Fri, 17/03/2006 - 06:59
Michael Sonenshine outlines the thinking behind the New Europe Fund managed by MT Thaler, whose principals are based in London and Prague.
Michael Sonenshine worked at Credit Suisse First Boston from 2000 to 2003, where he was Vice-President of European High Yield Research. Prior to joining CSFB he spent six years in the ING Group. From 1994-96, he covered Russian and Central European equities as a senior analyst and following that as General Manager of ING Investment Management, Czech Republic. From 1998-2000, Michael worked as a senior analyst specializing in European High Yield bonds. Michael's career in Emerging Europe began in 1992, when he served as an advisor to Evrobanka under the auspices of the MBA Enterprise Corps. On completing his assignment at Evrobanka, Michael followed Central and East European equity markets for Chicago-based Driehaus Capital Management. Michael earned his CFA designation in 1999. He holds an MBA from the William E. Simon Graduate School of Business Administration at the University of Rochester and a B.A. in History from Tufts University.
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 strategy behind your fund?
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 approach. 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 19.5% in the last 12 months. We are up about 2.1% year-to-date through January. We were up 20.5% in 2005 and 12.5% 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 50 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. The Fund has USD and EURO share classes.
HW: Your assets under management have grown significantly in the last few years. What's driven this growth?
MS: We've had healthy inflows. Our clients include family offices, funds of funds and our seed investor. We have a diverse base of about 50 investors in the fund.
HW: How do you generate ideas for your fund?
MS: We do a lot of research, both top-down and bottom-up. We look for events that we believe will occur over the next one to three months and which will drive securities prices. Each investment idea in our portfolio is associated with specific catalysts and resulting target return. We run proprietary earnings models on equities and bonds, we continually refine our views on the region's political and economic environment and we monitor the impact of global market conditions on the region.
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: What do you feel is your competitive edge?
MS: Our principals have been working in this region for more than a decade. We therefore understand the region's dynamics and we have an extensive network of contacts throughout the region. We believe this gives us better access to information and higher quality insight into events and their impact on securities prices.
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 in April/May 2004, our fund was up about 2%. In April of 2005, when EMBI spreads widened by nearly 60 bps and the MSCI East Europe Index was down nearly 10%, we were up approximately 1%. This past October, when markets fell in double digit terms, our portfolio was down by only about 0.7% and that loss came mainly from specific events in the region rather than overall market movement.
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: For 2006, I think one big story is going to be in Turkey as it gets closer and closer to the EU along with strong FDI flows and privatisation. The other big story is that the Russian consumer just keeps on going - high oil prices and easy fiscal policy should mean another strong year for Russian markets. I also think the market will continue to expand in terms of number and size of issues.
HW: How will these events impact on your own portfolio?
MS: Our range of investment opportunities will increase.
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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