Steer Clear Of Single Fund Solutions For Absolute
Return In 2015
Roderick Collins, Investment Manager, WM Capital Management Limited 28.01.15.
Never has absolute return investing been more important. Equities are an
unpredictable roll of the dice and even if fixed income, the classic diversifier,
continues its amazing bull run, the arithmetical scope for loss through duration risk
far exceeds the potential for any gain. So where should investors go for absolute
return in 2015?
Many advisers opt for single fund solutions which go long or short on equity or
credit. Others choose “high conviction strategies”, where we are led to believe
that fund managers have the ability to predict the future of financial markets. But
such dependence on a single manager and strategy is risky on the too-many-eggsin-one-basket principle. Instead, investors should seek a more varied solution.
First, find trades which depend upon inter and intra asset class relativities –
“reversion to mean”: a far safer approach than the crystal ball method. Boussard
& Gavaudan is a classic example of a fund which plays the relativity between the
values of different classes of security (equity, debt and convertibles) issued by a
single company. A typical trade was to short BP equity after a share price recovery
following the Macondo rig disaster and to invest in BP US dollar denominated debt,
yielding double digits when President Obama was bad mouthing “British
Petroleum”.
Secondly, be diversified, the only free lunch in asset management. Diversification
should be achieved by using a wide range of strategies which are then
implemented by different managers, who will bring subtly different approaches to
each. Furthermore, the individual managers are themselves diversified by their
holdings and transactions. The in-house funds of funds offer ready-made
diversification but with much stronger control and risk management than their
predecessors, the investment trusts of hedge funds, which have largely failed their
continuation votes and been wound up. Examples are Bluecrest Allblue, which
offers a range of judgemental and formulaic strategies, and the small but
satisfactorily performing CQS Diversified.
Thirdly, make use of the full range of alternative investments which themselves
offer extensive diversification. Indeed the list of alternative options with a low
correlation to other asset classes is huge, if one cares to look. Credit is a good
example and the one area of financial analysis where the effort of a substantial and
well trained team is rewarded. While anyone can take a view on the dollar/euro,
credit analysis demands armies of assiduous number crunchers. As a result, credit
funds have surprisingly low default experiences and would have survived the worst
excesses of 2008/9. The principle holds true for distressed debt (Neuberger
Berman Distressed Debt); bank debt (Alcentra and CVC); collateralised loan
obligations (Carador and GSO Blackstone) or real estate debt (Starwood).
Other alternative investments worth considering include activist managers, such as
Pershing Square or Thirdpoint, which provoke management changes within the
companies in which they invest, usually to the benefit of shareholders. A further
www.wmcapitalmanagement.co.uk
Roderick Collins
Investment Manager
Roderick has an MA in Modern
History from Oxford University. He
commenced his career as an
investment analyst in London before
analysing European companies at
Eurofinance in Paris . He was
appointed manager of the New Court
European Investment Trust and
became an Assistant Director at N.M.
Rothschild
Asset
Management.
Subsequent appointments were as
Manager at Trade Development Bank,
Managing Director at AEIBC Asset
Management and Managing Director
at James Capel International Asset
Management. At Matheson and Co.
Limited he created a private banking
group with interests in stockbroking,
asset management, trust and
company administration and banking.
Latterly, he has had charitable
interests and undertaken various nonexecutive directorships, including that
of a J.P.Morgan investment trust. He
has created Solent Systematic
Investment solutions with two
professors at the Cass Business School
to design formulaic investment
strategies. He manages various funds
focussing on the non-correlated
alternative sector. Roderick is married
with three daughters and divides his
time between London and the New
Forest.
alternative fund is Empiric, which invests in purpose built student accommodation, largely let to post graduates
and with pre-paid rent.
Finally do not ignore the listed sector, which is under more intensive scrutiny than the open-ended, which offers a
diversifying range of strategies and where judiciously assets may be purchased below their net asset value. Many
of the listed vehicles (both in-house funds of funds and single strategy funds) are themselves feeders into open
ended vehicles. To come to market, listed companies undergo much greater scrutiny than their open-ended
cousins. A sponsoring broker will only be interested if he can raise £100 million plus. After the IPO the company
will be followed by many analysts, an aid to the investor.
The closed-ended structure also offers exposure to some less liquid underlying assets. In the alternative space
most listed companies are incorporated in the Channel Islands but quoted on the London Stock Exchange. Unlike
their on-shore counterparts, these companies have extensive “discount control mechanisms” (repurchase of
shares, reverse auctions, continuation votes). This is the icing on the cake for investors who can purchase an
attractive range of assets at a discount to net asset value in the knowledge that, if a discount persists, the
shareholders may vote for the termination of the company. In such an instance the discount will usually close
lucratively for shareholders. Notable examples of listed vehicles closing include FRM Credit Alpha, Goldman Sachs
Dynamic Opportunities, Absolute Return Fund, Dexion Trading and Alternative Investment Strategies. It may also
come as a surprise that many of the listed vehicles have very attractive dividend yields: Carador (11.2 percent),
Chenavari (4.8 percent), Blackstone GSO (5.9 percent), Starwood (0.6 percent) and Third Point (5.3 percent).
Nor should we neglect the open-ended sector, not the illiquid offshore hedge funds but their onshore cousins with
daily dealing under UCITS III. For example, Odey UK Absolute Alpha has been spectacularly successful as a long
short equity fund. Insight Absolute Credit has provided sustained positive returns, again based on solid credit
analysis. It should be noted, however, that some open-ended active fund management houses, which in any case
are probably little more than “closet indexers”, have attempted to enter the absolute return space but have
lacked the shorting skills essential to equity long/short management or equity market neutral management. For
professional investors there are also some very interesting opportunities in the unregulated sector. These include
Darwin Leisure Properties, which invests in, develops and manages caravan parks and has produced very attractive
returns with minimal correlation to any other asset class.
So these are the conclusions for investors seeking returns no matter how the markets perform in 2015. Do not rely
on one provider for absolute return. Examine the widest range of asset classes and managers. Invest in the closed
and open ended sectors. Be diversified.
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IMPORTANT INFORMATION
This document has been produced for information only and represents the views of the investment manager at the time of
writing. It should not be construed as Investment Advice. No investment decisions should be made without first seeking advice.
Full details of the WAY Absolute Return Fund, including risk warnings, are published in the WAY Fund Managers Limited
Prospectus.
RISK WARNINGS
The Absolute Return Fund, is subject to normal stock market fluctuations and other risks inherent in such investments. The
value of your clients investment and the income derived from it can go down as well as up, and your client may not get back
the money that they invested. Investments in overseas equities may be effected by changes in exchange rates, which could
cause the value of your clients investment to increase or diminish. Your client should regard their investment as medium to
long term. Past performance is not a guide to future performance. Every effort is taken to ensure the accuracy of this data, but
no warranties are given.
www.wmcapitalmanagement.co.uk