The Hedgeweek Interview: John Innes, Manager, MPC Pilgrim Fund: Portfolio construction discipline helps achieve targets with relatively low risk

John Innes outlines the investment processes that are driving the consistent performance of the MPC Pilgrim Fund.

HW: What is the background to the fund?

JI: MPC Pilgrim Fund was launched on 27 October 2000. The fund is managed by myself (John Innes) with assistance from Andrew Ballard, Chris Kinder and Inigo Edsberg. Current AUM is USD 1,141m.

HW: Who are your service providers?

JI: Ernst & Young (accountant), Dechert (law firm), HSBC (fund administratrion), Deutsche Bank and Morgan-Stanley (prime brokers).

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

JI: The fund is marketed by MPC on a global basis. The fund is currently targeting more institutional investors.

HW: What is the investment process of your fund?

JI: We try to find those stocks which are out of fashion for some reason or another yet are experiencing positive business momentum. The process has been applied consistently since the fund's inception.

HW: How do you generate ideas for your fund?

JI: We have a clear philosophy and process, which drives idea generation. We use a mixture of quantitative screens, industry and company contacts, market contacts and macroeconomic drivers.

HW: What is your approach to managing risk?

JI: Risk is evaluated on a daily basis, both by the managers and by the Portfolio Analytics team. We believe maintaining an independent assessment of risk is an important aspect of the fund. Equally ensuring that the risks in the fund are deployed in an optimal manner is a key element to achieving consistent returns.

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

JI: The MPC Pilgrim Fund is an absolute return fund, so the real benchmark is the money market rates in mainstream currencies. We also use the FTSE All Share Index as a reference.

HW: Has your performance been as per budget and expectations?

JI: We have always maintained that we would achieve 10-15%. As of year-end 2005, we have compounded at an annual rate of 12.5%. Our focus on portfolio construction discipline has ensured this has been achieved with relatively low risk.

HW: Do you expect your performance or style to change going forward?

JI: No

HW: What opportunities are you looking at right now?

JI: Having been very negative on small- and mid-caps for some time, we are finding opportunities in distressed liquidations in some of these names. We also believe the negative operational gearing of many cyclical companies is poorly understood by the market. We are generally long of economically resilient companies.

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

JI: An increased level of volatility with opportunities on both the long and short side. The general slowing of economies and the gradual withdrawal of liquidity is likely to provide an environment conducive to fundamental stock picking.

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

JI: We have positioned the portfolio to withstand these changes.

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

JI: We passionately believe in our investment philosophy and process and have found it to be effective and consistent. Maintaining a clear understanding of what we are seeking from each prospective investment is a key element in repeatedly achieving our investment objectives.

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

JI: Having recently launched the Pilgrim Select Fund (a smaller, more concentrated version of the Pilgrim Fund), it is unlikely we will be launching new products soon.

(John Innes was interviewed in August 2006

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