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Church House’s Mahon turns to cash and treasury stocks

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Volatility has been proving a real challenge for fund managers seeking absolute returns but Church House Investment Management manager James Mahon has turned to cash and treasury stocks to navigate uncertainty.

The £50.9m Tenax Absolute Return Strategies fund has its biggest investment in floating rate notes, at almost 31 per cent of the fund, and cash at 12 per cent.

Mahon says: “We’ve been increasing floating rate notes over the last two years, so the greatest portion of the fund is either in cash or short-dated treasury stock. We are talking about highly liquid and high-grade instruments. We are seeking to achieve positive return over 12 months. We have had a fairly cautious strategy in place for a while, at least two years, and probably the fund is getting more cautious.”

The fund also has a large exposure to fixed interest, currently at 24.3 per cent.

Mahon says: “The majority of the fixed interest slice of the portfolio is in sterling corporate debt, short medium-dated sterling corporate debt, hybrid corporate debt and some US hybrid corporate debt so we built up on the underlying assets rather than fixed interest per se.”

The fund has been co-managed by Mahon and Jeremy Wharton since launch in 2007. Over three years,  it has significantly outperformed its benchmark, the three-year British sterling Libor, returning 10.6 per cent against 1.64 per cent.

Despite investing mostly directly into asset classes, Church House also buys into other funds to maintain diversification. In property, which makes 3.7 per cent of the portfolio, Mahon holds the Standard Life Property Income trust, managed by Jason Baggaley, a position he has gradually increased to 1.7 per cent.

He says: “We still hold that fund because Baggaley invests in regional properties and he knows every property very well. It is not a very big pool of assets he has got but with the Standard Life name you get to see an enormous amount of opportunities.”

Mahon also says the recent equity sell-off has given him other opportunities in property as the fund manager sold “more conventional” property holdings and started looking at some London based companies.

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In particular, Mahon is “closely” monitoring Great Portland Estates, one of the companies which has been “probably hit too much” by the recent sell-off.

Mahon also says he likes to look at hedge funds for diversification, although there are “not too many good ones out there”.

He says: “We hold two at the moment in the equity long-short space where we know the managers. Most hedge funds are insufficiently transparent for us and don’t seem to have robust enough funds, but we don’t close our minds to them.”

Mahon says the strategy within his team is to not look at macro economic events when deciding on asset allocation.

“Looking at macro is not a basis for investment frankly. Forecasting is like looking at tea leaves and most forecasts get it wrong just as much they get it right.

“However, the thing that would surprise people would be a bit of inflation coming back into the system. Everybody is convinced we are deflating. If that happens we are going to see the market  wobble  outrageously and I don’t want to be in a position of facing a 2006 sell-off in the bond market.”

Mahon says overall, in equities the fund is “more international” rather than UK-focused. He tends to keep equity exposure below 20 per cent and it currently runs at 15 per cent.

“In equities, we are not planning any moves around the EU referendum unless it becomes an extreme event. The Brexit debate is now commencing in earnest, though the ‘out’ campaign appears to lack leadership at this stage.

“I wonder if enough thought is being given to the potential effect on Europe of the UK leaving rather than simply the effect on the UK.”

Despite recent volatility, Mahon bought into some of the unloved mining stocks during the sell off.

He says fund managers have to be prepared “to move relatively quickly” because of increasing market uncertainties. “It is remarkably easy to find worries at the moment in markets. With bond rates this low it is quite hard to look forward at the next five to 10 years and say ‘I am  going to make great returns’.

“It wouldn’t be surprising to see more volatility at an index level, simply because China is going through a major transition in its economy and it is hard to manage the relationship between that and how the US Federal Reserve backs away from putting rates up again.”

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