Having just passed its fifth anniversary on July 1, the £715.8m Old Mutual Global Equity Absolute Return fund has seen its assets grow substantially in the past 18 months, as investors realise the potential of a market-neutral proposition.
Ian Heslop, manager of the fund and head of the quantitative strategies team at Old Mutual Global Investors, notes that by using long and short positions, “effectively you’re taking market risk out of the portfolio”.
Although not a ‘true’ quant process, as there is a dynamic structure to the approach, the strategy attempts to remove emotion from the equation to arrive at a dispassionate investment process.
While the fund has a market-neutral approach, Mr Heslop points out that a problem with this type of process is “the way you pick stocks opens you up to being only good in certain types of market, which comes from style exposure”.
“What we’re trying to do with this portfolio is to recognise that very fact,” he adds. “It doesn’t matter what fund managers invest in, their returns will be cyclical if they are concentrated in certain styles. So we’re trying to avoid that by building a diversified portfolio across multiple styles. Those multiple styles are designed to offset one another and hence stabilise the returns.”
One consequence of this approach is the number of holdings the portfolio has: roughly 695, as of the end of May, which some might suggest shows little conviction in the holdings.
But Mr Heslop says: “Our conviction is in the stock selection components; it is less so in the stocks we actually hold. That’s not necessarily a bad thing as it means you can change your mind on a stock if the data changes or your view changes. It’s a very dispassionate way of investing.”
The manager notes the team uses a process that builds components that are driven primarily by behavioural bias.
He points to value investing as a classic example. While this approach can make money over the very long term, by buying cheap stocks and shorting expensive ones, this type of approach tends to work best in a rising market.
“So we’re going to hedge that out by using the ideas of quality and balance sheet strength. If we can incorporate those into the portfolio at the same time, we break up the cyclicality and the downside risk and the correlation structure,” he explains.
“Basically, that is it and you grade every single stock in your investable universe. You can do it across lots of stocks because a lot of it is automated – and so you can perhaps start to look in areas that are less well travelled by the market, where mispricing is more prevalent and you can add value consistently,” he says.
“It is driven by very well-understood ways of picking stocks, but what we’re doing is automating a large part of the process, allowing a computer to do the heavy lifting essentially, so we can cover a large number of stocks.”
Since its launch on July 1 2009, the fund has delivered an impressive 37.19 per cent compared with the IMA Targeted Absolute Return sector average of 20.86 per cent, according to FE Analytics. It has also outperformed the sector across one- and three-year periods to July 9 2014. This consistent performance has helped the fund appear in the Investment Adviser 100 Club in both 2013 and 2014.
In addition, the manager notes the asset base of the fund has rocketed in the past 18 months from roughly $77m (£45m) at the end of 2012 to approximately $1.4bn. He says: “The reason why is we have managed to show very managed volatility through time, but also low correlation and investors have been interested in that. It doesn’t move in the same way as equities or bonds or other absolute return funds, so you are able to diversify your risk.”
He adds: “It often sounds complicated, but if you strip it all back it is not as complicated as it sounds. It is looking for the same type of stocks everyone is looking for, but we also recognise that when you do that you introduce some stuff you don’t want, so we try and hedge that out.”
Expert view
Martin Bamford, managing director and chartered financial planner, Informed Choice:
“This fund has done a pretty good job at achieving its goals of capital appreciation with closely controlled risk. The team follows well-tested strategies designed to deliver absolute returns that have low correlations with the global equity and bond markets. But one of the elements I dislike about these funds in the targeted absolute return sector is the prevalence of performance fees. In addition to the ongoing charges of 1.76 per cent, this fund charges investors 20 per cent of outperformance over the hurdle rate. This fund is priced in US dollars and is Irish domiciled, with a Ucits fund structure, which might not appeal to UK retail investors.”
Jon Beckett, UK research lead, Association of Professional Fund Investors:
This is a Dublin-based market-neutral fund, one that is absolute return in nature, not relative to benchmark driven. This is a much larger fund than the Hermes offering at over £500m albeit both funds should enjoy good liquidity and neither too large to suffer from a lack of nimbleness when required. The Old Mutual quant team is headed up by Ian Heslop. On this fund he co-manages alongside Amadeo Alentorn and Mike Servent. When you re-position this fund as an absolute return fund rather than a global equity portfolio then it makes much more sense from an investor perspective. The key aspects an investor should expect from an absolute return fund are excess returns over cash in most (if not all) market conditions, low correlation to mainstream assets and lower downside than available through market directional funds; yet still have the ability to capture upside (that elusive asymmetry). Compared to the Hermes fund, the asset allocation of this fund can be much more dynamic to comply with a more challenging objective than simply ‘beat the market’.
