When respected UK equity manager David Urch joined EEA Fund Management it may have raised a few eyebrows. Previously headhunted by big name fund groups such as Martin Currie, Scottish Widows Investment Partners and Fidelity International, it perhaps came as a surprise for Urch to join the relatively smaller alternative asset manager in late 2013.
Arguably best known for its EEA Life Settlements fund, which has been tangled up in mis-selling allegations for the past few years, EEA Fund Management has assets under management of around $650m (£410m).
Urch began working in the city in 1996, spending six years at Mercury Asset Management (latterly Merrill Lynch Investment Managers) in the UK specialist team. After being headhunted by Tim Hall at Martin Currie to grow its UK equities business, Urch joined the firm in Edinburgh but left when he was approached by SWIP to join its UK equities team. Urch ran the SWIP UK Opportunities fund, then a fledgling retail product, from 2003 before being headhunted by Fidelity International in 2007 to re-launch the firm’s UK institutional business.
“I thought that would be my last career move,” Urch says. “I was running a series of funds with £800m in seed capital and had autonomy of the process. But to my dismay it was shut down after nine months during the teeth of the crisis in November 2008. It was very bad timing.”
In February 2009 Urch set up his own Edinburgh-based boutique business, Oriel Asset Management, with the backing of Oriel Securities. Hall – who had been at Martin Currie since 1984 – joined Oriel Asset Management in January 2011 as partner and chairman to assist in building out the business.
The pair manages a £40m UK equity market fund, which was launched in May 2012, and an £18m segregated family office mandate, Onyx, which is a mirror version of the UK equity market fund without the shorting capabilities. They also ran a Cayman-domiciled UK equity hedge fund between 2009 and 2014, but this was wound up due to the cost drag of its structure.
However the hedge fund was beneficial in allowing Urch and Hall to do the groundwork on the UK equity market fund.
“We researched the UK equity market fund while running the hedge fund,” Urch says. “We wanted to use Ucits powers to short stocks we considered over valued, and the feedback from investors was that they could understand that. Our clients were petrified of leverage so we avoided using it.”
The fund therefore has a gross exposure of 100 per cent and can short assets up to 15 per cent, which means the net exposure cannot fall below 70 per cent.
“We don’t use shorts for the sake of it, but we short companies with negative operating momentum,” Urch says. “The most we have shorted is 7.5 per cent but most of the short positions are 1 or 2 per cent. We don’t want to give the impression that shorting is the tail that wags the dog.”
In October 2013 Urch and Hall joined EEA in order to distribute the funds to a wider audience.
“We wanted somewhere with the heartbeat of a fund manager, not a broker, and I knew chairman Simon Shaw from Clerical Medical,” Urch explains. “We wanted a firm that was strongly capitalised and could invest in the funds’ growth in the future. The missing pieces of the jigsaw were a strong brand and equity participation in the vehicle.
“When we joined EEA the funds had less than £10m in assets under management and now there is almost £60m in aggregate. Previously we had no retail platform exposure, and now the funds are on 18 platforms.”
In May this year, EEA’s parent company Anath Capital Group launched a new fund house, Garraway Capital Management. Urch and Hall relocated their funds and the UK Equity fund was rebranded the TB Garraway UK Equity Market fund.
“Twelve of us moved from EEA to Garraway,” Urch says. “We wanted to bring everyone together and incentivise people to drive the funds forward.”
The TB Garraway UK Equity Market fund uses a largely bottom-up process that aims to find change in UK companies ahead of the market.
“We are looking for companies that can harness positive change,” Urch says. “Companies with positive earnings revisions and positive share price momentum can generate alpha. Our process is to harness that on a repeatable basis.”
To do this, 80 per cent of the stock selection is bottom up, 10 per cent is macro-driven and the remaining 10 per cent is quant-based.
G4S is a key holding. The managers bought into the security company just over a year ago, on the back of the Olympic contract finishing, the firm’s failed merger with ISS and the departure of the management team. They initiated a 1.5 per cent position that has grown to 3.5 per cent.
“We saw the new management as a positive, they are a good pedigree and the financial results show an arrest in the decline of in business,” Urch says. “There are a number of programmes management could enact, rather than silver bullets. They are taking a deep, low-risk approach. There has been a wide range of forecasts so there is the opportunity for a positive surprise. G4S has been a strong contributor to the fund’s performance.”
Urch also cites Ashstead, Howden, Barratt, CRH and Provident Financial as contributors to performance over the past year, which he says is “a good spread by end industry and market cap”.
However, not owning BG Group at the time of the Shell bid hurt performance. “We had a lacklustre February, March and April,” Urch says. “Eight out of the top 10 negatives were things we didn’t own. There was a quest for yield at any cost and an aggressive reaction to quantitative easing.”
Position sizes tend to be 2 to 3 per cent relative to the benchmark, and Urch says he looks to add value in the mega cap part of the market as well. The portfolio doesn’t have much in the way of factor risk, such as a small cap or value bias, and the fund has an average tracking error of 3.8 since launch.
‘There is no one sector or stock that dominates the performance of the fund,” Urch says. “There are no small cap wonder stocks.”
“People like the fund’s risk-return profile. The FE Sharpe Ratio [which measures risk-adjusted returns] ranks the fund 14th over a three-year period, which makes it top decile.”
The fund usually has between 30 and 40 positions, and currently has 37. The turnover tends to be 100 per cent, which Urch says “you would expect from a dynamic momentum strategy”. The managers take an 18 to 36-month investment horizon, but say they are not slow to cut from the portfolio.
At the moment there is one short position in the fund, drinks company Diageo, which Urch says is “the inverse of what we are looking for in our long positions”.
“There is pricing pressure in the vodka franchise and slow growth in emerging markets. The company has been increasing its dividend significantly over some time without earnings going up and the shares are expensive.”
Over the year to 12 June the UK Equity Market fund returned 13.3 per cent against the 9.4 per cent rise in the IA UK All Companies sector, FE shows.
“We have generated consistent returns since launch, and in 27 out of 36 months we have met or exceeded the sector median return,” Urch says. “We launched the UK Equity Market fund during the first Greek crisis with £1m and now we have £40m in the fund. Investors are starting to increase their positions and allocate to us as a core position.”
The fund’s investors are typically wealth managers, although Urch says they are “making great strides with the IFA marketplace”. Urch says the fund could reach £1bn in the next five years, which would be “a nice round target”.
“We have run books of business similar in size in the past. It would work without changing the process. We would look to achieve that in the medium term, in perhaps three to five years.”
2009 – Urch sets up Oriel Asset Management and launches a UK equity hedge fund
2011 – Hall joins Oriel Asset Management
2012 – TB Garraway Equity Maket fund launched