a full-time position and swiftly progressed from intern to helping manage about half of the company's small-cap portfolio.
I began at Argent as a generalist but in the latter part of my tenure, I specialized in Healthcare, Technology, and Consumer Discretionary sectors. However, when I founded 1035 Capital Management in 2019, I returned to a generalist role, which allowed me to apply my experience across sectors.
What strategies do you employ at 1035 Capital?
At 1035 Capital, we offer four distinct investment strategies: Small Cap Core, Investment Grade Preferred, High Yield Preferred, and our newest addition, a Commodity Trend Following strategy.
These strategies can be provided on a standalone basis, or we offer comprehensive portfolio management services utilizing a 'hub and spoke' model. In this model, our proprietary portfolios serve as the hub, while additional asset exposures, the spokes, are incorporated through low-cost ETFs to create a diversified portfolio tailored to our client’s needs.
Our Investment Grade Preferred Portfolio aims to capitalize on the structural differences in interest rates between preferred dividends in investment-grade companies and their bond interest payments.
Typically, we observe up to a 50 basis point per year yield advantage by investing in investment-grade preferreds compared to similar bonds from the same issuer. This advantage arises because preferreds are lower in the capital stack in the event of a default. However, historical bankruptcy rates for investment-grade companies are quite low, around 1-3% per year.
Essentially, we accept a slightly elevated bankruptcy risk in exchange for a higher yield today and annually going forward. It is predominantly financials and utilities that issue this type of preferred, resulting in significant exposure to these sectors within this portfolio.
The High Yield Preferred Portfolio seeks preferred equities that offer yields higher than what we believe their company's prospects suggest they should. We refer to these as “orphaned preferreds.”
Our goal is to acquire orphan preferreds yielding 8-12%, often the yield is due to trading at a discount to par value. This strategy provides our clients with an attractive annual yield close to 10%, with the potential for capital gains as the underlying companies improve their operations and financials.
Our Commodity Trend Following Portfolio buys specific commodities when our system identifies an upward trend. The system then sells and shifts to cash when it detects a neutral or negative trend.
While we have automated portions of the process for all our portfolios, this portfolio is our first fully quantitative strategy. It plays a crucial role in our client portfolios by providing controlled commodity exposure without the use of leverage or futures.
We will discuss our Small Cap Core Strategy in more detail below.
For your small cap core strategy, what type of businesses or situations do you like to invest in?
The investment philosophy for our small cap core product can be summed up in one word – change. We believe that for a stock’s price to increase, something needs to change for the better at the company. As a result, all of the stocks in our portfolio must have catalysts to drive meaningful change.