Thu, 01/06/2006 - 17:53
Ramiz Hasan and Simon Donne outline Invicta Chikara Japan Fund's focus on delivering consistent returns with an equity long/short approach.
Ramiz Hasan, is an Economics graduate from the London School of Economics & Political Science (LSE), a Chartered Accountant (CA) and Chartered Financial Analyst (CFA). He spent four years with Deloitte and Touche, two years with JP Morgan in London, nearly five years as a Japanese equities investment advisor with Orbis Investment Advisory Limited in London and a year with Hermes Pensions Management Limited as co-manager of the Japan long short fund. During his time at Orbis, Ramiz was a member of the research team supporting the award-winning Orbis Global Equity Fund - the fund was ranked second in the Micropal offshore global equity fund rankings in 1995. He was also the investment advisor to the award winning Orbis Japan Fund which was ranked first in the Micropal offshore Japanese equity fund rankings in 1998.
Simon Donne graduated from Magdalene College, Cambridge with a degree in Mathematics. He worked for two years with Guinness Flight Global Asset Management as an assistant on the Far East Desk covering Japan and Australia. In 1995 he joined Threadneedle Investment Management as a fund manager on the Japan desk which runs over USD 1 billion. During his 8 years at Threadneedle, Simon was responsible for managing the offshore, institutional and retail funds including small cap. Under his management the Threadneedle Japan Growth Fund was awarded an A rating by S&P/Micropal. He was also Head of the Global Autos Sector team and in charge of economic forecasting for Japan. Simon joined IIM in January 2004 and is co-Fund Manager of the Invicta Chikara Japan Fund.
HW: What is the background to the fund?
RH&SD: The Invicta Chikara Japan Fund is a Japan Equity Long Short Fund that was launched in January 2001. Somewhat unusually, the principals ran it (as a proper fund with all the documentation and service providers in place from day one) with their own money for a little over three years before opening it to outside investors. They feel strongly about long only managers who launch a long short fund and start marketing before having a full understanding of the product. The two portfolio managers are Ramiz Hasan and Simon Donne, and Sanjai Dhar is responsible for risk management and the non investment side of the business. Ramiz divides his time equally between the Tokyo and London offices of Invicta, and Simon visits Tokyo frequently to see companies. The investment process is aided by two analysts, Nanako Sakaguchi based out of Tokyo and Philip Young based in London. The fund currently has an AUM of USD 87 million.
HW: How and where do you distribute the fund? What is your current and targeted client base?
RH&SD: The fund is marketed mainly to prospects introduced to Invicta by its primebroker Goldman Sachs. Additionally Eurekahedge acts as a third party marketer. The fund is on the Arrowhedge distribution platform in Canada. In addition to the principals who continue to be the second largest investor (as a group), the current client base comprise a mix of fund of funds, family offices and high net worth individuals.
HW: What is the investment process of your fund?
RH&SD: The process is fundamental bottom up stock picking with a technical overlay. It is aided by three proprietary screenings, two of which screen the investment universe on a fundamental basis and the third one spotting technical signals. The process is also focused around a high number of company visits and contacts. In 2005 the number of company visits/ contacts was circa 750. With the upgrade in our Tokyo presence, this number is likely to be closer to 1000 in 2006. The listed universe in Japan is about 4000 companies of which about half that number are in the Chikara investment universe. This is based on a market capitalization and liquidity cut off. Invicta has tagged each one of these companies and developed its own 170 highly specialized and niche sub sectors (the Topix index comprises 33 sectors). Each one of the sub sectors is assigned to one of the four members of the investment team.
HW: How do you generate ideas for your fund?
RH&SD: Ideas are generated from several sources including the three proprietary screenings mentioned above and the large amount of company visits and contacts.
HW: What is your approach to managing risk?
RH&SD: We have a very disciplined and yet common sense approach to risk management. From the very beginning we have set ourselves certain parameters that we like the portfolio to stay within. We employ stop losses, limits for the gross and net exposure, liquidity and market capitalization constraints. We also look at VaR and regularly stress test the portfolio. We decided, at inception, that the risk function should be separate from the investment function and equally, not subordinate to it. To accomplish this Sanjai Dhar is the Risk Manager. He makes sure that Ramiz and Simon remain within the limits we have set ourselves. He has the authority to put on trades and being a founder of the firm he cannot be over-ruled. Having said that, the risk limits were established collectively by Ramiz, Sanjai and Simon and both Ramiz and Simon passionately believe in them and are disciplined in following them, as a result of which, Sanjai has not once had to put on a trade in five years.
HW: How/against what do you benchmark the performance of your fund?
RH&SD: We are an absolute return fund and are focused on returns as we, the principals, are also one of the larger investors in the fund. It is hard to benchmark ourselves on a risk adjusted return basis as we have generated the returns we have with single digit volatility. The various indices out there contain a broad mix of funds with very different risk profiles. They range from funds with our risk return profile to some "long short" funds which strictly speaking are leveraged long funds. We believe that you would be hard pressed to find a Japan long short fund with a 5 year track record, a risk return profile similar to ours, where the principals ironed out the wrinkles of the investment process and running a business on their own dime for three and a quarter years before asking others to invest alongside us, that is open to investors.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
RH&SD: We set out to achieve an annualized return of 10 - 12 % over a 3 year period with a sub 10% volatility and no down years. It is gratifying to have been able to achieve that for 5 years. Every one of our 5 years has been positive in what have been very different and varied market conditions. We are, however, never satisfied and keep on looking to improve the investment process and also improve our corporate governance and employ best business practice. We do not do soft commissions and if we do go down that route, it will be for the benefit of the fund and not the management company. From a corporate governance standpoint, we are investors in the fund, first and foremost.
From the very beginning, the fund has been run as a US$ 300m fund. We were very cognizant of not having to suffer from 'style drift' as we grew our assets under management. The change that we foresee happening going forward is that, with the opening of our Tokyo Office at the beginning of this year, and with Ramiz spending 6 months in a year over there, we are going to up the annual number of company visits from circa 750 to about 1000. We are expecting to increase the depth of our understanding and expertise of our investment universe. To further enhance this process, we are also looking to adding a second full time analyst in Tokyo, in the second half of 2006.
HW: What opportunities are you looking at right now?
RH&SD: After a sustained bear market of 17 years, with the restructuring of the financial sector truly under way, and asset reflation also gaining traction, we are optimistic about Japan in the medium term. Our investment universe comprises 2000 listed companies. Due to the length of the bear market only 300 of these have proper analyst coverage. Therein is the big opportunity for a firm that does its own research. We find the Japanese market very attractive with many areas of interest. Our focus continues to be on the domestic side of the economy.
HW: What events do you expect to see in your sector in the year ahead? How will these changes/future events impact on your own portfolio?
RH&SD: We see the recovery of asset prices and the restructuring of the financial sector continuing. With long term employment trending up (and temporary employment trending down), with consumer confidence improving, the domestic sectors such as real estate and retail will continue their resurgence. On a cautionary note, with Koizumi expected to leave office later this year, and no clear successor in sight, and the impending consumption tax hike, the ride is going to be bumpy. Interest rates also have to go up after being at near zero for sometime. If this is done prematurely by the Bank of Japan, as they did last time, it could also lead to some turbulence. Summarizing, while we remain optimistic about the trend in Japanese economy we are cautious by nature and will always be long short and will not at anytime simply become a long only fund.
HW: What differentiates you from other managers in your sector?
RH&SD: We do not really have an in-depth knowledge of the process of our peers other than a superficial understanding that one can gather on a second hand basis. What we do know is that some funds in our universe have a similar risk return profile to ours and others do not remotely resemble us. Commenting on ourselves, we are very fundamental in our approach and analyze a lot of numbers on a daily basis. There is a lot of fundamental data available in Japan if one is prepared to look for it. We are very big users of this data and gather it from a myriad of sources and spend a lot of our resources crunching and analyzing this data using our proprietary screenings. We also spend a lot of our time and resources contacting and visiting companies and for a small team of 4 investment professionals conduct a high number of company visits.
HW: Do you have any plans for similar/other product launches in the near future?
RH&SD: The only project on the plate in the immediate future is to grow the assets of the Invicta Chikara Japan Fund and bring it to a close. Beyond that we would like to grow the firm by launching other geographically specialized long short equity products by bringing in regional experts on to the team and without diluting the Japan investment team.
Ramiz Hasan & Simon Donne were interviewed on 20 February 2006; the interview was revised on 17 May 2006
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