Northbank Capital Managment

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Investment Strategy

We employ a concentrated, fundamental inflection strategy

The Fund employs a dynamic long/short strategy, with a long bias

Rationale for Excess Returns

Market Cap Range

Our market cap sweet spot is generally $25-350mn. At this size, there is little to no sell-side coverage, and institutional investors only play a small part of the trading dynamics in these companies.

Right to Win

We earn our right to win by applying a disciplined, institutional investment framework to a “mom and pop” investing landscape. We believe we our research process is far deeper than the participants we are trading against. Over time, we have developed pattern recognition that allows us to repeatably spot compelling investment setups that go unnoticed by others.

Lack of Institutional Investors

Our market cap sweet spot is generally $25-350mn, a range that is generally considered “uninvestable” in the public markets, with little to no sell-side coverage. Institutional investors are largely absent in this range, as they have self-imposed limits on minimum market caps and liquidity. The asset management industry is focused on scale and it is generally not worth the effort for institutional investors to traffic in these stocks. As such, despite there being thousands of publicly listed small/microcap stocks in developed markets, smart institutional investors are largely absent.

Frequent Mispricings

Retail and quant traders often lack a thorough understanding of the fundamental prospects of a business. These participants’ trading patterns help us twofold: often, they drive the stock down to overly depressed levels as they focus on previous disappointments and riding the downtrend, oblivious to a potential underlying change. Furthermore, once the inflection has shown through, they often aggressively bid the stock well above intrinsic value, often in a short period of time.

Investment Process

Security selection and initial entry prices are the most important parts of our process.

Idea Generating and Vetting

  • We review 1,000+ equities per year, generally investing in only a handful
  • Ideas come to us from various places
  • Insider buying lists
  • Investment conferences
  • Our network of investor and corporate friends
  • Quantitative screens
  • The sell-side
  • Our own acquired knowledge of industries and companies from professionally researching and investing at institutions since 2008
  • Repetition at the vetting process and knowing what we are looking for enables us to complete the first round of diligence quickly, allowing us to be very efficient at finding the handful of interesting opportunities that arise from sifting through the initial pool

Disciplined Fourfold Mandate

We also invest in preferred equity and debt when we can still hit our return objectives and the risk-reward outlook is positively skewed.

  • At times, we have noticed even greater inefficiencies in these securities than in the common equity
  • When we invest higher up in the capital stack, the company does not typically have the strong balance sheet that we require with our common equity investments

Northbank also offers Select Co-investment Opportunities

  • Occasionally, we come across an idea where we would like to own more of a stock, but cannot due to position limits and/or not enough AUM.
  • In these cases, we will raise money in a special purpose vehicle to invest in a single stock. Fund investors will be given priority for allocations into these individual ideas.
  • Typically, these ideas involve a special situation, where the company has passed all our checks to get into the portfolio, but there is an additional benefit to owning greater size. Examples includes:
  • Block trades to clean up a large seller (common in this market cap size)
  • Direct financing with the company (rarer as we typically invest in self sustaining companies)
  • Securing a large enough stake to influence management and the Board on key decisions such as capital allocation
  • We believe this approach allows us to effectively flex AUM up and down based on the opportunity set and will provide superior outcomes to investors.
Investments

Why Small Caps Matter

  • We aren't smart enough to time market cycles, and our return stream is driven by largely by idiosyncratic drivers; however, a tailwind for small caps wouldn't hurt and generally, forward looking returns are higher when the starting valuations are lower, as is the case for small caps now
  • Small cap underperformance/outperformance is cyclical, historically, and this period of small cap underperformance is getting a bit long in the tooth
  • Source: CFA Institute. Bloomberg. Northern Trust Global Asset Allocation Quantitative Research. Data from 1, 1930–December 31, 2024. Note: 10-year return spread is calculated as rolling 10-year annualized. January total return spread between Russell 2000 and Russell 1000 Indices. Prior to 1979, return data is based off S&P 500 Index and US Small Caps (bottom decile) total return time series downloaded from New York University.