Lan Cai, PineBridge Investments – “The environment is conducive for both strategic acquisitions and leveraged buyouts”
Lan Cai (pictured), head portfolio manager at PineBridge Investments, the former AIG fund management business that is now majority-owned by the Pacific Century Group, says the firm’s nearly 10-year-old merger arbitrage strategy, which is now being offered through a Ucits fund, has a track record of positive returns every year and exhibits low correlation with the firm’s peers.
GFM: What is the history and background of your company and funds?
LC: PineBridge Investments is an independent asset manager with broad investment capabilities across equities, fixed income and alternative strategies. As of June 30 this year, PineBridge managed USD77.9bn in assets, offering a truly global footprint and extensive regional expertise.
I joined PineBridge in 2000 and serve as head portfolio manager, responsible for managing merger arbitrage portfolios, insured index-plus funds, research-enhanced products and equity income portfolios. I am a key member of the firm’s product management committee and global asset allocation committee.
GFM: What is the structure of your fund?
LC: We launched our merger arbitrage Ucits fund in December 2010. Previously we had been managing this strategy in onshore separate accounts.
GFM: What are the advantages of offering hedge fund strategies within a Ucits framework?
LC: Increasingly investors are looking for total return strategies in an investment vehicle that is transparent, somewhat regulated and offers good liquidity. The Ucits regime provides these investor-friendly features.
GFM: Please describe your investment process.
LC: We follow a pure merger arbitrage investment process. As a result, we only invest in publicly announced merger and acquisition transactions. Our focus is on deals with a high probability of closing.
In determining the probability of deal closing, we conduct thorough fundamental and regulatory analysis, and draw statistical inference from our proprietary M&A database. We stay disciplined by investing only in deals that are highly likely to close and with returns that are enough to compensate for the potential downside risks.
GFM: How do you generate ideas for your funds?
LC: Publicly-announced M&A transactions with sufficient liquidity naturally come into our investible universe. We monitor all outstanding M&A deals and focus on the ones that will close.
GFM: What is your approach to managing risk?
LC: We manage risks at both position level and portfolio level and we conduct scenario analysis for each investment we undertake. Our compliance department has also hard-coded the rules in the pre-trade approval process to ensure no deviation from investment guidelines and no concentration risks.
GFM: How has your fund performed?
LC: Our Ucits fund has outperformed since its launch in December 2010. Since the inception of our merger arbitrage strategy in 2002, we have delivered positive returns every year. The last three-year annualised return was 7.5 per cent on an unlevered basis. It is also important to note that our merger arbitrage strategy was up 6.3 per cent in 2008 and up 46 basis points in August this year, at a time when the market experienced extreme volatility and stress.
GFM: What developments do you expect to see in your sector in the coming year?
LC: We think merger and acquisition activity will continue and may grow further still. Corporations need to conduct business across all economic cycles and as part of the business process they need to seek out merger and acquisition opportunities to grow revenue, cut costs or improve their business mix and capital structure. With many companies enjoying high cash levels and strong balance sheets in addition to benefiting from historically low interest rates, the environment is conducive for both strategic acquisitions and leveraged buyouts.
GFM: What do investors currently expect from managers?
LC: Investors, particularly institutional investors, are very keen to understand how managers deliver alpha in various market conditions. They also expect managers to follow their investment process closely and in a transparent manner.
GFM: What differentiates you from other managers in your sector?
LC: We have had the same investment team at PineBridge managing our merger arbitrage strategy since 2002. Over more than nine years, we have been able to deliver consistent performance through the varying M&A cycles and market conditions. This is largely down to our low-risk approach and our focus on deals that are likely to close.
In addition, we don’t view leverage as an alpha source – rather we want our alpha to come from each deal we invest in, not just to be concentrated in a few deals. Therefore, our track record has demonstrated almost no correlation with the equity or fixed income markets, and has a low correlation with our peers.
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