Originally published in The Australian Financial Review on 3 March 2025.
Author: Joanne Tran.

After 20 years of leading Arnott Capital single-handedly, hedge fund veteran Kenny Arnott decided to bring in fresh blood and for the first time is ready to talk about it publicly.

At 56, Arnott has led one of the country’s most secretive asset management firms, which has served wealthy family offices since 1999. He says this is the first in-depth interview he and the firm have given.

Arnott Capital’s Kenny Arnott and Yianni Gertos are betting big on the aviation industry. Photo: Janie Barrett

Speaking from the firm’s offices at Aurora Place in Sydney, he explains that after two decades of making the big calls alone he concluded in 2019 that he needed a partner to help drive investment returns.

“I believe you get a better outcome running a portfolio when you have two people who are aligned in investment values and philosophy, but bring different skill sets to the table,” he tells The Australian Financial Review.

He was introduced to Yianni Gertos, 33, who was then an assistant portfolio manager at the now shut hedge fund KIS Capital Partners, and managed to convince him to come on board.

“Yianni went on holiday to Europe and told me he was joining the sell side for three times the money I offered him,” Arnott recalls. “I told him, ‘You’re an idiot if you take that job. Come work for me, and you’ll be much happier.’”

Arnott’s forthright approach worked.

“It was very blunt. Each line of the email was four words,” Gertos says. “I showed it to my wife in Venice, and she asked me if I was sure I wanted to do it and I said, ‘absolutely’.”

The fund has differentiated itself from rivals by offering a wide investment mandate that stretches across asset classes. This flexibility has allowed the self-described “thematic investors” to build a long/short portfolio across equities, commodities, fixed income and currencies.

‘No room for ego’

The pair says the combination of deep macro analysis with detailed company research has created a unique set-up. While Arnott focuses on economic data and identifying macro trends, Gertos meets with companies, listens in on earnings calls and sifts through annual reports.

“Kenny sees things from a high level, identifying long-term trends, while I spend my time verifying the details, checking whether the micro aligns with the macro.”

Arnott adds: “We challenge each other constantly. There’s no room for ego in this business – only the best ideas win.”

One of their most successful bets for the firm lately has been in aviation. It comes as the major aircraft manufacturers struggle to keep up with demand, a challenge exacerbated by heightened scrutiny of Boeing following the disastrous crashes of its 737 MAX jets.

This has made for a difficult year – not just for Boeing but for airlines worldwide that were relying on fleet upgrades. But it’s also been a lucrative trade for Arnott Capital.

The aircraft manufacturing industry is a duopoly, dominated by Boeing and Airbus, says Gertos, who first started looking at Boeing when its stock was already down 50 per cent.

“Then we did the micro work and realised the long-term impact. Boeing won’t restore production for years, leading to fleet shortages and pricing advantages for airlines with newer planes,” Gertos says.

That is when the pair identified an opportunity in Boeing’s rival, Airbus, in July last year. The stock has since jumped over 10 per cent.

“It’s been an intense duopoly for a long time, but now your competitor is severely weakened,” he says. “You’re increasing production and doing everything right. You’ve gone from competing in a duopoly to essentially having a monopoly, and all that’s left is to execute your plan.

“It’s a great opportunity with strong underpinned earnings growth.”

Elsewhere in the aerospace world, the duo particularly like Irish budget airline Ryanair after a “massive” expansion of their fleet.

“They didn’t cancel [their orders] with Boeing during COVID, so they’re getting their Boeing aircraft when other carriers need to renew their fleet,” Gertos says. “They’re about to go through a big free cash flow cycle.”

They’ve also snapped up shares in British Airways parent International Airlines Group for the “pricing growth” on the North America route, and they like Japan Airlines for similar reasons.

As for Qantas, as recently as June last year Gertos said the fund had a “much bigger position” in the airline, but they have been selling shares ahead of capital expenditure increasing to as much as $3.9 billion this year. The airline also faces a $15 billion mega investment pipeline for new planes.

“On Qantas, we believe the story with them has largely played out,” Gertos adds. “In contrast, Ryanair presents a more enduring opportunity.

“Their balance sheet is in excellent shape, they’re net cash right now even as they’ve been growing their fleets. Ryanair represents a highly attractive long-term investment, especially in an environment of solid pricing growth.”

Gertos does concede that their airline bets are not without risk given the industry remains vulnerable to demand shocks, such as escalations in geopolitical tensions.

Exiting China

Other recent changes to their portfolio include selling down their holdings in Chinese equities in November after initially reducing their position in October. That came down to a core change in their investment thesis.

Before July last year, China had largely faded from the investment community’s radar, according to Arnott. Sentiment had soured to the point where many had abandoned hope for the world’s second-largest economy, which had led to declining valuations and reduced investor exposure.

That narrative shifted dramatically in September when China signalled a new policy direction and investors piled back into the sharemarket amid talk of potential fiscal policy packages of up to 10 trillion yuan ($2.2 billion).

“Positioning was elevated. Everyone got excited, and we just thought it was too hot for us,” Gertos says. “We’re currently looking for another entry point where people aren’t as excited about China.”

Despite their successes, the pair admit that as a hedge fund, they have to dig deep to find opportunities to short – a strategy where you make money on a declining asset price – when markets are soaring. They don’t elaborate on their short book.

“When markets rip and valuations go up, there are opportunities to find things that are overvalued,” says Arnott. “We don’t short things on valuation alone. That’s a very poor tool to use from a timing perspective.

“We’re not agnostic to what indexes are doing. But the opportunities that we find are a layer below, and they always exist.”

Arnott launched the hedge fund after a stint in Macquarie’s commodities trading business. He started his career as a trader for Dunavant Enterprises in Memphis, Tennessee, which in the 90s was the world’s largest cotton trading firm.

“Our process hasn’t changed much, but we’ve evolved with the markets,” Arnott says. “We look for long-term ideas, but we’re also actively in and out of things we like.”