The Hedgeweek Interview: Ben Helm and Alex McKnight, Augustus Asset Managers Limited: "We expect a good deal of new issuance in the convertible bond market"
Ben Helm and Alex McKnight, managers of the JB Convertible Bond Fund at Augustus Asset Managers, say the convertible bond market is now the most accessible market for capital-raising by corporates, which will lead to strong supply at relatively good valuations for investors.
HW: What is the background to your company and fund?
BH/AM: Augustus Asset Managers Limited (Augustus) is an independent asset manager with a focus on fixed income and currency asset management and is skilled in both relative and absolute return management. Augustus had total assets under management of around USD11.54bn at the end of January 2008 in long-only, hedge fund and absolute return products across the risk spectrum.
Augustus has been managing fixed income portfolios for 25 years, pre-dating the establishment of the Citigroup World Government Bond Index. Over this period the company has developed the necessary resources to research and monitor developments within these markets, which has enabled it to achieve its stated aim of consistently outperforming its benchmarks - generating alpha - with relatively low volatility.
Augustus was previously known as Julius Baer Investments, which was the subject of a management buyout on January 11, 2007. Up to 90 per cent of the company is held effectively by the staff of the company. The company remains sub-advisor on certain Julius Baer-branded and distributed funds.
The JB Convertible Bond Hedge Fund was launched in July 2005 and is sub-advised by Augustus. Assets in the strategy through offshore and onshore funds and managed accounts totalled USD229m as of January 31, 2008.
HW: Who are your key service providers?
BH/AM: For the JB Convertible Bond Hedge Fund the key service providers are PricewaterhouseCoopers as auditor, Simmons & Simmons and Maples and Calder as legal counsel and Kirkpatrick & Lockhart Preston Gates Ellis as legal counsel for the Cayman fund only. The fund administrator is International Fund Services (Ireland).
HW: Have there been any recent events such as additions to the management team?
BH/AM: Alex joined the team as fund manager in September 2007.
HW: What is your investment process?
BH/AM: Major global macroeconomic themes are discussed by the entire portfolio management team, with specific ideas researched by individual managers using fundamental analysis. Factors such as market risk appetite and liquidity are taken into account to arrive at a strategic or tactical allocation within each fund as appropriate.
Once the trade has been executed the relevant sector specialist then monitors the position throughout its life. Ideas can be entered into the Riskmetrics system and also Thinkfolio, our trade processing system, to see their effect on the portfolio before they are actually executed.
The fund seeks low correlation to equity and bond markets using a multistrategy approach to trading convertibles comprising convertible arbitrage, directional trades, distressed convertible bonds, low premium carry trades and corporate action trades. Interest rate, credit and equity risks may be variously hedged out. The fund trades convertible bonds of all credit ratings and invests globally, with the main focus outside the US.
HW: How has your fund performed?
BH/AM: The JB Convertible Bond Hedge Fund has a target of Libor plus 10 per cent per annum. Since launch it has achieved an annualised return, net of fees, of 10.99 per cent with a Sharpe Ratio of 1.13. The fund is currently running around 4 per cent ahead of its Bloomberg peer group based on 12 months returns to the end of January 2008
HW: How many positions are in your portfolio?
BH/AM: There should be a minimum of 20 trades across at least four of the five strategies. In practice the fund normally has around 30 trades active involving at least 70 positions. There is no maximum limit to the number of trades or positions. As of February 26, there were 172 positions in the fund.
The fund has little bias, with approximately equal long and short exposure. The maximum exposure is four times fund equity long and four times short. Average exposure is three times long and three times short on the arbitrage trades. Short positions are held in the convertible bond's underlying equity to hedge the delta exposure generated by the long convertible bond position.
HW: What is the appeal of your strategy to investors?
BH/AM: We offer a solid return profile. Over the last two and a half years the fund has produced consistent returns.
The fund is not a credit fund masquerading as a convertible bond fund, as the credit and interest rate exposure is largely hedged out. The fund is constructed as a portfolio of diverse themes, geographically diverse and utilising a number of different investment buckets: volatility, directional, low premium carry, corporate event and potentially distressed.
The fund structure offers 90-day liquidity for a lower than average fee of 1.75 per cent. For those investors who require it, we offer better than average liquidity terms, at one month, with the market average fee of 2 per cent. There is also a redemption fee with this option if exercised within the first 12 months. Investors may access portfolio holdings with a delay of 10 business days provided that they sign a confidentiality agreement.
Finally, the current environment is excellent for convertibles, with volatility and an expected flood of issuance creating attractive conditions.
HW: What events do you anticipate in your sector in the year ahead?
BH/AM: We expect to see a good deal of new issuance in the convertible bond market. It is the most accessible market for capital-raising by corporates now and for the foreseeable future, which will lead to a good supply at relatively good valuations for the investor. As far as the strategy is concerned, there will be greater concentration on volatility trading than in recent times, purely as a function of the current dynamics of the equity and credit markets.
HW: How will these developments impact your portfolio?
BH/AM: We have had quite low leverage recently in anticipation of the new issuance hitting the market, so we are standing and waiting for new issue opportunities, and some opportunities in existing paper, in what is a cheap asset class. Over the past few months we have skewed the portfolio more toward volatility trades (now about 70 per cent from a low of around 30 per cent) to take advantage of the current market environment.
HW: What differentiates you from other managers in your sector?
BH/AM: We have stuck to our knitting. We believe that we can add value through our skill in managing the risks and extracting the value from convertible bonds - we have hedged our credit risk on both an individual name and overlay basis. We also don't take oversize equity risks, having set limits within the fund. We deliver consistent returns, uncorrelated to the equity market, with relatively low volatility.
HW: What is your attitude toward risk in general?
BH/AM: While fortune can often favour the brave in the markets, in the current situation it is not really the case. There are opportunities out there, but the liquidity to get in and out of positions is not really available now for size. This changes the symmetry of any trade you do at the moment - and not, unfortunately, in your favour. One of the main factors holding valuations back right now is the expected supply - there is going to be a lot of great-value paper available very soon - so why leverage up on existing issues?
HW: Are investors' expectations moving upward?
BH/AM: If by expectations moving upward, you mean positive returns with low volatility, then the answer is yes. Investors are drawing a line between a historic positive return, and the volatility of those returns encountered to achieve that. We believe our fund deals with this by targeting double-digit returns but on a low volatility basis.
HW: How do you distribute your products?
BH/AM: Augustus does most of the marketing of its single-manager hedge fund products and works separately with three third-party marketers for certain customers and geographic markets.
HW: Are you planning any further launches this year?
BH/AM: Not at present. Our last single manager hedge fund launch was on July 2, 2007 when we launched the JB Currency Hedge Fund, which invests in discretionary foreign exchange.
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