TOMORR OW’ S TITANS 2023
Founder and Chief Investment Officer Findell Capital New York
Brian Finn
F
indell Capital’s strategy has annualized at over 25% net since 2019 with double digit positive returns every calendar year, over a period in which the Russell 2000 has been roughly flat.
Founder and CIO Brian Finn took a long path before finally actually practicing small cap value investing. Having initially contemplated academia, Finn was first lured on to a proprietary trading desk that specialized in mortgage derivatives at Deutsche Bank in 2007, working closely with the characters that inspired the book and then film, The Big Short. “This was very macro and quant focused, building complex models for prepayments,” he recalls. Finn then went to Columbia Business School and studied value investing. After getting an MBA, he worked at commodity trader Glencore in Switzerland, analyzing asset deals including one involving a Russian oligarch (Oleg Deripaska).
Finn’s first hedge fund role was at Force Capital in 2012 before moving onto MAK Capital in 2014 where he worked for five years before launching Findell in 2019.
Neglected names Finn’s specialty is ferreting out neglected names that offer a skewed risk reward based on an approach that distills a business into one or two key investment drivers that can be properly researched. Most holdings have a market cap of between USD 1 and 5 billion, though there are a handful of microcaps. “Our goal is to find small and mid-cap, off the run, idiosyncratic, companies that the average investor has not heard of. The share prices are typically dislocated due to behavioural or technical factors, but our research process reduces the complexity to one or two key drivers. We build a portfolio of names with a catalyst schedule. Catalysts can create outperformance even when small caps and value are out of favour,” says Finn.
Behavioral biases Many of the inefficiencies that Findell trades are explained by behavioural finance, which Finn encountered as a Harvard undergraduate in 2005: “I realized that my own sometimes impulsive risk taking seemed to be guided by unlearned instincts. I started collaborating with a doctoral student at Harvard Business School
44 Ferreting out small cap value with behavioral insights
and we put together a book that outlined how evolutionary psychology has created innate behaviour patterns that lead to all sorts of irrational decision making in the financial markets. For instance, herding makes sense from an evolutionary perspective – if all your fellow hunter gatherers dart in one direction at the same time – you should probably follow. But herding in financial markets can lead to folks buying a stock simply because others are buying it and can create huge deviations away from fundamental value”.
These sorts of behaviours are called heuristics and they systematically create dislocations in the market: “Selling losers is an example of recency bias, so we screen for new lows. We also screen for news stories because people over- interpret headlines due to representativeness. Binary situations may scare away many investors because the pain of loss outweighs the pleasure of gain. A portfolio of very skewed risk/reward investment should work regardless of the market environment as long you do the work on the idiosyncratic risk factors”.
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