The Hedgeweek Interview: John Monnelly, Lead Manager, Martin Currie Absolute Return Funds - UK Fund: Running Winners, Cutting Losers
John Monnelly describes Martin Currie's investment processes and the use of the 'Dynamic Stock Matrix'.
John Monnelly joined Pilkington plc in 1978 as a research scientist and progressed to senior technologist by 1988. In 1990 he became a UK portfolio manager and in 1996 was appointed deputy to the CIO, with responsibility for global bonds and US equities. John joined Martin Currie's pan-Europe team in 1999 as the manager of the UK Growth product. In 2001 he joined the team of sector managers to research and recommend technology stocks. He moved to the UK active team in 2003 to work with Jeff Saunders in managing specialist UK portfolios.
HW: What is the background to the fund?
JM: The Martin Currie Absolute Return UK Fund is a market neutral UK equity long/short fund.
The fund re-launched on 1 January 2005 and aims to offer consistent, positive, absolute returns in all market conditions with low correlation to equity markets. The performance objective is to provide returns of 10-15% per annum. This will be achieved with a combination of long/short alpha generation in both up and down markets. We aim to protect markets through a market neutral stance and maximize positive returns through active stock selection. Product capacity is capped at USD 200m.
I am lead manager and Jeff Saunders is co-manager of the fund. We have 38 years' combined investment experience and a proven track record. I have experience in managing global bonds and US equities in addition to a strong background in UK equities. Jeff has 22 years' investment experience in UK active equity management.
The fund is domiciled in Bermuda and listed on the Irish Stock Exchange.
HW: Who are your service providers?
JM: Our fund administrator is AIB/BNY Fund Management (Ireland) Limited and the prime broker is Morgan Stanley & Co International Limited. Ernst & Young are the fund's auditors and the lawyers are Lovells.
HW: How and where do you distribute the fund? What is your current and targeted client base?
JM: Martin Currie's range of hedge funds are available to both US and non-US investors. Our investors include: institutions, family offices, principals, high net worth individuals and funds of funds.
HW: What is the investment process of your fund?
JM: The process employed is built upon the successful long only process used by the team in the core long only model. At the core of this is the use of our proprietary stock screening tool (the Dynamic Stock Matrix), which helps identify potential buy or sell ideas. It allows a focussed approach to stock selection and research effort. It also acts as a discipline, ensuring that the proven elements of this screening tool are adhered to as a principle. This process has produced significant out performance over the last five years at Martin Currie in the long only product, and has translated well (indeed better) than its historic use over the previous 12 years.
Our investment process 'runs winners' and 'cuts losers' on both the long and short side. We identify change as the central dynamic behind stock price movement. We concentrate on the drivers behind changes in stock prices and the sustainability of that change. Our approach allows us to identify, evaluate and exploit change at an early stage.
- Clear focus on quality, value, growth and change.
- Translates into 'running the winners' and 'cutting the losers'.
- We look for positive dynamics - regardless of whether investments are classed as growth or value stocks.
- We are always objective - and are particularly wary of behavioural traps.
HW: How do you generate ideas for your fund?
JM: The Dynamic Stock Matrix is our proprietary stock ranking system. It is used across our investment floors at a global, regional and sector level and is an important component in our investment process.
We use it as a screen to identify changes, both positive and negative, in the key variables that influence the direction of stock prices. The matrix ranks stocks in terms of attractiveness (or unattractiveness for our shorts). These variables can be split into 'static' and 'dynamic' factors.
The Dynamic Stock Matrix identifies positive and negative change and presents an objective view to highlight stocks for us to investigate further.
Secondly our experienced team of sector managers is a differentiating factor in our idea generation. We have a 13 strong team covering the 10 MSCI sectors. The team identify ideas for research and challenge views on the existing portfolio. Jeff and I discuss their ideas and views with our own to help our stock selection decisions.
I am ultimately responsible for all investment ideas used in the fund.
HW: What is your approach to managing risk?
JM: We have a specialist independent portfolio risk management team, led by Dan Gardner.
The portfolio risk manager has a dual role. As controller he ensures all investment risks are identified, reported and pro-actively discussed by all relevant parties within Martin Currie. Also, as a member of the investment team he provides consultancy to the product managers to help meet their performance and risk objectives.
The risk limits on the UK Fund are currently:
- Gross exposure maximum +300%
- Net exposure -20% to +20%
- Long portfolio 20-40 stocks
- Short portfolio 20-40 stocks
- Maximum one-month VaR 7.0% (95% confidence level)
The risk limits are authorised by the risk manager, in discussion with the product manager and Allan MacLeod, head of our hedge fund business.
We monitor and manage the fund's sensitivity to market volatility using Algorithmics, a market leading investment risk management system. Volatility and Value at Risk (VaR) is forecast on a daily basis at both the fund and the individual stock level. The fund managers have access to this information on their desktops.
HW: How/against what do you benchmark the performance of your fund?
JM: The fund is an absolute return fund with a performance target of 10-15% per annum. As this is a market neutral fund we benchmark against cash. We do use the FTSE All-Share to measure the performance of either side of the long/short book.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
JM: Alpha generation has been slightly higher than expected. We increased our gross exposure to 300% to ensure our long-term expectations can be met.
HW: What opportunities are you looking at right now?
JM: Focus on fundamentals leads us to be exposed to global growth in the long book with more of a short position in consumer related areas. But the book is built from a 'bottom-up' basis.
HW: What events do you expect to see in your sector in the year ahead?
JM: Given the recent setback in a protracted strong market run, I would expect the greater scrutiny on alpha versus beta generation. This might encourage more due diligence on hedge funds and possibly a greater interest in truly index independent strategies like market neutral.
HW: How will these changes/future events impact on your own portfolio?
JM: We expect that the fund will perform well in most market conditions given the bottom-up and stock specific nature of our investment process.
HW: What differentiates you from other managers in your sector?
JM: We regard ourselves as non-consensual rather than contrarian managers, believing that our performance cannot be achieved by doing what everyone else is doing. We recognise that most UK investors under-perform because:
- They overweight stories relative to statistics
- They underestimate the extent by which things may change
We have recognised that understanding the basic psychology behind the way people think can gives us a distinct advantage against our competitors. Generally investment managers underperform because they are misled by behavioural, emotional and intellectual bias more than they realise. To overcome these inherent problems we use the Dynamic Stock Matrix that focuses on the quality, value, growth and change factors that are the proven drivers behind share price performance. The matrix highlights potential ideas for us to carry out further fundamental analysis. We then use our judgement and experience to pick stocks which will, we believe, outperform.
HW: Do you have any plans for similar/other product launches in the near future?
JM: We have just launched a second sector specialist fund - the Martin Currie ARF - Global Financials Fund.
(John Monnelly was interviewed on 5 June 2006
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