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Fund strategies

The absolute return sector covers a wide variety of possible investment strategies. Kira Nickerson asks four fund managers where they see opportunities

Cazenove absolute UK dynamic fund

Cazenove absolute UK dynamic fund manager Paul Marriage believes there is increasing value to be found in UK retail companies and recently upped the retail weighting in his fund, a small-cap biased long/short portfolio. He says: “The UK consumer is more resilient than you think.”

Marriage favours long positions on smaller retailers rather than going either long or short some of the more prominent high-street names.

Small and mid-cap insurers are another area to which he has increased his exposure of late, particularly those companies dealing in catastrophes. With recent global events such as the earthquakes in New Zealand and Japan, catastrophe insurers are starting to see their ratings move upwards, says Marriage.

The fund mirrors the manager’s offshore hedge fund and little has changed in the strategy and orientation of the portfolio since he began running the hedge fund more than five years ago.

“I see no less or more opportunity than at any other stage. As long as you keep meeting companies, ideas will come.”

BlackRock UK absolute alpha fund

Protection has been taken out on half of the BlackRock UK absolute alpha fund’s net exposure, the most extreme level in the portfolio’s history.

Co-manager Nick Osborne feels the events in north Africa and the Middle East have the potential to destabilise the global growth story. He says: “Mark Lyttleton and myself allocate capital to where we have conviction and that is a potentially detrimental event that is hard to analyse or price in so protection is the most sensible conclusion.”

Outside of this risk, the managers are quite positive and are currently finding more buy ideas than sells.

Net exposure in the fund is at the upper end of its 20 per cent historical band.

The potential rise in corporate expenditure is one theme the managers are playing. Osborne says: “UK plc is sitting on £150bn of cash, a multi-year high borne out of fear and the need to conserve cash. Now there is greater confidence, ability and desire to put that to work.”

The fund’s long book consists of companies that stand to benefit from an increase in corporate spending, such as IT hardware and media.

At the same time, the managers are negative on domestic consumer spending, those exposed to government spending and highly leveraged firms, which will limit their expenditure.

Standard Life global absolute return strategies fund

Volatility trades within Standard Life Investment’s global absolute return strategies fund helped it generate positive risk-adjusted returns during a quarter that experienced a number of shocks.

The volatility difference between the US and Japanese equity markets has historically been priced in at around 2 per cent, says head of multi-asset Euan Munro. In reality, the difference has been closer to 7 per cent, he says. A trade around the difference in volatility between the two markets enables the fund to lock in what the market is pricing and obtain income for every percentage of volatility above that level.

This has been a long-term holding and served the fund well in the aftermath of the Japanese earthquake. Munro says: “There was no reason to expect Japan to suddenly become less volatile before the earthquake and even less so now.”

Munro says trades of this nature are not just about making money but can aid in capital preservation if something unexpected occurs. The Gars portfolio features a similar volatility play between the Hang Seng China index versus the FTSE.

The biggest country exposure within the fund is currently the US, where the company sees opportunity. Physically, the portfolio has 15 per cent in UK equities but actual exposure is 4 per cent in the UK versus 11 per cent in the US, a consequence of being short the FTSE 100 and 250.

Despite the sway towards Western economies, the fund has maintained reasonable emerging market exposure, particularly to regions such as Russia. Munro says: “It is good to have nonMiddle East oil exposure in your portfolio right now.”

Jupiter absolute return fund

Philip Gibbs is long on banks in his Jupiter absolute return fund but negative on the retail sector. From a macro perspective, the fund’s biggest country allocation short is Japan, taken long before the country’s recent difficulties.

Gibbs says: “The tragic earthquake in Japan and subsequent nuclear crisis has added to the complexity of the country’s economic situation. Even before the earthquake and tsunami struck, the country’s debt to GDP ratio was the highest in the world, 225 per cent at the end of 2010, and yields were very low. Now that the Bank of Japan must pump billions of yen into the reconstruction effort, this ratio is likely to be stretched even further, perhaps eventually to breaking point.”

According to Gibbs, the global economic outlook remains uncertain and he is particularly concerned about the possible impact of interest rates rises, persistent Western indebtedness, higher commodity prices and inflation.

Gibbs notes the European Central Bank’s recent rate hike may push peripheral countries such as Greece and Ireland into further trouble. For this reason, he is short the euro against the Swiss franc, the Swedish krona and the Norwegian krone.

In addition, he remains cautious on equities in general and European retailers in particular.

The fund’s long book is biased towards energy market demand, the positive impact of fiscal stimulus in the US on Hong Kong’s economy and growth in the US.



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