ICM is a singularly focused manager, having just one product—Inflection. Inflection is a concentrated long-only US core equity strategy. We believe that Inflection can produce over +250 bps in net "alpha" per year through superior stock selection and a tight management of the reward-to-risk in the strategy. Inflection is an alpha generating product versus a broader market mandate.
Fee Structure Aligned With Client's Interests
- Management fee of 0.60% of account value.
- We earn 20% of annual account profits for performance of more than +210 bps in gross performance (relative to the S&P 500/Russell 1000).
- The performance fee is only assessed if an account’s cumulative gross returns exceed a rolling CAGR of 210 bps plus the S&P 500/Russell 1000 total return since account inception.
- Total annual fees are capped at 200 bps.
Our client creates a separately managed accounts (SMA) at its custodian. The client then gives ICM discretionary authority to trade equities, ADRs, and ETFs within that account. The client and restrict ICM's access to the account at any time.
Inflection continues to post strong year-to-day performance, +11.5% vs. the S&P’s +8.4%. Q2 was more volatile for Inflection and the strategy returned +2.5%, vs. +3.1% for the S&P 500 TR index. We used the volatility to rebalance several positions for more attractive reward-to-risk ratios and significantly enhance the strategy’s medium-term, alpha generating potential.
Three primary factors held down Inflection’s relative performance: 1) a further unwind of media stocks, 2) the broad, indiscriminate selling of retail stocks post the AMZN/Whole Foods news, and 3) FAANG’s waning momentum. For years, we have viewed the market as significantly complacent about the risks posed by Amazon to multiple industries, particularly retail. The market didn’t understand Amazon. We still believe that the market doesn’t have a refined understanding of Amazon. That lack of insight has now metastasized to broad fear, indiscriminate selling, and significant macro bets against the retail sector. The sell-off in Costco Wholesale (COST) and Ross Stores (ROST) were significant contributors to Inflection’s alpha loss, by -142 bps. We see the risk from Amazon’s actions in June (Whole Foods and Amazon Wardrobe) to these companies’ long-term value as de minimis. Consequently, we have been adding to the positions given very compelling reward-to-risk ratios and our confidence in our investment perspectives for each company. That confidence also extends to all positions within the strategy.
Our 12-Month Outlook for the Strategy:
We retain our confidence in all of our investment views. We are looking for opportunities to increase our weight in consumer-financials and consumer-industrials (building products, airlines, and Toro). Most of Inflection performance this year has been driven by near-term movements in our positions’ relative valuation multiple; we characterize these moves as being driven by near-term market emotion and somewhat random in nature. We have an investment process that limits “being fooled by randomness.” Our investment process is based on fundamental and measurable outcomes. Those outcomes take time to become material (one or more years). These are outcomes like sustainable faster top-line growth or materially higher margins, than what was expected by the market.
Inflection’s modeled “predictive alpha” is currently a record high of +10.6%; as a reminder, the predictive alpha is our modeled outperformance over the next 12 months based upon our target prices and stock picking hit-rate ratio. We manage the strategy for a predictive alpha of over 6%. Consequently, the +10.6% means that the current strategy is rich in opportunity.