The Interview - David Sheasby, Martin Currie: "Many funds of funds will have to rethink their fee structures"
David Sheasby, a member of the management team for the Martin Currie Omnium Fund, believes the fund of funds, which invests in the firm's range of nine single-strategy absolute return funds, stands to benefit this year as institutional investors returning to the market become increasingly thorough in their due diligence and far more discerning than before.
HW: What is the background to your fund and company?
DS: We launched the Martin Currie Omnium Fund in March 2008, with a management team of myself as portfolio manager for global equities and Paul Hughes as head of risk management and product analytics.
Omnium is a diversified long/short equity fund that invests in our range of single-strategy absolute return funds. We have been running long/short equity funds since 2000, when we launched our Japan long/short strategy. We now have a range of nine absolute return funds, and Omnium invests only in these.
Omnium aims to protect investors' capital when the market is falling and to capture the bulk of performance in a rising market. To match the long-term needs of institutional investors and pension schemes, we aim to achieve a gross return of cash plus 5 to 7 per cent over 10 years. The fund has a simple, transparent structure. Unlike many other funds of funds, there is no double layer of fees. At present, Omnium has USD22m in assets under management.
HW: Who are your main service providers?
DS: Our fund administrator is BNY Mellon Fund Services (Ireland), and the main prime broker for our underlying funds is UBS. Ernst & Young is the auditor. The lawyers for our absolute return funds are Lovells in the UK, Ropes & Gray in the US and Mello Jones & Martin in Bermuda.
HW: Have there been any recent important events such as launches?
DS: On December 1 last year we launched our Global TMT Absolute Return Fund. As with all our strategies, we had run the strategy as a model to test its ability to generate the right blend of risk and return. Our model funds are run as if in a live environment, with strict risk parameters (gross and net exposure), and follow 'live' short-selling rules, transaction costs and borrow availability. Omnium invested in the TMT fund at launch.
HW: What is your investment process?
DS: Omnium invests only in Martin Currie's absolute return funds. At its launch, we assigned each of its constituent funds one of four risk bandings: low, moderate, medium and high. This assessment takes into account each fund's historic realised volatility and drawdowns, along with its maximum permitted and average gross and net market exposures. We also consider each fund's equity market and its manager's investment process and style.
We allocate capital invested in Omnium according to the risk bandings, using the ratio 4:3:2:1 - for every four units invested in each low-risk fund, we invest three units in each moderate-risk fund, two in each medium-risk fund and one in each high-risk fund. At the end of each month, we rebalance the funds to their target allocation.
Our process proved its worth in 2008. Thanks to our risk banding, the largest element in Omnium was our market-neutral strategy, which produced a good positive return over the year.
HW: How has your portfolio of hedge funds performed?
DS: We couldn't have picked a more volatile period for markets in which to launch Omnium - it went live on March 27, 2008 - but the fund has performed very well. Since launch, Omnium has experienced a decline of 7.2 per cent, while the MSCI World has lost 40.4 per cent and our peer group has fallen 21.9 per cent.
Our back-tested data demonstrates our strategy's longer-term success. This data consists of the 'live' performances of our individual absolute return funds, and so is based on hard fact. Between December 31, 2004 and January 31, 2009, the Omnium strategy produced a return of 8.2 per cent per annum, compared with an annualised fall of 5.2 per cent in the MSCI World index and a 4.3 per cent return from cash.
HW: How many funds are in your portfolio? Which strategies do they represent?
DS: Our nine absolute return funds comprise four regional strategies (Asia, China, Europe and Japan), four global sector strategies (resources, energy, financials and TMT) and a market-neutral strategy with a UK focus.
HW: What are your criteria for removing funds from the portfolio?
DS: Asset capacity is the key consideration here. We continually assess the product liquidity and market impact for all of our absolute return strategies. When we perceive any potential impact on our ability to perform or to meet our liquidity obligation to investors, we determine a final capacity limit and stop accepting new business.
If we close one of our funds because of capacity limitations, Omnium will retain a holding until the position drops below 2 per cent, when we will sell it. We will then rebalance Omnium, which will no longer invest in the closed fund.
HW: How many funds do you have waiting to become part of the Omnium portfolio?
DS: Before we launch a new fund, we run the strategy as a model to test our ability to generate the right blend of risk and return, managed in the same way that we run our 'live' funds. At the moment, our investment team is running four long/short model funds.
HW: What events do you anticipate in the alternative investment sector in the year ahead?
DS: After a traumatic year for all asset classes, clients will - quite rightly - be putting managers under much more scrutiny than before. It's now clear that a number of investment firms took on too much money when markets were rising, and as a result are now suffering severe liquidity problems. For their clients, this means lock-ups and redemption gates are now commonplace. We expect this to increase as the year unfolds.
Nevertheless, we expect to see a return to alternative investments in the second half of the year, with increased allocation by institutional investors. But these investors will be extremely thorough in their due diligence and will be far more discerning than before.
With the credentials of many managers in tatters after last year, we also think that many funds of funds will have to rethink their fee structures. Meanwhile, as prime brokers come under funding pressure, the cost of leverage is rising. So those funds that depended on large amounts of gearing are going to face sharply increased costs.
HW: How will these developments impact upon your own portfolios?
DS: We stand to benefit. We welcome additional scrutiny, which can only highlight the simplicity, transparency and quality of our offering. We have demonstrated our ability to protect capital, and our risk-banding has been working well. Through Martin Currie, we are already regulated, have a good operational platform and are highly transparent. On top of this, Omnium has only a single layer of fees, and all of our funds use only modest leverage.
We also offer superior liquidity. We have no lock-ups or redemption gates - in fact, from March we plan to reduce the redemption notice periods on most of our underlying funds to just 30 days. So we believe that we already meet the more stringent standards that investors will expect. Finally, we are in the process of adopting the Hedge Fund Standards Board best-practice standards and expect to conform fully in the next six months.
HW: What is the split of your assets under management between institutional and private clients?
DS: Private investors account for 70 per cent of Omnium's assets under management, with institutional clients accounting for 30 per cent.
HW: What differentiates you from other managers?
DS: Martin Currie's independence, size and employee-owned status gives us greater flexibility than many of our peers. Our 'big boutique' structure proved its value in 2008, when we were able to act decisively to cut our costs while keeping the client proposition sacrosanct.
Our employee ownership also ensures that our interests are aligned with those of our clients. All of our permanent employees are shareholders in the company, and many are invested our funds, demonstrating the conviction in our investment process and our business. As part of our remuneration policy, all of our absolute return fund managers must reinvest 50 per cent of any performance fee they earn into the funds in our range. This investment is locked in for a minimum of three years.
We are specialists. Managing equities is Martin Currie's only business and all the funds we manage are for external clients. We are committed to our bottom-up, long-term approach focusing on quality, value, growth and change, the proven drivers of share prices. Our 46 investment professionals are able to evaluate and monitor stocks on a global basis, and the single location of our investment team in Edinburgh provides short lines of communication, enabling us to make and implement decisions quickly.
HW: What are your views on risk?
DS: In Omnium, our risk-banding process gives us an appropriate balance of risk and prudence. We do run high-risk strategies - our European and China funds - but we balance these with lower-risk ones. With markets likely to remain volatile for some time, our focus is on protecting our investors' capital. And Omnium has done a good job here - since launch, we have substantially outperformed our peer group.
Last year's levels of volatility, government intervention and counterparty risk far exceeded the experience of most investors. As a result, focus on risk management has never been greater. We believe that asset managers should be transparent in their management of risk.
Risk management is a vital part of our process. Our risk team monitors our managers and portfolios to ensure adherence to client objectives and fund parameters. Each day, the risk team runs numerous stress tests on each fund, designed to capture sensitivity to every class of systematic risk, from commodity prices or currencies to interest rates and market sectors. We also include historic periods such as the largest one-week move in the investment universe.
We share the findings immediately with our portfolio managers. Ultimately, though, risk models frame the question, they don't give the answer. There is always a judgement call to be made. For the moment, we are comfortable with our constituent funds' balance of risk and return.
HW: Are investors' expectations moving towards capital preservation? If so, how do you deal with this?
DS: The past year has demonstrated that many funds haven't been able to protect capital adequately. We think that investors will place increasing emphasis on a fund's record and will expect a robust approach to capital protection. Our record is strong, so we see no need to change our approach.
In Omnium, we aim to capture no more than one-third of a downturn but at least two-thirds of a rising market. We target asymmetrical returns, with many more positive months than negative ones. If we achieve these aims, we will deliver superior long-term performance for our clients, with lower absolute and relative risk than the equity markets. So far, we have exceeded our target, with Omnium capturing less than a fifth of the market fall since launch.
HW: How do you distribute your funds?
DS: We have a global client base, and our funds are available to both US and non-US investors. Our clients include endowments, foundations, pension schemes, family offices, high-net-worth individuals, private banks and funds of funds. We offer both commingled funds and managed accounts for all strategies.
HW: Do you foresee problems in raising mandates from investors through 2009?
DS: We don't foresee any problems. Thanks to our performance, liquidity and operational platform, we are in a strong position. As investors increase due diligence, they will look to funds with strong records in capital protection and risk management: funds like Omnium.
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