Titan is a Y Combinator startup that launched in 2018 and aims to do for active investing what Wealthfront, Betterment and Vanguard have done for passive investing.
They pick a basket of 20 companies with $10B+ market cap which they believe are above-average long-term-focused investments relative to the whole S&P 500.
Originally, their stock picking was done via a deterministic process of copying what a group of top hedge funds were reporting that they were doing. I’m not sure if that’s still the case.
Their 2018-2020 performance has been 16.8%/yr (net of fees) compared to 10.0% for the S&P 500, and a higher Sharpe ratio (.77 vs .51).
My question is, what’s the catch?
Here’s my guess: They’re buying high-quality companies at high prices. That’s how they can expect to have steady market-beating returns for a few years, until momentum reverses and/or once-in-a-few-years risks play out, at which point their P/E multiples will shrink and they’ll plunge all the way down to cumulative market-matching returns, and worse after subtracting their fees.
Their “process” page claims they look for a Warren Buffet style “Margin of safety”:
Valuation is important. We seek companies that are trading at a meaningful discount to our estimate of their long-term intrinsic value, with little to no risk of permanent capital impairment.
But I’m not convinced there’s much substance to their use of this term.
More (vague) info about how they pick stocks here.
I don’t understand why there needs to be a catch. It seems like they’re just running a hedge fund where they tell everybody which things they’re buying. It’s an unusual thing to do, because you could probably get better returns by being more secretive (otherwise why are most hedge funds so secretive?).
You can become good at hedge-funding without having money as a primary motivation. If you did, you might try to start an open-access hedge fund just because it’s a neat idea.
They’re claiming that picking a subset of 20 S&P stocks and charging a 1% fee is an expected win for their clients’ net returns, so if what they’re actually selling is an expected money-losing strategy compared to buying the whole index, that seems like a catch
Exactly! So I think that is exactly the catch—I think the clients are paying for them to manage the money and update holdings according to their somewhat public strategy (following 13f?g? disclosures of what whales are buying has its lag, but can work out if they’re not short trades but long positions.. with limits). So it’s not obviously money losing if they outperform, and we don’t know that they will underperform the index. What we do know is that if they’re charging a fee to buy a rarely changing openly available list of stocks… then clients would be a little silly.
I see nothing unusual here. They seem to be following the kind of strategy that generated the Nifty Fifty. I expect it to work well a majority of the time, then occasionally become too popular and underperform for a decade or so.
I guess my point is that mutual funds are kind of scammy, and this is no exception. It’s known that index funds do better than mutual funds over the long term, but they’re marketing themselves like their long-term focus is what makes them better than investing in index funds.