The Interview: Andy Sowerby, Martin Currie: "We welcome more intense due diligence on managers"

Andy Sowerby, managing director of marketing, product development and distribution at Martin Currie, says the firm and its hedge fund strategies have shone over the past year thanks to its equities focus, genuine alignment between the interests of managers and investors, and a prudent approach to asset capacity.

HW: What is the background to your company and funds?

AS: Martin Currie is a private company, with a majority of the firm's shares owned by directors and staff. From our Edinburgh headquarters, we manage active equity portfolios worth USD14.2bn for clients around the world.

We launched our first absolute return fund, a Japanese long/short equity strategy, in July 2000. Since then, we have added new strategies as our investment skills have matched client demand.

We now have nine long/short strategies with assets of USD1bn, comprising four regional strategies (Japan, Asia, China and Europe), four global sector strategies (resources, energy, financials and TMT) and a market-neutral strategy.

These are all simple equity strategies, investing within a defined scope in areas where we have the skills and resources to succeed. We invest in listed equities and use 'vanilla' derivatives to help manage risk. We use covered short-selling techniques and low leverage.

In March last year we launched Martin Currie Omnium, a diversified long/short fund that invests in our entire range of single-strategy absolute return funds. Omnium is designed to meet the needs of institutional investors, such as corporate pension schemes, that are steadily increasing their exposure to absolute return strategies.

All our funds have independent boards and are listed on the Irish Stock Exchange for an additional layer of oversight.

HW: Who are your service providers?

AS: All our absolute return funds have independent service providers. Our fund administrator is BNY Mellon Fund Services (Ireland), our main prime broker is UBS, and the auditors are Ernst & Young. The lawyers for our funds are Lovells in the UK, Ropes & Gray in the US and Mello Jones & Martin in Bermuda.

HW: Have there been any recent launches?

AS: We launched two new funds last year, Omnium on March 27 and our Global TMT fund on December 1. Both have made excellent starts.

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

AS: We have a global client base. Our funds are available to both US and non-US investors including endowments, foundations, pension schemes, family offices, high net worth individuals, private banks and funds of funds. For all of our strategies, we offer both commingled funds and managed accounts.

HW: What is your approach to managing risk?

AS: Risk management is an integral part of our process. Our independent risk team monitors our managers and portfolios to ensure adherence to clients' objectives and fund parameters. We employ a suite of market-leading systems and analytics, and customise them to fit our objectives. The framework we utilise incorporates 'hard' portfolio limits and 'soft' stress testing, value at risk and liquidity limits.

Every day, we run up to 60 stress tests on every fund. We also back-test our strategies for 'what if' scenarios, such as 'How would the portfolio have performed during the best and worst five-day periods for the market over the past 10 years?'.

Our risk team shares their findings with our managers immediately, both directly and through our interactive risk-analytics tool. This is available on our managers' desktops and accessible even when they're out of the office, via their Blackberries.

Our continued investment in our portfolio risk team and their systems has demonstrably helped our portfolio managers - especially during the extreme market conditions of the past year, when our funds were highly successful in protecting capital.

HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?

AS: We aim to protect capital as much as possible through market downturns and then deliver returns when markets rise. We aim for asymmetrical returns, with many positive months and few negative months.

As a rule of thumb, we want to capture no more than one-third of a market downturn but two-thirds of a market rise. This should deliver better long-term returns for our clients than the broad equity markets, and with much lower absolute and relative risk.

Obviously, 2008 was a horrendous year for the world's stock markets, but it did provide an excellent test of our absolute return credentials. During this period, our funds have managed to control volatility and limit losses - exactly what our clients expect.

The past year produced some of the worst-ever declines in global equity markets, with the MSCI World index down more than 40 per cent. Against this, our market-neutral and Japan funds produced positive returns for the year, while the rest of our funds limited their losses to a fraction of those in their markets.

Over three years, all our funds that have been in existence for this time (Asia, Japan, Europe, China Global Resources and market-neutral) have produced a positive annualised return, while all of their comparative indices have been negative, and all these funds have outperformed their respective peer groups.

We don't expect to change our style. But we do expect strong performance this year. Although markets remain insecure and volatile, they are showing some signs of stabilizing. Crucially, fundamentals and stock selection are being rewarded once more - which suits our approach. Seven of our 10 funds produced positive returns in January.

HW: What opportunities are you looking at right now?

AS: We launch new funds only where our internal skills meet proven demand from clients. We always run model funds internally before taking them to market - our investment team is currently running four model funds.

This year, we are planning structural enhancements to our range. Last December, we signed up to the HFSB best practice standards and aim to conform fully in the next six months.

We believe that the liquidity of our funds must be at least equal to the liquidity of the underlying assets and investment process. We have imposed no redemption restrictions on our range. In fact, from March we're planning to reduce the redemption notice on all our funds (except China) to 30 days.

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

AS: We call ourselves the 'big boutique'. Our business model gives our investors the stability of an independent employee-owned business with the robust operational platform of a large company. Our independence and size gives us greater flexibility than many of our peers. We are all shareholders in the company, so our interests are aligned with those of our clients. All our decisions are made with the entire business in mind.

We are specialists - managing equities is all we do. All our managers take a bottom-up, long-term approach and focus on quality, value, growth and change: the proven drivers of share prices. Our 46 investment professionals benefit from short lines of communication in our Edinburgh office, so we can take and implement decisions quickly.

Many of our employees invest in our funds, demonstrating the conviction in our investment process and our business. All our absolute return fund managers must reinvest 50 per cent of any performance fee they earn into our funds. This investment is locked in for at least three years. Again, our interests are aligned with our clients'.

Finally, we take a prudent approach to asset capacity. It is now clear that a number of investment firms took on too much money when markets were rising and are now suffering severe liquidity problems. For their clients, lock-ups and redemption gates are now commonplace.

We, on the other hand, continually monitor market liquidity for each strategy. When we see any potential impact on our ability to perform or meet our liquidity obligations to investors, we set a final capacity limit and stop accepting new business. As a result, we have never imposed redemption restrictions on any of our absolute return funds.

HW: Do you foresee problems in raising mandates from investors through 2009? If so, what factors will drive investors back to your funds?

AS: We don't expect 2009 to be an easy year, but we're confident that our funds will continue to prove attractive to investors.

Indeed, the ongoing volatility in the markets highlights the value of our strategies. Take our market-neutral fund. As equity markets experienced huge falls in 2008, supposedly market-neutral strategies betrayed their correlation to the market by falling on average more than 6 per cent. In contrast, our fund produced a positive return of 4.4 per cent, and since launch it has produced a double-digit annualised return.

We do think that the due diligence on managers will become more intense, and we welcome this. Additional scrutiny can only endorse the quality of our team, our risk controls and our platform.



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