London-based Dalton Strategic Partnership has had a good year for the latest newcits in its stable of eleven other funds under the firm’s Melchior Selected Trust Lux-domicile
London-based Dalton Strategic Partnership has had a good year for the latest newcits in its stable of eleven other funds under the firm’s Melchior Selected Trust Lux-domiciled SICAV. Entitled the Melchior Selected Trust: European Absolute Return Fund, the fund closely replicates Dalton’s successful Cayman Island-based Melchior European Fund, employing a largely market neutral, equity l/s strategy to generate alpha. At the helm as portfolio manager is Leonard Charlton, formerly of GLG, who is supported by his own team and the rest of the fund management group. As of December 14th the fund, which invests in a universe of 1,500 all-cap companies across Europe and uses leverage conservatively, was up +9.62 per cent; impressive given the tough economic headwinds that have been blowing across Europe this year. “We think simplistically about investing, we believe in compounding,” Charlton told Hedgeweek in a phone interview. “We don’t see any logic in being exposed to businesses whose fundamentals we don’t understand.” Indeed, there’s a clear blueprint behind the fund’s obvious success this year: Charlton’s precise use of short positions to generate alpha in the fund in all markets, as well as identifying long stocks to benefit from market upturns.
According to Charlton, the fund (both offshore and onshore variants) avoids, and by default shorts, businesses that are highly leveraged. “Our average holding period for our short book tends to be longer than our long book,” said Charlton, whose logical focus to playing the short effectively has generated +1.17 per cent per month in the short book since the UCITS fund was launched in February. Charlton says there’s an anomaly with respect to short selling: “The risk-adjusted opportunities are actually very high. You can only generate consistent monthly returns if you successfully short sell.” The fund’s other key differentiator is the flexible approach it takes to market allocations. Using fundamental analysis in tandem with active trading, the fund invests primarily in European large and mid-cap companies, looking for opportunities across all sectors. This year it’s been overweight on reliable growth stocks and Emerging Market consumption with Charlton adding “businesses with hard asset-backing across the globe are also attractive to us”.
But despite the fund’s flexibility, Charlton looks selectively: “Investing in the same sectors as everyone else is not part of our armoury,” he said. “We only look for liquid stocks that we believe are alpha generators.” And it seems to be working, given that the fund’s assets have grown to EUR125million. “What’s exciting is the quality of investors that have invested in the fund this year,” said Charlton, who hopes to see the fund’s assets double in 2011. As to future opportunities, Charlton believes 2011 will see equities outperforming bonds although there will be a risk of rising Emerging Market inflation. “I think it’s important to understand macro, to successfully pick longs and shorts, and to actively manage risk,” added Charlton. “If you can do all three you’ll make money in 2011.”
