The Hedgeweek Interview: Ross Hollyman, Investment Director, GAM: "We are cautiously optimistic but do expect the volatile conditions to persist"
Ross Hollyman, Investment Director responsible for UK and European equity mandates at GAM, discusses the strategy that underpins the new GAM Star Absolute EuroSystematic fund.
HW: What is the background to your team?
RH: Our UK/Europe team manages over USD 1.3 billion across six funds including, our new fund, GAM Star Absolute EuroSystematic. The team consists of three Investment Managers and one Investment Director.
HW: Have there been any recent events such as launches?
RH: We launched a new fund, GAM Star Absolute EuroSystematic, on 8 September. Using the investment flexibility offered by UCITS III we have been able to create a daily dealing, regulated European long / short fund.
HW: What is the investment process of your fund?
RH: The universe of approximately 3,000 European stocks with market capitalisations typically of over EUR 450 million is screened according to three key factors; value, earnings quality and momentum to create a buy list for the long portfolio and a sell list for the short portfolio.
Few subjective modifications are applied to the results of the process leading to a high degree of consistency in the practical implementation of the investment strategy.
HW: How do you generate ideas for your fund?
RH: We focus on the way that investors actually behave relative to the way that theory says they should behave. We think that investors tend to make observable psychological errors when looking at markets. Investors tend to extrapolate recent trends too far into the future and we all learn in economics that mean reversion is a very powerful economic force.
Typically people find it very difficult to incorporate mean reversion into their forecast of the future and often mean reversion happens more rapidly and aggressively than most people think. This gives rise to exploitable investment opportunities, which we seek to take advantage of in a systematic way.
HW: What is your approach to managing risk?
RH: Risk control is obviously one of the most important things on any hedge fund product and this one is no different, in fact, it is particularly important on this portfolio given the daily liquidity that we are offering to investors. The first thing we have to control very carefully is the liquidity in individual positions, especially on the short side.
Fortunately we have a lot of experience in doing this from managing offshore funds for many years. GAM UK Equity Hedge has been running for five years and has a significant short book so our experience of managing that fund should stand us in good stead. The fund has done well so far whilst employing this strategy.
HW: Do you expect your performance or style to change going forward?
RH: Our investment model has been continually refined over the last 10 years. We screen the universe of approximately 3,000 European stocks with market capitalisations typically of over EUR 450 million according to three key factors; value, earnings quality and momentum.
HW: What opportunities are you looking at right now?
RH: In the shorter term, we expect economic fundamentals to deteriorate and the prospect of recession to grow rapidly. From an investment perspective we expect some interesting shorting opportunities and valuation dispersions to continue to widen further as they have done since summer 2007; which in time will lead investors to refocus on valuation.
HW: What events do you expect to see in your sector in the year ahead?
RH: Although we've already seen a significant derating across European equities many stocks are still not trading at their historic trough multiples. Coupled with the continued discrepancy between macro "top-down" forecasts and equity analyst forecasts (which are still pricing in growth 1-2 years out and are often predicated on historically high and, in our view, unrealistic profit margin assumptions) this leads us to anticipate continued negative earnings momentum which in turn will further drive down equity prices.
This is producing some attractive shorting opportunities. In addition, the increased dispersion in valuations is encouraging for us and we are still focused on stocks with attractive momentum characteristics.
HW: How will these changes/future events impact on your own portfolio?
RH: Risk control is of great importance at the moment as the technical pressures within the markets are producing perverse price actions. Although this is a temporary and ultimately, in the long run, fundamentals do prevail, it places great importance of the robustness of risk control. In terms of performance we are cautiously optimistic but do expect the volatile conditions to persist.
HW: Do you have any plans for similar/other product launches in the near future?
RH: We launched GAM Star Absolute EuroSystematic on 8 September, which brings the number of funds that the team manages to six, so at present we are focusing on managing the funds we have already.
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