The Interview - Julie Bouhuys, Concerto Asset Management: "Volatility in the loan and bonds market will remain high"
Julie Bouhuys, founder and chief executive of Concerto Asset Management, says that although the Concerto Credit Opportunity Offshore Fund I benefited from a market rally to achieve a combined net return of 9.5 per cent April and May, the fact that the fund significantly outperformed the loan and high-yield markets reflects the team's credit-picking skills.
HW: What is the background to your company and fund?
JB: : Concerto Asset Management is a newly-formed credit asset management firm whose first multistrategy credit fund, launched in October 2008, currently has USD56.7m in assets under management.
Prior to founding Concerto, I was in the lending business for 24 years, most recently at Wachovia Securities. As head of the fixed income credit products business from 2004 to 2006, I had overall responsibility for Wachovia's global loan portfolio as well as leveraged and investment grade loan syndication, high-yield and high-grade bonds, proprietary credit trading, credit portfolio management and the special situations group.
Concerto's team has a suite of credit skills spanning two credit cycles across par and distressed, both in a market value and book value context. The firm's investment strategy is to capitalise on the best opportunities present in the credit market at any given time and throughout the credit and economic cycle.
Currently the Concerto Credit Opportunity Offshore Fund I seeks to capture historically high risk-adjusted returns from the continuing credit market dislocation and the growing market for distressed debt with below-market volatility.
The fund's target markets include the non-investment grade segments of the leveraged loan market, high yield bonds, single name credit defaults swap, and the CDX and LCDX indices, using both long and short investment positions with a net long bias.
Our strategy is to identify and achieve attractive absolute risk-adjusted returns in targeted segments, and attractive relative value investment and trading opportunities across sectors, asset classes, issuers and within individual issuer capital structures. Our management style is to engage in both medium-term investing and short-term trading.
HW: Who are your key service providers?
JB: Our administrator is Pinnacle Fund Administration, the fund custodian is Citibank and the collateral administrator is Virtus Partners. Deloitte & Touche- is the fund's auditor and Robinson, Bradshaw & Hinson is the manager counsel.
HW: How and where do you distribute the funds?
JB: Our fund was initially seeded by a large European incubator based in Paris and subsequently we received private subscriptions. Our funds are distributed globally through a co-ordinated marketing effort involving our in-house marketing team and our incubator's distribution platform.
HW: What is your investment process?
JB: Concerto manages invested capital using both qualitative and quantitative analysis, within both bottom-up and top-down investment processes, and a disciplined risk management framework.
The firm believes in active portfolio management applied in a relative value context and is explicitly not a buy-and-hold investor. We adhere to a disciplined process of portfolio construction based on opportunity assessment, target portfolio mix across credit asset classes, rating, liquidity and sector, followed by single name credit selection based on bottom-up credit analysis and ongoing active portfolio management applied at the single name and portfolio levels.
Investments positions must meet approved issuer, position, industry, rating and other criteria established by the investment committee. Each approval is in turn subject to documentation requirements such as preparation of an investment recommendation, financial projections/model, detailed credit analysis and credit rating.
Positions must have a well-defined investment thesis with target returns consistent with the fund's overall strategy. Positions must be consistent with the model portfolio, and liquidity must be sufficient to permit effective execution of the strategy.
HW: How do you generate ideas for your funds?
JB: All our ideas are generated internally by our analysts and portfolio manager. Concerto first establishes both a fundamental thesis - how the issuer is expected to perform over the investment horizon - and an investment thesis - how a particular investment is expected to perform over the investment horizon - at the outset of every investment.
The objective is then to observe documented entry and exit points and to effectively 're-underwrite' every investment daily based on a constantly updated assessment of opportunities and risks. We incorporate key value drivers such as macro market outlook, fundamental value, relative value and technical market factors. While the investment thesis will incorporate a view of each of these drivers, they are each dynamic and must be reassessed on a regular basis.
HW: What is your approach to managing risk?
JB: Our risk management process aims to address our five primary goals - to reduce unexpected losses by imposing strict notional, industry and sector limits, reduce expected losses by imposing strict loss triggers and credit policies and procedures, generate high risk-adjusted returns by stress-testing our returns, generate a high component of alpha by analysing marginal risk and understanding and testing our P&L attribution, and operate within set risk parameters.
This process is enhanced by regular oversight by the investment committee and the chief investment officer. It is also aligned with our bottom-up credit process and top-down investment process to allow for seamless integration of daily activities.
HW: How has your recent performance compared with your expectations and track record? Do you expect your performance or style to change going forward?
JB: Our performance in April and May, when the fund achieved a combined net return of 9.5 per cent, reflects our full deployment of the fund during April, before which we were essentially in cash, reflecting our bearish view of the credit markets in the last quarter of 2008 and the first quarter of this year.
Although we benefited from a market rally, our fund significantly outperformed the loan and high-yield markets, showcasing our team's credit-picking skills. We were particularly pleased that our return came from a variety of positions in different strategies - 25 per cent of our positions by market value generated returns greater than 13 per cent - and our top two positions each returned more than 50 per cent.
We expect our performance to continue to stem equally from different underlying strategies. As the credit markets normalise, we anticipate that our performance will be around 15 per cent on an unlevered basis.
HW: What opportunities are you looking at right now?
JB: We are looking at the loan/bond market recovery play as a result of the market dislocation, the upcoming and unparalleled distressed opportunity, and the asset class and capital structure relative value resulting from lack of differentiation across asset classes.
HW: What events do you expect to see in your sector in the year ahead?
JB: We anticipate defaults will continue to rise, and although the credit markets are showing early signs of stabilisation, we believe volatility in the loan and bonds market will remain high.
HW: How will these developments affect your own portfolio?
JB: Our allocation to distressed assets will grow over time, asopportunities become more plentiful and we identify good operationalturnaround or balance sheet restructuring situations that are
undervalued, as well as industry or sector turnaround plays that may
become evident later in the cycle.
For investors with the
appropriate credit-picking skills who operate in a relative value
context, more volatile markets and a wide coverage of industries and
asset classes should result in attractive opportunities.
HW: What differentiates you from other managers in your sector?
JB: Our team depth and experience investing through the cycle. Concerto's team has experience investing through credit cycles and includes various professionals each with more than 20 years of experience in managing par and distressed.
Our multi-class expertise. A large proportion of our team includes individuals with experience in managing market value portfolios across loans, LCDS, bonds and credit default swaps from the long-only, long/short and short-only side. We believe this brings a unique context to our investment process and an understanding of adjacent markets.
Our distressed expertise. I and other Concerto staff have deep experience in workout and distressed investing. I previously managed the special situations workout group at First Union (now Wells Fargo), where I directly managed or oversaw hundreds of workouts and restructurings between 1997 and 2002, and also founded and managed a distressed investing unit.
Our industry coverage model and fundamental credit focus in a relative value context. We believe strongly that this model and the fact that each of our analysts has at least five years' experience covering each of their sectors gives us access to a much broader investible universe. Combining that with detailed credit analysis and a relative value focus, we are better positioned to uncover investment opportunities, avoid or minimise defaults, and proactively utilise relative value in our credit selection.
Concerto is building a sophisticated technology platform that we believe gives us an edge in the identification of investment opportunities, management of risk, and active portfolio management.
HW: What demand do you expect to see from investors this year?
JB: We believe that the second half of 2009 should see investors returning to credit-related strategies, and that emerging managers with no legacy issues and solid early performance will benefit as a result.
HW: Do you have any plans for other product launches in the near future?
JB: We have seen some specific demand for a distressed-only product that we may consider in the future.
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