Joel Greenblatt is confident he can do it again. The famed value investor, whose Gotham Capital hedge fund earned average annualized returns (before fees) in excess of 50 percent in the ten years of its existence, is launching Gotham Asset Management, a New York-based firm that will offer value-focused funds to institutional and retail investors. It is the first time Greenblatt will be running institutional money since 1994, when he closed his former fund and returned capital to outside investors.
The new funds are based on Greenblatt’s so-called Magic Formula, a common-sense approach to value investing that ranks stocks on price and yield and recommends buying and holding a basket of cheap companies that have been overlooked or are under-appreciated by investors. (Greenblatt outlined the philosophy in his 2005 book, The Little Book That Beats the Market.) Greenblatt and his 16-person investment staff have been working to create a slate of value strategies, both long-only and long-short funds, which both build on and enhance his value-investing formula.
Despite Greenblatt’s impressive track record, however, institutional investors may take a wait-and-see attitude. Many institutions require at least a three-year track record before they will invest in a particular fund; the longest track record of any of the strategies Greenblatt is currently using dates back only to the spring of 2009, when Greenblatt launched Formula Investing, an online money manager that allows retail investors to avail themselves of the Magic Formula approach.
“There are a lot of people who know my work over time,” he says. “At this stage we will get the early adopters, but that is a bigger segment of the market then you might think.”
The early success of Formula Investing will no doubt help. The firm’s back-testing results indicate that the long-short equity fund would have enjoyed average annualized returns of roughly 13.5 percent, compared to negative 0.9 percent for the Standard & Poor’s 500 index, in the ten years through 2009. The institutional version of that fund is being launched this month, with an international version to be launched next month.
“It became very clear that not only individuals wanted to have their money managed with the type of value methodology - there were a number of advisors and institutions who were interested in using Joel’s expertise,” according to K. Blake Darcy, the former CEO of Formula Investing who is now CEO of the new firm.
The Gotham Asset Management platform is an enhanced version of the formula Greenblatt spells out in his book and that it was used at Formula Investing. To serve the institutional market, the team added a quantitative framework to Greenblatt’s investment approach and expanded its proprietary database of companies under consideration, but high touch still trumps high tech.
“I’ve been making money over the years, and we have adopted those into a quantitative framework,” says Greenblatt. “But it is still driven by our investor skills.”
