The Hedgeweek Interview: Ron Senator, Principal, Sphera Fund Management: Focusing on Israeli and Israeli-related equities

Ron Senator outlines the investment thinking behind the new Puma Sphera fund, a joint venture between Shore Capital of London and Sphera Fund Management of Tel Aviv.

HW: What is the background to your fund?

RS: We have been managing the strategy that is being replicated in the Puma Sphera fund (our joint venture with Shore Capital of London) since 2001. It is a classical fundamentally-driven long-short strategy with great emphasis on close contact with company managements and stock picking skills. Its main focus is on Israeli and Israeli- related equities listed both locally and on the Nasdaq and other international exchanges.

Israel, incidentally, has the largest foreign presence on the Nasdaq. Less well known is that although the image of Israel's 'cutting edge' tech' sector is accurate, the listed corporate sector there is fairly diversified.

Sphera is majority owned by its staff, but Shrem, Fulner, Kelner & Co.- one of the leading Tel Aviv investment firms- owns 42.5% and this helps to give us an institutional quality infrastructure. We currently employ 7 highly experienced investment professionals, including myself and the other two portfolio managers, Israel Mor and Doron Breen. Current AUM are nearly USD 150m.

HW: Who are your service providers?

RS: For our existing vehicle, which is aimed at Israeli investors, we use the local operations of leading international firms or the leading Israeli service providers. For the Puma Sphera fund, which is making Sphera's strategy available to international investors for the first time, we will be using the same sort of leading international service providers that would be used by a hedge fund managed from centres like New York or London.

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

RS: The investor profile for the existing vehicle that is aimed at Israeli investors is a carefully diversified range of local institutional,  corporate and private investors.  The Puma Sphera  joint venture with Shore Capital is supported by substantial seed capital and thiswill be supplemented by external investors who will be drawn from the traditional international investor base for hedge funds.

HW: What is the investment process of your funds?

RS: Our investment process is rigorous and lengthy. Stock selection typically includes numerous meetings with companies' managements. This occurs in tandem with highly detailed research into the dynamics of the companies' sectors, due diligence about their competitive positioning, customers, suppliers, financial strength and so forth.

HW: How do you generate ideas for your fund?

RS: Over the years, we have developed a very extensive network of industry sources, consultation with which we combine with systematic and in-depth research of pre-defined sectors and a continual search from both qualitative and quantitative data for new opportunities . 

HW: What is your approach to managing risk?

RS: This is paramount, since we aim to preserve capital as well as generating strong returns.

  1. We take a conservative approach to market exposure and leverage. The typical net exposure of portfolio is 50-60%  and the typical gross is 110%-120%.
  2. We manage risk by implementing a disciplined trading approach, using stop-losses and defined price targets for individual positions
  3. We seek to reduce market risk by using correlated derivatives, shorting market indices, sector ETFs, or specific industry stocks with similar drivers
  4. Currency risk is neutralized by hedging all non-dollar denominated investments in our portfolio
  5. There is a strong emphasis on the liquidity and float of companies within the portfolio- weighted average trading days of portfolio is less than 5 days (based on 3 month average trading volume of each stock in the portfolio)   

HW: Has your performance been as per budget and expectations? (If new launch, detail results of back-testing). Do you expect your performance or style to change going forward?

RS: Yes, but there is no 'back testing' involved, since the new Puma Sphera fund will simply replicate our current strategy. Our success in generating net annualized returns of over 21% since 2001 with low double digit volatility compares very favourably with the performance of the markets (the strategy has had volatility of under 12% compared to over  20% for the Tel Aviv 100 index and over 25% for the Nasdaq Composite, while returns on the TA 100 have been below 10% annualized and annualized returns on the Nasdaq have been negative). This, alongside our repeated ability to preserve capital in periods of market weakness, has contributed to our amassing nearly USD150m of investor assets, hitherto all sourced from within Israel.

HW: What opportunities are you looking at right now?

RS: We are more focused on less-cyclical quality companies with less vulnerability to a potential moderating local economy and increasing exposure to high growth markets (India, China). We attempt to identify undervalued companies with limited downside and improving fundamentals. We currently see several interesting health care companies and 'beaten-down' industrial and tech names that fit this profile.
 
HW: What events do you expect to see in your sector in the year ahead?

RS:
We expect relative stability in the Israeli stock market. Valuations are reasonable with a fair amount of upside for select quality companies that are driven by export markets.

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

RS: Our portfolio is currently more defensive with lower exposure to the local economy and higher emphasis on several value-oriented companies along with high growth sectors and markets - defense, energy, tech and health care.

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

RS: Our local presence certainly gives us an 'edge'. We are the largest hedge fund manager in the Israeli market by a substantial margin and this helps us to enjoy close access to company managements and industry sources. We also have a proven track record and successful experience of both strong and weak markets.

Ron Senator was interviewed on 7 September 2006

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