Hedgeweek Interview: Philip Hardy, Polar Capital: "The outlook for equity markets is likely to be one of hope ultimately ending in despair"
Philip Hardy, manager of the Polar Capital UK Absolute Return Fund, says that after a savage bear market in UK equities in 2008 the outlook remains uncertain, and he expects continued heightened volatility in 2009 to present the fund with opportunities on both the long and short side.
HW: What is the background to your company and funds?
PH: Polar Capital was established in January 2001 as a research-driven investment management company. A substantial majority of the business is owned by management and staff and the company, Polar Capital Holdings, was listed on London's Alternative Investment Market in February 2007. Today Polar Capital manages a total of USD2.5bn across a number of traditional long-only and hedge fund strategies.
From a fund manager's perspective, the firm provides a highly entrepreneurial environment in which to work, within a structure that offers a level of marketing, administrative and operational support normally found in much larger organisations. I am a fund manager, one of 28 investment professionals at the firm, and head of the UK team, which I founded in 2001.
HW: Who are your service providers?
PH: The service providers for the Polar Capital UK Absolute Return Fund are Northern Trust International Fund Administration Services (Ireland) as administrator, registrar, transfer agent and secretary, Northern Trust Fiduciary Services (Ireland) as custodian, and KPMG Chartered Accountants as independent auditors.
HW: Have there been any recent launches?
PH: Launched in June last year, the Polar Capital UK Absolute Return Fund is a Dublin-domiciled Ucits III fund. A near-clone of Polar Capital's existing long/short UK equity fund launched in November 2001, it offers investors access to the strategy via a regulated structure with daily liquidity.
HW: How and where do you distribute the fund? What is the profile of your current and targeted client base?
PH: The fund is distributed primarily in the UK and to a lesser degree continental Europe (as a Ucits fund it is currently registered for sale in the UK, Germany, the Netherlands and Austria). Our current and targeted client base includes private banks, multi-manager funds of funds, private wealth managers and family offices.
HW: What is the investment process of your fund?
PH: The investment style has been consistent since launch of our hedge fund in November 2001, but the process has been progressively refined over the period, reflecting our experiences of managing a long/short portfolio through a full stock market cycle. This process of refinement is a continuous one.
Our style is to blend a portfolio of core long-term fundamental positions with an overlay of shorter-term trading positions. The core portfolio reflects our long-term outlook and consequently these positions may be held for several years. The trading positions are more opportunistic in nature and seek to take advantage of short-term pricing anomalies; they may be held for periods as short as several weeks.
The investment style is pragmatic and flexible, and the emphasis between core and trading portfolios changes in response to changes in the economic and market cycle. We constantly strive to think differently about investing and employ a contrarian bias to stock selection.
HW: How do you generate ideas for your fund?
PH: We identify investment opportunities through a combination of qualitative and quantitative analysis. Our primary sources of information are company annual reports and meetings with management, both with the company under analysis and also its competitors where possible.
We focus our initial analysis on the industry in which the company operates, as it is our belief that factors such as sector growth, barriers to entry and competitive environment are key drivers of financial variables.
Additional avenues of investigation may include aspects such as change in management, turnaround potential, hidden value and intrinsic worth. Once an investment conclusion has been reached, we utilise technical analysis to time entry and exit points.
HW: What is your approach to managing risk?
PH: We adopt what we believe to be an overall risk averse approach to investment. We measure risk in the fund in terms of the volatility of absolute returns, not relative to an index. Capital preservation is always our primary consideration when making investment decisions, and we consistently analyse opportunities on a risk-reward basis at both the stock-specific and portfolio aggregate levels.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
PH: Our primary aim is to provide absolute returns regardless of the movement of stock market indices, and between November 2001 and the end of November last year the sterling class of our hedge fund produced an annualised return of 8.6 per cent, compared with a annualised total return decline of 2.35 per cent for the FTSE All-Share Index.
The fund should perform in all market conditions, but higher volatility markets such as those experienced in 2002 and 2008 are most favoured. Least favoured are low-volatility, range-bound markets such as those experienced in 2004.
HW: What opportunities are you looking at right now?
PH: After a savage bear market in UK equities in 2008 the outlook remains uncertain. We believe that 2009 will be characterised by continued heightened volatility, which should present us with opportunities on both the long and short side.
On the long side we are currently looking at a number of fantastic opportunities to invest in companies that are trading significantly below intrinsic value as a result of the huge prevailing uncertainty.
HW: What events do you expect to see in your sector in the year ahead?
PH: The outlook for equity markets during the course of 2009 is likely to be one of hope ultimately ending in despair. The recent rally in equity markets may well continue for a few months and could surprise in terms of its magnitude.
We were particularly encouraged by the resilience of the major equity markets during December, against a barrage of very poor economic news and the Madoff scandal. A lot of bad news had clearly been priced in, at least for now.
As a result, investors are likely to feel the pressure to allocate more money to risky assets over the coming weeks and months, especially if markets continue to rally and given the virtually zero return on cash. Sector rotation away from defensive sectors could also be a feature.
The fiscal and monetary stimuli that have already been announced, as well as those to come, should feed through into improved economic data over the course of 2009. Indeed, market participants could get quite excited by the scale of the possible improvements, only to be ultimately disappointed as consumers continue to grapple with issues such as falling house prices, rising unemployment, a lack of available credit, the need to rebuild savings and the consequent reduced demand for durable goods.
HW: How will these developments affect your own portfolio?
PH: We will remain flexible with regard to the fund's net and gross exposure and anticipate that they are likely to come down over the coming months. We will also use the anticipated strength in certain areas of the market to add or rebuild short positions.
HW: What differentiates you from other managers in your sector?
PH: We have been running our strategy for more than seven years now and we have not had a down year since the original fund launch in 2001. The Ucits-compliant UK Absolute Return Fund offers investors access to the same strategy in a regulated fund with daily dealing.
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