By James LaDue from Emerging Manager Focus
SCO Capital Partners fund managers have been posting overall gains throughout the past 3 years. I wanted to get more information from the firm based on its success as an emerging manager firm. When I contacted the organization, I was put in touch with John Doss, partner.
Emerging Manager Focus: Reps from your firm are scheduled to attend the Opal Emerging Manager Summit. What potential do you see in small firms and emerging managers given current economic conditions?
John Doss: “Small firms and emerging managers have the benefit of no legacy issues (ie illiquid positions, redemptions etc.). The bear market has created a tremendous opportunity to purchase financial instruments at attractive valuations and new funds have the ability to capitalize on these opportunities. The problems for small firms and emerging managers are related to raising capital, potential regulatory oversight and costs related to building the compliance checks and balances in the post-Madoff era.”
EMF: Do you agree with evidence demonstrating smaller funds are currently outperforming larger funds?
JD: “Obviously return must be viewed in relation to liquidity. A small fund could be invested in microcap situations, generating significant return, but not be able to sell these positions. 2 life science funds recently blew up. One had 90% and the other 50% of AUM in Sequenom. They prove that analysis of return must be weighed with liquidity and diversification.”
EMF: What are some of your strategies? Which of these do you find works best and why does your company use these particular Investment Strategies?
JD: “We manage the fund for return, liquidity and transparency. Our strategy is to find biotech/life science companies which clinical investigators believe represent the next generation in therapy. We like to buy at deep discounts to what the smart money pays for these exciting companies. An example is our investment in Isis. Genzyme purchased shares at $30 per share for rights to mipomersen, a cardiovascular drug. We purchased the shares at $15 per share on the open market (50% below Genzyme!). Additionally, we avoid binary event investments and are attracted to products approved in one indication which can be used in multiple indications (ie Cephalon’s Treanda originally approved for chronic lymphocytic leukemia is now generating revenues in Non-Hodgkins lymphoma or Avastin approved in colorectal cancer but now used for breast cancer and glioblastoma etc.)
We are not market neutral. We believe in being 100%+ long in a bull market and 100% cash + short in a bear market. This strategy enables us to outperform in bull markets and minimize losses in bear markets.”
SCO has a great track record according to Doss. SCO has a 2009 return average so far of 14.69%, with April posting 15.15% gain. The overall average return since inception, at the beginning of 2007, is 22.46%.
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