The Hedgeweek Interview: Delivering targeted returns within stringent risk limits: Frederic Desage-Bonnet, F&C Citrine Fund

Frederic Desage-Bonnet outlines the thinking behind the F&C Citrine Fund, which was launched in May 2004.


F&C Citrine Fund is managed by Desage-Bonnet, assisted by Robert Cunningham-Reid.  The F&C Alternative Investment business manages EUR 1.4 billion with EUR 48 million invested in the F&C Citrine Fund.


HW: How and where do you distribute the fund? What is your current and targeted client base?


FDB: The fund is distributed to institutional clients of F&C Asset Management and to external institutional clients such as pension funds, insurance companies and funds of hedge funds. The geographical focus is Europe.


HW: What is the investment process of your fund?


FDB: The investment process is based on active fundamental/bottom-up stock picking using our own valuation and forecast models. The investment universe is the European equity market with a focus mainly on companies with market capitalisation greater than € 1 billion.
 
HW: How do you generate ideas for your fund?


FDB: Investment ideas are derived from three main sources namely stock screening, research and special/technical situations. This enables the use of multiple signals to identify potential investment targets. The purpose is to search for change in equity value. The stock selection is based upon fundamental analysis and the calculation of an intrinsic value using drivers such as cash-flow return on investments, the company's internal ability to grow, market leadership over time and consistent value creation. We also investigate potential catalysts for the company in order to evaluate the probability to move towards the intrinsic value within a reasonable timeframe.


HW: What is your approach to managing risk?


FDB: At F&C Alternative Investments the risk is managed by the Fund Managers but is monitored and controlled by an Independent Risk Team of three. 


HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?


FDB: F&C Citrine Fund has a target net return of 10 to 12% per annum. The return for the year to end August 2005 is 11.47%, very much in line with expectations. We do expect returns to remain on target and to have no change in style. 


HW: What opportunities are you looking at right now?


FDB: Derived from Stock Screening and Research - On the long side we are currently looking at Renault, the French auto manufacturer which owns a large stake in Nissan. As a result of several meetings with senior company management and fundamental analysis of company and sector trends, we are convinced that the market is under-estimating the earnings potential for Renault, and that the shares are substantially under-valued. Current trading for Renault is not supportive, however, we believe this will improve with the launch of new models (such as the Clio), and the arrival of Carlos Ghosn as CEO will be the catalyst to re-rate the shares to fair value.


Derived from Special/Technical Situation and Research - On the short side we are investigating Rentokil, the UK Hygiene, Security and Facilities Management company. Before we took profits in June 2005, this short sale trade had been successful for F&C Citirine, and was founded on our belief that margins in Rentokil's core divisions were too high and the market was under-estimating the extent to which they should fall, driven down by competitive pressure. Nevertheless, the shares have rallied in the last fortnight on the back an offer by Gerry Robinson to take control of the company. Contrary to the market, we do not think the details of this offer are attractive for shareholders, and given the much higher current valuation for Rentokil after the rally, the further deterioration in operations as demonstrated in the second quarter results, we are looking at whether we should again short sale the stock.


HW: What events do you expect to see in your sector in the year ahead?


FDB: The performance of the European markets over the summer has been good, weathering both the surge in the oil price and the impact of Hurricane Katrina. However, the outlook for equity markets is somewhat mixed.  The main uncertainty for markets post Katrina is whether there is likely to be any serious dent in the economic prospects for the US economy and specifically the US consumer. USD3 per gallon of gasoline is clearly going to be a shock and it is difficult to say what the outcome will be. The good news is that the Fed could hold interest rates rather than tighten them. In Europe, further corporate deals have recently been taking place namely Old Mutual bidding for Skandia, Gas Natural for Endesa, Julius Baer for GAM, and Deutsche Post for Exel. Furthermore, at a corporate level, cash flow generation is still strong, valuations are undemanding, and M&A activity is accelerating. 


HW: How will these changes/future events impact on your own portfolios?


FDB: We will continue to stick to our strategy of investing in companies with underlying strong fundamentals.


HW: What differentiates you from other managers in your sector?


FDB: The F&C Citrine fund has delivered over the last year its target return but has done so on within particularly stringent risk limits. Indeed, the volatility of monthly returns to date has been low, and the high Sharpe ratio (3.7 in the last twelve months) has been a real differentiating factor compared with other managers.


HW: Do you have any plans for similar product launches in the near future?


FDB: F&C Alternative Investments is a single manager platform so we are always looking at new opportunities to attract talented fund managers to join the platform and lunch new hedge funds.


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