(Bloomberg) -- GCQ Funds Management is looking to build on its 30% annualized gain since launching two years ago by betting that players in Japan’s cloud accounting industry can keep raising prices.
The Sydney-based firm’s flagship long-short equity fund topped up its position last month in Money Forward Inc., the small-cap it believes can jump fivefold in the next five years as regulations prompt businesses in Japan to hold electronic receipts. It’s also sold out of positions in ratings-agency duopoly Moody’s Corp. and S&P Global Inc., saying investor expectations had caught up with strong performance.
At the heart of GCQ’s strategy is the ability of firms dominant in their industry to demonstrate pricing power in an inflation-ridden world. Visa Inc. and Alphabet Inc. are among just five stocks comprising more than half of the fund, while newer additions like Money Forward account for less than 5%.
“This is the first time a new company has made it through our investment checklist in three-and-a-half years,” said Chief Investment Officer Doug Tynan. “Cloud accounting software is fantastic because they tend to be local monopolies,” Tynan said in an interview in Sydney.
Tynan said as much as half the firm’s above-benchmark profits come from trading in and out of the roughly 20 companies it owns, based on their changing outlooks. His investable universe is no more than 221 sector-dominant firms, he said. The Money Forward thesis was years in the preparation until a change on prices finally made it investable in April.
“We had followed it for seven or eight years but it didn’t tick all the boxes because it didn’t generate cash flow. But then, in February, one of the two key players announced a major price increase,” he said.
The stock’s up about 2.6% this year, lagging the Topix index of Japanese equities.
Some 13% of the fund was in Alphabet and Meta Platforms Inc. as of October and almost 20% between Visa and Mastercard Inc. The fund is up 30.2% per annum net of fees and expenses since it started July 2022, according to the most recent October investor letter on its website.
Tynan quipped at his obsession for researching companies, like Hermes International SCA, which comprises roughly 3% of his portfolio. He’s attempting to buy a Birkin bag — one of the brand’s signature products that requires an interview with the recipient and a years-long wait — and even purchased a $2,000 dog bowl to better understand its exclusivity.
“It’s probably the world’s most expensive dog bowl,” said Tynan.
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But such fanaticism is often fruitful: he and portfolio manager Chris Morris were aghast to discover last year one of their favorite fashion houses discounting items on web marketplaces — a cardinal breach of the elitist economics that makes ultra-luxury brands sound investments, according to their principles.
“We’re not stock analysts, we’re industry structure analysts,” said Tynan, who is also the firm’s co-founder. “We like finding industries offshore which are 10 to 20 years behind. Cloud accounting is another one that is absolutely going to win.”
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