Fri, 10/03/2006 - 07:00
Julian Mayo outlines the strategy and thinking behind the development of Charlemagne Capital's suite of emerging market funds.
Julian Mayo joined Charlemagne Capital in 2003 as a Director of Charlemagne Capital (UK) and a member of the Portfolio Management team. Before joining Charlemagne Capital, Julian was with the Regent group in Hong Kong as Managing Director, responsible for Asian portfolio management, and in London. Prior to this, Julian spent 11 years with Thornton Investment Management (now part of Allianz Global Investors) in Hong Kong, Tokyo, where he opened Thornton's office, and London. Julian began his investment management career in Hong Kong with Schroders Asia in 1983. Julian has a BSc in Economics from Bristol University.
HW: What is the background to the firm and its principals?
JM: We were founded as a specialist emerging markets manager by Jayne Sutcliffe, our CEO, and David Curl, both of whom have extensive experience in the sector. They were joined in 2001 by Stefan Bottcher, who runs the portfolio management department and, in 2002, by Anderson Whammond as COO. Stefan joined us from Schroders and before that Flemings, where he set up their Emerging European team.
HW: What is your current AUM and what are your products/strategies? How much is under management in each fund and when were these funds launched?
JM: We now run about USD 2. 5 (now over USD 5) billion. We manage the OCCO range of four hedge funds (Global Emerging Markets, Asia, Eastern Europe and, most recently, Latin America) and the Magna Umbrella Fund plc, an Irish mutual fund, with six sub funds. In addition, we run a number of segregated accounts and private equity portfolios.
The OCCOs now total USD 320 million: USD 175 million in Eastern Europe (launched in Dec 2001), USD 38 million in Asia (converted to its current strategy in Jan 2002), USD 75 million in Global Emerging Markets (May 2003) and USD 38 million in Latin America (Apr 2005).
HW: How and where do you distribute your hedge funds? What is your current and targeted client base?
JM: We have an in-house sales team. Their relationships are with family offices, pension funds, private banks and other private client managers, foundations, funds of funds, charities and other institutional investors.
Our client base is global but with a clear European focus, logically since our sales team is based in London. This is not expected to change in the near to medium term.
HW: How do you generate ideas for your funds?
JM: Ideas are internally generated from the stocks on our focus stock list. In addition, the experience of our team (eight portfolio managers, each with over ten years' experience) means that ideas are shown to us by market participants.
HW: What is your approach to managing risk?
JM: Risk management is an integral part of the investment process. We use the Barra system and track risk real-time. We manage risk at the 'whole portfolio' level: that is, we do not exclude an individual idea purely if it is risky. Instead, we look at the risk profile of the entire portfolio.
HW: What is the investment process of your hedge funds?
JM: We seek to profit from what we see are inefficiencies in emerging markets, both on the long side and the short, using a disciplined, focused, bottom up investment process. The process is symmetric: we buy undervalued situations, which we think will outperform, and short overvalued stocks (expected underperformers).
We analyse companies in detail, the portfolio managers meeting management in each portfolio company at least four times a year. We assess companies' management: cash flows: profits: sales; and balance sheets.
Finally, we value these findings with reference to both relative and absolute valuation yardsticks and establish price targets. Portfolio construction involves buying and selling the outstanding under- and overvalued situations respectively, taking into account the desired risk profile of the portfolios.
HW: What are the biggest gains/losses in your Asian fund over the last 12 months? What were the reasons for these variations?
JM: The biggest gains/losses in OCCO Asia are as follows, in the last 12 months:
These were as a result of stock selection. August 2005 was a weak market for Asia as a whole. Of greater relevance for this was the fall in a couple of specific situations. We had a short in Lenovo, the Chinese computer company, which we considered had overpaid for IBM's personal computer business. However, the market saw it as a concept stock and bid it up. We also witnessed some profit taking in previously successful holdings.
In December 2005, the Fund rose sharply. Asian markets had a good month. The aforementioned Lenovo fell against this gain, while stocks such as SPIL, a Taiwanese semiconductor company, and Chitaly, the Chinese furniture maker, performed particularly well.
HW: What are you looking at right now?
JM: As we are bottom-up, we do not look at sectors (or, for that matter, countries) per se. However, we have a bias on the long side to financials in our hedge funds. We see, from our meetings with management, that they are prime beneficiaries of recovery in domestic demand in emerging markets.
HW: Do you expect any style shift in your funds going forward?
JM: No. We see no reason to shift our style.
HW: What events do you expect to see in your sector in the year ahead?
JM: Markets remain, in our view, inefficient. This means that opportunities are abundant. Volatility has itself been volatile over the last 12 months and there have been unusual price movements with short term rises in overvalued stocks and declines in cheap stocks. We expect to be able to profit from these inefficiencies in the coming year.
HW: How will these changes/events impact on your own portfolios?
JM: We hope that we can continue to benefit from the existence of these inefficiencies, as we believe that inefficiencies are greater in the short than in the long run. With a couple of key additions to the team we expect to find more such opportunities going forward.
HW: What differentiates you from other managers in your sector?
JM: We have a more focused approach; the business only invests in emerging markets; and, we have a smaller number of positions (and therefore bigger positions, indicating greater conviction and no 'tail' to the portfolio). Also, our managers themselves, rather than a team of analysts, spearhead the company visits and research.
Finally, risk management is an integrated part of the process, and, with a relatively low maximum vol, we have generally a much lower 'net long' exposure than most peers, most of which are very directional.
HW: Do you have any plans for product launches in the near future?
JM: In April 2005 we launched the OCCO Latin America fund. This essentially completes our range of global and regional emerging markets funds. We see a lot of opportunities in the Lat-am region and shorting is relatively easy and inexpensive, either locally or via the NYSE-listed ADRs. At the same time, we have had a number of client enquiries for this product and we are pleased to have raised USD 18 million already.
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