The Hedgeweek Interview: Mark Tinker, global portfolio manager, Axa Framlington Absolute Return Gemini Worldview: “The economic impact of the woes in western credit markets has been wildly overplayed”

HW: What is the background to your company?

MT: Axa Framlington manages a small suite of three long/short equity funds. Each fund has an absolute return focus and has been designed to maximise potential returns from the proven skill-set of the individual fund manager.

Our oldest fund, Framlington Absolute Return UK Fund, was launched in December 2004 and is a multi-cap UK fund managed on a broadly market neutral basis by George Luckraft. In February 2006, a UK small-cap fund (Axa Framlington Absolute Return UK Smaller Companies) was added to the product range, in which Roger Whiteoak takes a more directional approach. My fund, the Axa Framlington Absolute Return Gemini Worldview fund, is a thematically-driven global fund and our latest offering, launching earlier this year.

HW: Who are your service providers?

MT: The fund’s administrator is PFPC International, the prime brokers are Goldman Sachs and UBS, and the legal adviser is Dechert.

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

MT: We believe that a global unconstrained equity fund is currently of interest to a wide number of investors including fund of fund groups, family offices, private banks and institutional clients. The Gemini Worldview fund is an unregulated collective investment scheme, domiciled in the Cayman Islands and listed on the Irish Stock Exchange. The current assets are the initial seed monies.

HW: What is the investment process of your fund?

MT:The fund is an unconstrained global equity long/short fund, driven by my thematic views. The fund is not bound by geographic or sectoral limits, aiming for optimal stock selection to reflect the chosen themes.

The process starts with a top-down analysis, aiming to identify a number of key themes driven by developing global trends. These thematic ideas drive the stock selection, as the optimal stock mix is selected to fit the theme. The portfolio is constructed with 12 to 15 high-conviction themes implemented in a diversified equity portfolio.

The stock selection is compiled using in-house company analysis and meetings, ideas generated from the wider Axa Framlington fund management team, and valuation/screening tools. The fund is a value buyer of hedging, looking to protect the tail risk in the portfolio.

HW: How do you generate ideas for your funds?

MT: In searching for excess returns, I use a ‘balance sheet approach’ in which the four key balance sheets – household, government, corporate and financial – are analysed. These are assessed globally and in reference to the four major economic blocks, the US, Europe, Japan and Asia, out of which themes are identified. Stocks used as the transmission mechanisms through which the themes are implemented are then selected though a strong bottom-up framework.

HW: What is your approach to managing risk?

MT: At a macro level, I try to access what I consider to be the tail risks of the portfolio and then aim to hedge out some of those potential impacts. Risk management is an important consideration in the funds’ construction and is managed through a combination of top-down and bottom-up approaches.

From the bottom up, using both external and internally-developed risk models, the team will assess the risk of the fund. Correlations between each stock will be analysed, enabling the team to identify concentrations of risk in themes, sectors, markets and individual positions and ensure that these are consistent with our convictions.

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

MT: Performance is ahead of our expectations, and despite the fund launching in a difficult and volatile market environment it has managed to achieve a euro-based return of 16.41 per cent in the six months to the end of October. Throughout much of this period the fund has remained net long (between 50 and 100 per cent), which makes the achievement even more notable.

In the month to date up to November 16, the fund was down by 5.57 per cent, compared with a decline of 7.28 per cent for the MSCI World over the same period.

Our belief is that a repeatable edge can be generated from the structure and process of the strategy and from the competitive edge of the individuals involved. Our aim is to produce a consistent return of between 15 and 25 per cent per annum.

HW: What opportunities are you looking at right now?

MT: Currently I am mainly focused on growth opportunities in emerging markets, particularly Asia. In Europe, the leveraged countries – UK, Ireland and Spain in particular – will continue to struggle with floating-rate mortgages and the sharp tightening of credit conditions, and while the US is in far better shape than the hysteria over sub-prime mortgages is suggesting, I am keenly aware that 70 per cent of global GDP growth is coming from emerging markets.

HW: What events do you expect to see in your sector in the year ahead? How will these developments impact your portfolio?

MT: The end of the credit cycle is extremely bad news for some leveraged financials, but it is not the end of economic growth. The super-cycle for commodities continues, as does the bottleneck in supplying energy and trade infrastructure, and we continue to see opportunities for companies to generate pricing power from exposure to these areas.

In Asia, the building of physical infrastructure remains a long-term area of growth, but so too is the emergence of a financial services infrastructure to build out the household balance sheets. These can be UK, US or European companies, not just Asian domestics. Our financials exposure will therefore concentrate on areas of balance sheet expansion rather than trying to call a recovery in areas where there is contraction.

The business cycle is currently consistent with what we would regard as the second leg of the bull market. After a period of operationally geared growth, capacity utilisation is back up to peak levels and we are now in the capital expenditure phase. This is very good news for business to business providers, but potentially threatening to margins of cyclical companies mislabelled as growth after four years of strong profits.

Cost pressures or sales bottlenecks have already triggered an uneven reporting season, and this is a pattern to look forward to over the coming year. Market position and management ability are of increasing importance, and the portfolio is constantly being adjusted to take account of stocks that may theoretically be in the right area but are failing to deliver.

The ongoing shift in portfolio preference within Asia is also important as investors’ appetite for bonds decreases and their desire to own real assets intensifies. This will be a driver to property markets as well as equities in general, and the arrival of sovereign wealth funds with an appetite for some equity risk is another emerging theme.

For Asia next year the big story for is clearly going to be the Olympics, but the one post-Olympic event we are watching most keenly is a move on the fixed exchange rate. Were the peg to be relaxed or removed, it would probably lead to the speculative blow-off in Asian markets that many have been predicting.

Overall we see the markets focusing on growth and a re-rating of genuine growth companies. The economic background is far stronger than the macro doomsayers are currently predicting, not only because so much global growth is coming from emerging markets, but also the fact that the economic impact of the woes in the western credit markets has been wildly overplayed.

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

MT: A combination of both structural and competitive advantages will differentiate Gemini Worldview from other global long/short equity funds. There are the inbuilt benefits of unconstrained global investing in conjunction with my top-down advisory multi-asset multi-strategy experience. This combined top-down and bottom-up approach in sourcing alpha and the portfolio/risk management ensure the strategy is unique.

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

MT: In line with Axa Framlington’s strategy of launching one new fund per year, we will be looking to capitalise on individual fund management talent and should have a new offering for the market in late 2008, although the exact nature of the strategy or fund has yet to be finalised.