Aligned fund manager: We align our interest with our client’s interest. Most of our liquid wealth (more than 80%) is invested in the core portfolio. If our investors lose money, so do we. We make money only when our clients make money.
No (or tiny) fixed fee structure: It is common in the fund management industry for investors to be charged 1% to 2% management fees of the value of assets. We intend to keep this kind of fee to zero or next to zero in the future.
Performance fees for consistent capital gains: Our investors don’t pay any performance fees unless there are consistent capital gains. We only charge a performance fee if the hurdle rate of 6% is met and gains are consistent for 3 or more years (this fee is calculated on a 3-year rolling basis).
Simple investment policy: We keep things simple and clear. When making an investment decision, no corporate politics, investment committees or career risks are taken into consideration. We are independent, and have therefore, no institutional pressures. This allows us to spend more time doing our research rather than managing people.
Concentration: We run concentrated portfolios. That means that usually the 5 largest positions account for over 50% of the portfolio. We like concentration because focusing on our best ideas pays handsomely. Given this concentration, our portfolios are subject to high volatility.
Long term investing: We have a stable capital base with a patient long-term view. Results are measured twice a year (not monthly or quarterly). Most of our best investment ideas underperformed substantially for months, even years. To keep our focus on the long term, we only provide liquidity on two dates every year, and charge extraordinary fees to our investors in the event of an early or unplanned redemption of capital (these fees don’t go to the pocket of the manager, but benefit all the remaining investors in the fund). We reject any investor that tries to allocate capital for less than three years (although we indicate that the smallest recommended allocation time is ten years).
Small and focused portfolio: Keeping a small portfolio allows flexibility, and flexibility is good for returns. Arlas’ smaller size allows us to fish in small ponds where larger funds can’t go. Managers of large portfolios are restricted by several factors and often miss out on exploiting attractive opportunities, such as smaller micro caps, where pricing inefficiencies create investment opportunities.