James Morton outlines the investment thinking that drives the performance of Key Asset Management’s new special situations fund.
James Morton outlines the investment thinking that drives the performance of Key Asset Management’s new special situations fund.
HW: What is the background to your funds?
JM: All of Key’s multi-manager funds are run collectively by the investment team, headed by CIO Chris Jones.
The single manager funds are overseen run independently: Key Global Emerging is run by Gartmore and Key Value by Flagg St Capital. Morten Kielland is responsible for Key’s single manager products.
The new Key Special Situations fund, launched in November 2006, is being run by me together with George Garafas from CIM Investments.
HW: Who are your service providers?
JM: With a few exceptions, our fund administrator is Citco Fund Services (Dublin) Ltd and they will also be administering the Special Situations fund. The prime broker will be Bear Sterns International Ltd, the law firm will be Harney, Westwood and Riegels and accountants KPMG.
HW: How and where do you distribute the funds? What is the profile of your current and targeted client base?
JM: Key’s current client base is 76% institutional and 24% high net worth/family offices. This fund will be targeted more towards high net worth clients as the profile suits investors interested in exceptional return potential but with potentially higher volatility. Key has extensive presence across Europe and the fund will be distributed from our London, Oslo, Stockholm and Geneva offices.
HW: What is the investment process of your fund?
JM: The Key Special Situations (KSS) fund is a single manager fund and will look for superior returns by seeking valuation anomalies. The manager will look for companies which are unfamiliar, uncomfortable, complicated/difficult to understand, volatile and/or which have poor corporate governance.
HW: How do you generate ideas for your fund?
JM: For KSS, opportunities for achieving exceptional returns in global equity markets currently arise in 3 main areas:
- Natural resources
- Technology
- Distressed securities
To find investible stocks, the manager seeks out companies where change is dramatic, extensive and rapid. They may be operating in conditions where demand is rising far faster than supply and this is creating an imbalance or where a step change in asset value is on the cards.
HW: What is your approach to managing risk?
JM: My risk approach is as follows:
- Rigorous bottom up research
- Careful portfolio construction
- Sector diversification with a global mandate
- Disciplined buying and selling
- Daily reconciliation and real-time monitoring
- Monthly independent valuation and annual audit.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward
JM: KSS will be closely modeled on the CIM Special Situations Fund, which was started in October 2004. Since inception, the CIM Special Situations Fund has returned an annualised performance of 48.1%. Performance can be seen below:
HW: What events do you expect to see in the year ahead?
JM: The point of finding special situations is that there are no sector issues and if we were able to see what will happen in the future, the investment is no longer a special situation. Potential events affecting the fund could include climate change and political unrest amongst almost everything else that could possibly happen. The effects of these events on the portfolio are also impossible to judge.
HW: What differentiates you from other managers in your sector?
JM: Many special situations funds are closet natural resources funds with more than 80% in the sector and therefore are susceptible to sector risk. KSS is likely to have around half in natural resources but the manager feels that there are many other exciting markets which offer diverse opportunities and that are regularly ignored because of lack of information or difficult circumstances. We are passionate about uncomfortable and complex investment opportunities and this shows through in exceptional returns.
HW: Do you have any plans for similar/other product launches in the near future?
JM: Not at the moment.
