BlackRock’s Mark Lyttleton has slashed the number of holdings in the UK absolute alpha fund by 20 per cent and has increased the size of the holdings on the long and short side by 20 per cent to create a more “high conviction” portfolio.
In 2011, the fund’s performance suffered, falling 6.9 per cent. However, the realignment of the portfolio at the end of 2011 and start of this year has lifted performance, producing returns of 3.2 per cent so far this year, according to Morningstar.
“Last year was the fund’s first ever negative year, which we were disappointed with,” says Lyttleton. “The market was difficult, volatility was very high and we struggled with alpha generation.
“As a result, we spent a long time reviewing the portfolio, from the process and construction to the risk and position sizing.”
Lyttleton (pictured) concedes he was not active enough in managing holdings and failed to book profits last year.
“We were most disappointed that we lost money in pairs [where one stock is bought and a similar stock in the same sector shorted] for the first time. The market rotated so fast – and was risk on, risk off – that when we made money we then lost it again; we didn’t bank enough money.
“We are now more active with our pairs strategy. This year we have already made money back that we lost on pairs last year. We had 20 pairs last year and we now have 17. We missed a trick, but we are now managing them actively.”
As well as raising the stock concentration and reducing the number of holdings from 100 to 80, Lyttleton has reduced the fund’s market correlation.
“There were moments last summer when the fund had a 60% correlation to the market, due to the market volatility, cross correlation and stock specifics, and we have worked hard to take the correlation out. The correlation to the market is now 0 per cent,” he says.
In the first half of 2011, the fund had 20 per cent net exposure. “Through August to September this hurt the fund,” Lyttleton says.
“At the end of last year we cut the net exposure to 7 per cent and we haven’t put it back on.”
“The fund performance has been much better this year, which we have done with no beta.
“We have delivered 3% alpha this year so far, which we are pleased with. There is still a bit of work to do but we are on our way.”