The Hedgeweek Interview: Disciplined process generates consistent returns: Ben Walker, Co-Manager of the Gartmore Global Equity Hedge Fund
The Gartmore Global Equity Hedge Fund was launched on 1 March 2005 and is managed by Neil Rogan & Ben Walker. Current AUM (as at 31st July 2005) is USD 37million.
HW: How and where do you distribute the fund? What is your current and targeted client base?
BW: The hedge fund business sells directly, primarily to family offices, fund of funds, private banks and institutional advisors. More recently we have increased our direct sales to institutions such as pension funds.
HW: What is the investment process of your fund?
BW: Our investment approach is focused on taking long and short positions, primarily in listed global large and mid cap equities, where a catalyst has been identified which we believe is likely to lead to a future change in the value of a company or where we believe that there is some other factor likely to lead to a change in the price of the company's shares.
Such opportunities may be:
(i) either strategic in nature, where through our fundamental research we believe that the earnings growth prospects of a company are materially better or worse than the market consensus view, or
(ii) (ii) tactical in nature, based on either fundamental or technical catalysts.
AlphaGen Aldebaran is a bottom-up, stock-picking Fund with a large and mid-cap focus. Our core philosophy is to identify stocks that deliver unexpected earnings. Essentially, we aim to take long positions in stocks where we see earnings growth surprising on the upside. Similarly, our short positions are aimed at companies with excessive valuations whose earnings are likely to disappoint the market.
We identify these stocks by assessing industry dynamics, the strength of a company's franchise and, most importantly, the potential for earnings surprise. In particular we focus on how a company's franchise is changing; is it improving or declining.
Furthermore, as global fund managers we are able to cross-check our best ideas with similar companies in different regions. We set price targets for every stock and determine position size using sophisticated risk management tools.
HW: How do you generate ideas for your fund?
BW: Investment ideas are generated through detecting changes and trends in companies, industries and markets. By identifying these at an early stage, we can pinpoint those companies whose prospects are likely to improve or worsen as a result.
Our success results from our ability to utilise this information and translate it into intelligent, risk evaluated investment ideas. Investment ideas originate from:
- the specialist global equity team
- regional research analysts
- regional fund management teams including long/short managers
- our dealers
- quantitative screening
- external sources including Alpha Networks
- Gartmore's Strategic Research team for economics, asset allocation and
HW: What is your approach to managing risk?
BW: The management of risk is the responsibility of the fund managers ? in a hedge fund, management of risks has to be integral to the process.
Risk is managed in the context of paramaters such as; net market exposure, gross exposure and position limits.
The monitoring of risk is the responsibility of a separate London-based team, headed by John Mattimore. This team has a separate reporting line and is able to bring any issues directly to the attention of senior management.
A risk report is circulated on a daily basis.
HW: How/against what do you benchmark the performance of your fund?
BW: The Fund targets an absolute return, but the MSCI World Index is used as a market proxy.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
BW: When we launched the fund on March 1st the initial target was an annual return of 10%+ with low volatility. So far we have exceeded this expectation: the fund has an annualised return of over 12% with a volatility of around 4.6%, resulting in a Sharpe Ratio well in excess of 2.
However, the global team's strong performance record dates back further than this. Alphagen Aldebaran is one of two long-short global equity products run by the team, the second fund has been run as a managed account for an external third party and has returned 25.3% (net of management fees) since 1st January 2004 and over 10% year to date. Total assets across the two long-short equity accounts are now in excess of $120 million.
HW: What opportunities are you looking at right now?
BW: We increased the fund's long exposure in Japan ahead of the general elections. Prime Minister Koizumi won a landslide victory which gives him a mandate to push through much needed economic reforms. The latest GDP data revealed that the Japanese economy is now growing above 3%, the fastest rate in many years. The fund has long positions in Orix, Mitsui Fudosan and Matsui Securities, all of which should benefit from the strong
trends in that country.
Elsewhere, in emerging markets, we have been buying Kookmin Bank, the largest Korean bank. Korea is experiencing a rapid economic recovery driven by increased consumer spending and higher demand from China and other thriving Asian partners.
As loan losses decline and investment increases Kookmin Bank should be able to grow its ROE. The stock also looks very cheap when compared to its global peers.
HW: What events do you expect to see in your sector in the year ahead?
BW: Currently the macroeconomic picture is somewhat mixed. There are concerns that high oil prices will weigh on global growth, particularly through the negative effect of rising petrol prices on consumer spending. However given this constraint, combined with the supply shock resulting from Hurricane Katrina, it is possible that the Federal Reserve may suspend its policy of monetary tightening in the US in the short-term. This would be positive for equity markets.
In the UK, following a rate cut in August, the Bank of England may also continue to cut rates further in the near-term, whereas in Continental Europe the interest rate outlook is more stable.
From the macroeconomic perspective, investor optimism over Europe's future growth prospects continues to increase. The spotlight is on Germany this month in light of the forthcoming general election - the latest polls indicate that Angela Merkel's reformist Christian Democratic Union Party is likely to triumph.
However it is ultimately corporate profits, rather than politics, which will drive the stockmarket and we are cautiously confident about the economic growth prospects for Europe, Asia and Japan.
As for equity markets, we continue to believe that the outlook for the remainder of 2005 remains generally positive. M&A activity remains buoyant, particularly in Europe, where companies with low levels of debt or with excess cash on their balance sheets are keen to make acquisitions.
In the last month we have seen Deutsche Post's offer for UK logistics company Exel, Gas Natural's hostile bid for Endesa, the Spanish power company, and E.ON's potential offer for UK electricity supplier Scottish Power. We expect that this corporate activity, combined with equity inflows and reasonable valuations, should help to underpin global markets.
HW: How will these changes/future events impact on your own portfolios?
BW: AlphaGen Aldebaran is a bottom-up, stock picking Fund with a large and mid-cap focus. Our core philosophy is to identify stocks that deliver unexpected earnings. Essentially, we aim to take long positions in stocks where we see earnings growth surprising on the upside. Similarly, our short positions are aimed at companies with excessive valuations whose earnings are likely to disappoint the market.
We identify these stocks by assessing industry dynamics, the strength of a company's franchise and, most importantly, the potential for earnings surprise. Furthermore, as global fund managers we are able to cross-check our best ideas with similar companies in different regions.
We will continue to use this investment process to identify profitable investment opportunities using the multiple macro and micro inputs available to us.
HW: What differentiates you from other managers in your sector?
BW: We are a small team with genuinely global expertise. We are extremely flexible and this means that we can make quick decisions. We have a combined 70 years of investment experience covering all geographies.
We also have strong support from Gartmore's tried and tested hedge fund infrastructure. We have a large team of specialist research analysts as well as an independent risk management team that produces a daily analysis of the fund's exposures.
But essentially it is our disciplined investment process that differentiates us from other managers and this has generated strong and consistent returns in excess of our peer group.
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