The Hedgeweek Interview: Tony Zucker, Head of European Equities, Thames River Capital: Aiming to accurately assess price movement

Tony Zucker discusses the investment strategies that drive the performance of the Thames River Kingsway Fund.

Tony Zucker joined Thames River Capital in January 1999 as head of European Equities. From 1993, he was Head of Continental European Management at Friends Ivory & Sime. Previously Tony was Overseas Director at Aetna and prior to that he was Overseas Investment Manager at Sun Life of Canada. He is an economics graduate from the University of Essex and also holds CIMA and Dip Crim qualification.

HW: What is the background to the fund?

TZ: The name of the fund is Thames River Kingsway Fund and its launch date was 8 March 1999. As of June 1 2006, the AUM is EUR 94.3 million.

The core members of the team, namely myself and John Ferrario, have been managing European equity funds together since late 1993. Prior to joining Thames River Capital, we successfully managed over USD 3.5bn of assets on behalf of Friends Ivory & Sime. 

I am responsible for strategy and lead the team. John Ferrario is co-lead fund manager and together with Jeff Thomson and Chris Wright shares stock picking responsibilities (mid cap specialist). Marco Bianchi is Head of Quantitative Research, responsible for mathematical & statistical modelling. Jonathan Parsons and Phil Heady are responsible for performance attribution and risk analysis. Jonathan Callow is in charge of trade execution.

John joined Thames River Capital in January 1999 as a fund manager.  He was at Friends Ivory & Sime from 1992 where he specialised in researching the Southern European, Scandinavian, Swiss and Benelux markets. Prior to that he was at Smith New Court as an Italian Equity Analyst. He has a BSc from University College London and is a member of the Institute of Chartered Accountants, qualifying as a Chartered Accountant with Ernst and Young.

Jeff Thomson joined Thames River Capital in August 2003 as a fund manager. He was Fund Manager of Coronation Peak Hedge Fund, (Dublin & London) from July 2000 where he was jointly responsible for fundamental research, stock selection, fund construction and risk control. Prior to that he spent four years at Deutsche Bank Securities (Johannesburg) as an equity analyst. He has a BA (Hons) Economics from University of Witwatersrand (Johannesburg) and qualified as a Chartered Accountant (South Africa) with Ernst and Young. He is also a CFA charter-holder.

Chris Wright joined Thames River Capital in October 2004 as a fund manager.  He has more than twenty years experience in the investment industry, most recently four years at Collins Stewart, where he was involved in analysis and sales of Pan-European stock ideas specialising in the mid-cap area. Prior to that he was at ABN-Amro for two years and BZW Securities for six years.  He also held positions as UK Equity Fund Manager at British Airways Pension Fund where he managed GBP 2.5bn of UK equity assets, and Investment Analyst at National Provident Institution.  Chris has a BSc (Hons) from the University of Manchester Institute of Science and Technology.

Marco Bianchi joined Thames River Capital in August 2004 as Head of European Quantitative Research.  He has eleven years investment experience. Previously he spent four years at Newman & Ragazzi, where he was Head of R&D, Quantitative Risk Management and Trading.  Prior to that he was Vice President, Global Asset Management, Derivatives at Salomon Smith Barney Citi (Citicorp prior to Feb 99).  He also held positions as Director of Risk Management, Fixed Income, at Barclays Capital (BZW prior to Nov 97) and Senior Analyst at Bank of England. Marco has a PhD in Econometrics from the London School of Economics and Catholic University of Louvain (Belgium).  He has over 20 years experience in applied mathematics / statistical modelling, the first part (first 8-9 years) with an academic focus leading to publications in major international academic journals including the American Economic Review, the European Economic Review, the Journal of Business and Statistics and the Journal of Applied Econometrics; the last part (last 11-12 years) concentrating on Finance, with particular focus on risk management and proprietary trading.

HW: Who are your service providers?

TZ: Our Fund Administrator is Northern Trust International Fund Administration Services (Ireland) Limited. Our Prime Broker is Goldman Sachs and Auditors are PricewaterhouseCoopers. Our Lawyers in the UK are Dechert and in Cayman are Appleby Spurling Hunter

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

TZ: Kingsway Fund is distributed to professional investors such as private banks, family offices, and institutional investors in the UK and a number of European jurisdictions.

HW: What is the investment process of your fund?

TZ: The fund is a long/short European equity fund aiming to maximise absolute returns, which do not depend to any substantial degree on favourable or unfavourable economic conditions. The Fund invests in predominately large blue chip European companies. The investment brief also includes opportunities to invest long and short in smaller and mid sized companies but these will normally be limited to less than 15 percent of the Fund's Net Asset Value.

HW: How do you generate ideas for your fund?

TZ: Ideas are generated in three ways: Systematic screens, Research by four analysts and thirdly, through meetings with companies.

HW: What is your approach to managing risk?

TZ: Risk Controls:

There are a number of risk parameters for selling stocks short. Constant monitoring of risks in involved in shorting:

  • Squeeze / Recall: Focus on the top 300 companies in Europe substantially reduces the risks of a stock squeeze. Borrowing is limited to half of average daily trading volume.
  • Takeover risk: Risk of takeover outcome evaluated.    
  • Monitoring: Short positions reconciled daily internally and with prime broker overnight.
  • Stop Loss: No short positions greater than 2% at inception and closed if loss is 20%
  • Discipline: Positions greater than 0.5% average 20 days' trading volume are closed

Risk is minimised by ensuring low stock specific risk. Within the style sector, no sector is ever totally naked long or short and no style sector should ever be weighted more than three times. Two dedicated team members are responsible for monitoring this risk.

The investment team is responsible for a relatively small number of clients so the ratio of fund manager to client is very high. The fund management team monitors portfolio contents on a real time basis but additional oversight and supervision is provided by Thames River Compliance, who sample transactions and review portfolios for compliance with investment restrictions on a regular basis. Additionally, Compliance performs a daily exposure check. The Fund Administrator/custodian provides an additional level of oversight and control.

Risk Measures:

  • Parametric Model in Bloomberg is used. Stock contribution to Fund VaR observed, but VaR is not an integral part of the asset management process. It gives a useful 'broad-brush' picture of the expected exposure of the fund to various probabilities over a 10 day period. In practice, the inter-stock correlations used in these models are themselves prone to large changes and hence the practical worth of VaR is limited.
  • Utilise Salomon VaR data feed.
  • Scenario Analysis: Software with this functionality (stockfacts Pro 111) is currently being tested. As with VaR, scenario analysis depends on historic relationships between variables, which may sometimes be spurious.
  • Correlation Analysis: reports weekly on our proprietary sector correlation coefficients.
  • Position limits: less than or equal to 4% of NAV for long positions. Less than or equal to 2% of NAV for short positions.
  • Hedging: All currencies other than the base currency of the fund are fully hedged into the base currency.

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

TZ: FTSE Eurotop 300 Index is used.

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

TZ: Broadly as expected

HW: What opportunities are you looking at right now?

TZ: Both oversold  stocks with good earnings potential as  longs   and vulnerable  highly  rated  stocks on the short side

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

TZ: European markets have experienced their largest set back for three years with most commentators struggling to explain why exactly it occurred. Several theories have been advanced but what seems to have happened is that investors were fully invested in a range of growth assets and attempted to reduce risk and market exposure all at the same time. Investor sentiment appears to have turned negative due to concerns about inflation and growth factors. All major central banks are likely to increase interest rates further in the short term and this expected draining of liquidity from the system has led to a flight to safety away from equities and commodities and into cash and bond markets. However, the outlook for European equities still appears attractive. Consensus GDP estimates continue to edge up and interest rates are being increased against an improving background and in real terms remain at historically very low levels. Following the recent market set back Pan European equities are trading on a 2006 PER of 12 having a free cash flow yield of over 6%. Valuations remain cheap relative to history, debt and US equities. Earnings growth remains sound with an 8% forecast for 2006. Markets should benefit from a number of proactive factors. There continues to be substantial corporate activity via takeovers, share buybacks and private equity effectively underpinning valuations.

Short term market sentiment has taken a battering and recent volatility is expected to persist for a while longer. Given the emphasis on large cap stocks and the avoidance of companies which are in speculative parts of the market and which have low liquidity, the fund should navigate stormy waters relatively safely.

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

TZ: We have taken avoiding action by aggressively reducing both the gross and the net exposure in order to ensure that any drawdown is minimized.In addition, we are looking to rebuild exposures once markets start to stabilize.

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

TZ: Our edge is that we are able to utilise our judgement and experience to more accurately assess on a timely basis the impact of an event on the future movement of a stock price. We are also able to identify key macro changes in our marketplace through analysis of the key indicators and position the portfolio accordingly.

The team has four highly experienced fund manager analysts whose core skill is stock picking based on fundamental analysis. In terms of balance sheet management, the fundamentally driven portfolio is complimented by and protected from short term stockmarket moves by a sophisticated proprietary quantitative system and a dynamic hedge overlay.

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

TZ: Tybourne Fund (long/short mid-cap European equities) will be launched on 30 June.

Tony Zucker was interviewed on 13 June 2006.

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