Brian Foote, CFA has been involved in professional asset management for over two decades. Foote launched Broadway in the 1Q2020 with the idea of buying dislocated securities and setting up convex payout structures—buying call options on businesses that have had temporary market mispricing. The fund is long/short and concentrated across four broad categories: Transportation, Technology, Natural Resources and Consumer.
Using a proprietary process, Foote hunts for asymmetric mispriced securities with convex payouts and then construct capital-efficient means of owning them via derivatives (calls and puts).
Based on his 25+ years’ experience value investing across multiple markets, the process of identifying a new idea comes from frequent quantitative-based screens, investigative journalism, and a wide network of idea-generating sources.
The first pass is identifying areas where he does NOT have a defined edge, which eliminates potential blind spots and serves to maximize efficiency. Warren Buffett calls this the “circle of competence.”
The next step is to identify, from the screens, the top candidates for further investigation. “What is it worth?” is the primary question and “How can we lose” is the second.
If the security trades at a substantial enough discount (or premium) to the calculated-value, the next step is to build an appropriate options strategy to capture maximum risk-reward. Heuristically, he is looking for a 5:1 or better reward to risk ratio.
Broadway is buying calls and puts to benefit – in a non-linear way – from mispricing in the market.
What is “convexity”? Simply a non-linear reaction based on a linear move. In this case, options payouts.
Convexity through options selection, and an underlying bottoms-up value oriented mentality — we are buying exposure to businesses and events. Process, no adherence to prediction, probability-based modeling, ability (and desire) to short expensive indexes, etfs, individual companies. In 2022, money managers underperformed because they didn’t make use of puts. Some were constrained by mandate. Broadway is not.
Foote is a student of value investing tenets laid out by Buffett and Munger, as well as an alumnus of Nassim Taleb’s Real World Risk Institute, having completed the first “mini certificate” course in 2016. Foote can be contacted at:
Brian William Foote, CFA
Broadway Capital Management, LLC