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The Hedgeweek Interview: Nick Mann, founder, Oberon Asset Management: Taking an ethical approach to capacity

Nick Mann discusses Oberon Asset Management's strategies in its area of key competence, the Japanese markets.

Nick Mann graduated from the University of Durham with an Honours degree in English Literature and Language in 1985. Nick spent two years in the Private Client department of L Messel & Co before moving to WI Carr (Overseas) Ltd as a Japanese equity and derivative salesman. He moved to Tokyo in 1991, where in 1992 he joined Swiss Bank Corporation (SBC). From 1993 to 1995 he ran the London sales desk, before moving to Zurich to restructure and run SBC Warburg's Japanese sales in Switzerland. He returned to London in September 1997, leaving SBC Warburg as an Executive Director to set up Oberon Asset Management in June 1998. He has since appeared as an expert witness for the FSA.

HW: What is the background to the fund (Name of fund, Launch date, principals, manager/s, current AUM)?

The Oberon Strategic Fund started trading in October 2003, and currently has USD 10 million AUM. It is run by Oberon Asset Management Ltd., based in the UK, which was founded in 1998 by the same Principals who run it today. Helen Gorton and Nick Mann are based in the UK, and Colin Mills is in Brisbane, where he works as a consultant to Oberon. Colin is responsible for the fund's stock selection. The fund is a long / short fund investing in Japanese companies with market caps below USD 2 billion.

HW: Who are your service providers?

The fund's administrator is Goldman Sachs Dublin, and Goldman are also its Prime Broker. The company's lawyers are Simmons and Simmons, and the fund is audited by Ernst and Young.

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

The fund's limited capacity means that we are targeting specialist Asian fund of funds or smaller institutions and family offices. The fund appears to be relatively non-correlated to its peer group, which should make it attractive to fund of funds in particular.

HW: What is the investment process of your fund?

NM: Our process is very bottom up and some might regard as rather old fashioned. We identify potential trades - by which we mean trades offering at least 30% return - by screening our proprietary database. This quantitative process is followed up by a visit and recommendation, included in a sell side style report. A thorough approach is even more important to us than many funds, as most of the stocks in our universe are either not covered by brokers' research at all, or barely. Where they are covered, we try to ensure we are not taking a consensual view in a stock. Our report will specify a target price based on our forecasts. When the stock approaches it the position is reviewed before being taken out, in the event there has been any fundamental change affecting it. This process of Alpha generation relies not only on the skill of the analyst, but also a concentrated approach to stock picking; the portfolio typically has between 20 and 40 stocks in it at any one time.

HW: How do you generate ideas for your fund?

NM: Ideas are largely generated through our screening of fundamental valuations.

HW: What is your approach to managing risk?

NM: The portfolio's volatility has been remarkably low, given its lack of risk controls. We have no limits as to sector or style risk, and nor do we have stop losses. We feel that all of these features diminish the potential Alpha we are trying to generate. Lack of stops has been a key factor in the portfolio's consistent generation of Alpha on the short side of the portfolio. We do automatically hedge our Yen exposure and reduce individual positions when they hit 10% of the portfolio (beta adjusted).

HW: How/against what do you benchmark the performance of your fund?

NM: $ cash.

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

NM: The fund made 7.4% in 2004, which was below expectations. This was due to the fund's original mandate including Korea and Taiwan at clients' request; it lost around 5% of NAV due to the weakness in Korean tech stocks during the year. We've not only learnt from our experience since then, but also refocused the fund's mandate in November 2004 to concentrate exclusively on the Manager's key competence, Japan. While we have been happy with the fund's performance since, asset gathering has been frustratingly slow.

HW: What opportunities are you looking at right now?

NM: The environment for the fund appears more favourable this year than last as the market's liquidity driven exuberance has dissipated. There are an enormous range of opportunities in smaller caps, which are not followed by either the sell side or most other managers.

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

NM: In terms of the portfolio, see above. In terms of the Asset Management business, we would be surprised not to see most Japanese long / short managers struggle in terms of performance as beta has been harder to come by this year.

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

We hope our numbers this year will attract more AUM.

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

NM: We usually stress three points.  Firstly, our focus on generating Alpha without being concerned with short term market moves and volatility. We have very strong stock picking expertise, and our portfolio construction and long term outlook enable us to leverage that skill set. Secondly, this fund is being run by a group with over 60 years of Japanese equity experience behind them, who have been together for 8 years. We have successfully run very differently mandated and much larger pools of money over this time. Lastly, we like to think we have a very ethical approach to our business; hence, for example, our wish to soft close the strategy at a very modest USD 100 million before potentially increasing capacity.

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

NM: Not currently; we are concentrating on this one fund.

(Nick Mann was interviewed on 5 May 2006; the interview was refreshed on 26 May 2006

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