The firm founded by Heeten Doshi has an underlying philosophy that says “the tide is more important than the boat” in the achievement of absolute returns.
When the whole market loses value, even underpriced equities go down with it. When the whole market gains, even over-priced equities gain.
The Doshi Capital Management philosophy accounts for the need for a market-timing oriented fund as part of a broad portfolio for high-net-worth individuals. And since opening to outside investors at the beginning of 2020, Doshi’s systematic market timing fund has gained an impressive 180%.
Doshi founded Doshi Capital in 2011, upon departing from his vice president position at Brown Brothers Harriman.
“I wasn’t really dissatisfied being at Brown Brothers. The department was going through a rebuild in hiring new analysts, people switching roles and I simply thought it was time to move on,” Doshi said. Before Brown Brothers, he had worked at Lehman Brothers and Morgan Stanley.
Mike Lamont is the head of Doshi’s software development and has over 30 years of experience in the field. He is working to automate the market timing strategy from data input to trade execution, with internal software code named “Cerebro.” Lamont had several software-development roles at Bonneville Market Information.
Doshi said that the firm “has seen a considerable amount of interest from family offices who are looking for niche emerging managers that can generate alpha.”
Doshi recently spoke to Alternatives Watch where the market trends stand at present. He believes that the U.S. economy is at a turning point, and that where it goes from here depends in large part on its central bank. The conversation took place prior to a meeting of the U.S. Federal Reserve, and what would happen at that meeting was, naturally, on the mind of a systematic market timer.
Concern about over-correction
Doshi expressed concern that the Fed was about to over-correct in the face of recent price inflation. He said, “Inflation is troublesome, but it is not demand-driven. We’re seeing inflation because of supply bottlenecks, which is not best addressed by taking a hard line on monetary policy.”
He added that typically, inflation “is caused by an increase in money supply and demand” and in such a case “the right course of action is for the Fed to raise interest rates to cool demand and lower inflation.” But at this time, that is not the case.
The Fed announced after its meeting that it is leaving its federal funds rate unchanged but that rate increases would be coming soon. It also released a statement on its principles for reducing the size of its balance sheet. That is a ‘hawkish’ note to strike in itself, suggesting bond sales are on the way.
At a subsequent press conference, Fed Chairman Jerome Powell said, “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”
Doshi found this concerning. “The Fed,” he said, “gave no clarity and instead vague answers” that has “left the door open for further speculation about the path [it] will take.”
Further, there are predictions in some quarters that the Fed will raise rates seven times, and will start that process with a 50 basis points move as soon as March. That, Doshi said, “could be a shock to the economic system.”
The Fed typically raises rates in 25 basis point increments. But the Atlanta Fed President, Raphael Bostic, told The Financial Times that a larger move than that is possible in March if consumer price increases remain stubborn.
Active management rises to the challenge
Doshi also spoke to the timeless issue of active versus passive management. Passive investment, he said, “has a role as part of an equity portfolio. But it is best to diversify. The notion of only using funds tied to index instead of portioning to actively managed funds is fallacious.”
People and institutions that rely too much on passive investment will take the full hit when there is a downturn as there was for example when the pandemic closed the economy in the late winter of 2020 and there was a 34% drawdown in just two months. Against that, for reasons of diversification and risk adjusted return, investors should look to investing some of their portfolio in alternatives.
“One should look at funds much the same way one looks at stocks,” he suggested. “Some funds are better managed than others, and there is alpha to be made in picking the right ones.”
Doshi illustrated this with a chart drawn from Morningstar data that indicates how much better investors do when they invest in the top decile of hedge funds in the United States rather than the bottom decile, or the S&P for that matter. But this point raises an obvious question: does the fact that a fund is in the highest decile this year predict that it will be so next year? Or is there what statisticians might call a reversion to the mean?
In Doshi’s view, good performance is predictive of further good performance. A fund in the top decile, he said, “may not be in the top decile every year, but they will outperform over the long term.”