The Hedgeweek Interview: Finding value in Europe's emerging economies: Michael Sonenshine, CEO, MT Thaler Investment Management
Mike Sonenshine outlines the thinking behind the New Europe Fund managed by MT Thaler, whose principals are based in London and Prague.
HW: What is the background to the firm and its principals?
MS: MT Thaler was founded in 2003 by its three principals, - David Aserkoff (CIO, Equities), John Vax (CIO, Fixed Income) and me. All of us have significant experience in the region, so we have an extensive network of contacts and a good understanding of the region's dynamics.
We developed a team with skills that complement each other and give us a competitive advantage when it comes to executing our strategy. John moved to Prague in 1992, as did I. In 1993 he started and ran the local currency and fixed income capital markets trading operations for ING. In 1997 he started and ran Commerzbank's regional bond desk which was based out of Prague.
I followed the region's equity markets for Driehaus Capital Management and then joined ING in 1994. I wrote ING's first Central and East European equity research. In 1996 I started and ran ING's Investment Management business in the Czech Republic. David Aserkoff joined CSFB's economics team in 1994 and was CFSB's first Emerging European Equity strategist.
HW: What is the name of your fund and what is its strategy?
MS: The MT Thaler New Europe Fund is focused on the emerging economies of Europe (principally the Czech Republic, Hungary, Poland, Turkey and Russia). We are absolute return driven and take long and short positions in equities, sovereign and corporate bonds and local currency instruments. We identify trading opportunities using both a highly research driven macro approach (top-down) as well as a fundamental/technical approach (bottom-up). Essentially, we work to find the best ideas in the region - be they in equities, fixed income or local interest rates - and put them into the portfolio. The result is a portfolio that is uncorrelated with most major indices and has tended to perform well irrespective of market directionality.
HW: How is the fund performing?
MS: Our fund is up approximately 21% in the last 12 months. We are up about 8% year-to-date through March. We were up 13% in 2004. Our returns have little correlation to most major indices.
HW: What are your current assets under management and what structures do you offer?
MS: We have approximately USD 6 million under management, all of which is in the MT Thaler New Europe Master Fund which was launched in December 2003. The Master Fund has an Offshore Feeder that is listed in Ireland and a US Limited Partnership.
HW: How and where do you distribute your fund? What is your current and targeted client base?
MW: We tend to market directly to clients. Inquiry from prospective clients has increased significantly lately and in order to enable the principals to remain focused on generating investment performance, we hired a marketing director, Jill Hodges.
Our current clients include family offices and high net worth individuals, some of whom run multi-billion dollar investment management firms and hedge funds. We are actively marketing to the Fund of Funds community and expect to see some of them invest in the next few months.
HW: How do you generate ideas for your fund?
MS: We do a lot of research, both top-down and bottom-up. It is a lot of hard work. We use our extensive network of contacts in the region to identify and capitalise on events that drive stocks and bonds. We run proprietary models on the companies we follow. We continually scan the markets for relative value trades.
All of our trades have a catalyst (e.g. central bank meeting, earning report, etc.). If the catalyst doesn't occur or the trade does not react as we expect the trade should react to the catalyst, then we close the position. Therefore, losing positions tend to have slightly shorter holding periods.
We've held some positions for more than six months and in once case, more than a year. So long as our outlook for performance and risk generates a return profile that fits the criteria, a position can remain in the portfolio.
HW: What is your approach to managing risk?
MS: We use a value-at-risk model to determine the VAR on each of our positions and on the portfolio as a whole. We seek to keep our portfolio volatility below an annualised 12%. We couple the VAR model with a series of stress tests. Finally, we maintain a stop-loss discipline. If a trade negatively impacts the portfolio by more than 1% it is stopped out.
HW: What is the investment process of your hedge fund?
MS: We start with the research done by our three principals. We look at the global and regional macro-economic and political developments and other factors that drive markets. We couple that research with fundamental, bottom-up company analysis. When one of the principals feels strongly enough about an idea he calls the investment committee (the three principals) together and proposes the trade.
We evaluate the idea, the catalyst, the associated hedges, and potential return over the horizon period, the capital required for the trade and the factors comprising the inherent risks. We identify the hedges needed in order to isolate the ultimate risk we plan to run.
Finally, we run the trade through our risk model in order to understand how it impacts the portfolio as a whole and how the trade should be sized. The committee votes (majority rules). If the vote is yes then the principal executes the idea himself (most of the time) or passes it to another principal to execute.
HW: How is your portfolio allocated?
MS: We have no fixed asset allocation targets; we work to find the best ideas in the region and put them into the portfolio. Because we mix asset classes and run a concentrated portfolio of around 15 ideas, we tend to have the five best equity ideas, the five best interest rate trades and the five best credit ideas in the region. Bear in mind - each idea can consist of several individual positions.
The typical breakdown is 50% equity/50% debt in terms of risk. Within the debt portfolio, the mix is typically 50/50 local currency versus hard currency and 60/40 sovereign versus corporate risk. In equities our overall exposure typically ranges from -30% to +30% of NAV.
HW: How has your fund performed during market downturns?
MS: When markets were down double-digits last April and May, our fund was up about 2%. This past month, when EMBI spreads widened by nearly 60 bps and the MSCI East Europe Index was down nearly 10%, we were up approximately 1%.
HW: Do you expect any style shift in your funds going forward?
MS: No, our style is unlikely to change, but the markets in the region continue to evolve and expand. We see many more corporate bonds, especially from Russia now compared to when we started the fund in 2003. Also, markets in the region such as Turkey, Romania, Bulgaria and Ukraine - even Serbia - are developing, so the opportunity set expands.
HW: What events do you expect to see in your markets?
MS: The two big stories for Emerging Europe this year are first, the ongoing convergence, especially from Turkey, maybe from Ukraine as well. Ukraine, though, is a long way off. Second, high oil prices mean that Russian markets have an opportunity to ignore global trends. Remember the government taxes about 90% of oil revenues above USD 25/bbl. So the Russian economy should perform even if emerging markets have a hard time.
HW: How will these events impact on your own portfolio?
MS: More converging markets means that our range of investment opportunities will increase. Also, Russian markets - both corporate debt and equity -- will continue to expand.
HW: What differentiates you from other managers in your sector?
MS: First, most emerging market funds tend to be long-biased and equity-oriented with high volatility and low sharpe ratios; MT Thaler is long-short with low volatility (9.25% annualised through February) and a high sharpe ratio (1.89 through February).
Second, most emerging market funds look at either debt or equity; MT Thaler looks for the best opportunities in both asset classes.
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