Colin McQueen, head of the European equity team at FOUR Capital Partners, says the firm’s Stable Global strategy, established as a paper portfolio in March and due to be launched this month as a segregated mandate and a Ucits sub-fund, is designed to appeal to investors seeking attractive real returns combined with significantly lower volatility than the equity market as a whole.
GFM: What is the history and background of your company, principals and funds?
CMQ: FOUR Capital Partners was established in 2006 as a UK equity specialist by its founding partners, Tom Carroll, Derrick Dunne, Chris Rodgers and Ted Williams. Three years later, FOUR established a European equity team under the leadership of Dino Fuschillo, followed in 2010 by a global equity team under my leadership.
The global team comprises three fund managers, Stephen Walker, Justin Maloney and myself, and assistant fund manager Lorenzo Dicorrado. The firm’s assets under management totalled GBP991m at the end of July, including GBP223m invested in global assets.
In March this year FOUR began managing as a paper portfolio Stable Global, a low-volatility global equity strategy aimed at investors looking for attractive real returns with less volatility in their equity investments.
Stable Global concentrates on the most stable portions of the equity market (roughly 30 per cent), consisting of companies with the most robust businesses, with low cyclicality, low capital requirements and strong balance sheets.
Following a successful start, FOUR has a firm commitment of USD50m to launch the strategy as a live segregated mandate portfolio in September, when it will also launch a pooled fund vehicle as a sub-fund of a Dublin-domiciled Ucits IV Oeic, FOUR CAPITAL Funds.
GFM: Who are your main service providers?
CMQ: The main providers to FOUR CAPITAL Funds are Deloitte & Touche as auditor, Maples & Calder as legal counsel, J.P. Morgan as administrator and Northern Trust as custodian, all based in Ireland.
GFM: What is your distribution strategy and targeted client base?
CMQ: FOUR has been successful in attracting assets from institutional clients. Because of our transparency and clear investment process, firms that invest time in understanding a manager’s investment approach tend to like the firm. We have a good number of discretionary managers, fund of funds and multi-manager clients.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
CMQ: FOUR was launched in 2007, at the very start of the global financial crisis, but has nevertheless seen its assets grow to GBP1bn to date. We are looking forward to a less hostile environment for equity investors and have been highlighting what we think is an exceptional entry point at current levels.
GFM: Please describe your investment process.
CMQ: The portfolio is driven by our core investment philosophy and process: seeking to buy strong cash-generative companies at out-of-favour prices. The objective is to provide significant real returns to investors over a business cycle. The Stable Global Equity portfolio invests only within a subset of stocks from the wider Active Global Equity portfolio that benefit from stable non-cyclical business models and consistent cash generation. Its aims to offer attractive real returns combined with a significantly lower degree of volatility than the overall equity market.
FOUR operates a flexible and pragmatic framework that guides what is ultimately a bottom-up stock selection engine. The investment process focuses on the holdings in our portfolios, ensuring that every company held is delivering as per the team's investment thesis. FOUR is of course also continuously searching for new ideas for the portfolios.
GFM: How do you generate ideas for your funds?
CMQ: Idea generation comes from FOUR’s proprietary IV (Intrinsic Values) scoring system, external brokers and industry contacts, and internal research. The scoring system identifies companies with statistical characteristics that we find attractive and scores them between 1 and 100. Importantly, the system monitors the movement of stocks within the universe, alerting the managers and creating potential ideas for further analysis.
We operate a universal screen for all stocks with a market cap greater than USD2.5bn. We also score two subsets of this wider universe, one consisting of non-cyclical, non-capital intensive stocks (30 per cent of the universe) and another of more variable or capital-intensive businesses. We separate these to prioritise different metrics for the non-stable businesses, which we find rarely appear at the top end of the wider universe screen.
Due to the managers’ experience, FOUR knows the best sell-side analysts very well and receives excellent service from them. Similarly, the managers have developed good relationships and knowledge of company management, used by the team in researching and developing ideas on companies and sectors.
The real work begins when the team applies its experience to an idea and works up a fully documented investment case for owning a stock.
Team decision-making ensures a constant debate and friction between the senior investors.
The upside percentages to the Intrinsic Values applied to each company also move around. Combined with new investment opportunities, this gives rise to continuous competition for capital in the portfolio.
GFM: What is your approach to managing risk?
CMQ: Our fund managers spend the majority of their time monitoring existing positions to ensure that we are fully informed and constantly alert to changes that might prompt a change of our investment thesis.
Risk management is an integral part of our approach. FOUR has in place robust procedures and control structures, well tested over the years, to ensure compliance with regulations and bespoke investment guidelines. In addition to internal operations staff, we also employ independent consultants to regularly review compliance and risk monitoring.
The compliance and investment functions receive daily positioning reports, which give rise to alerts should guidelines be breached. In addition, the investment teams regularly review portfolios and quantitative risk analysis from PORT (Bloomberg) and Style Research. Finally, the compliance officer issues a risk monitoring report once a month and discusses any relevant findings with the team members.
Investment risk monitoring takes place on a day-to-day basis but is formally addressed at a documented monthly meeting.
GFM: What are your performance expectations for the strategy?
CMQ: The strategy is designed to deliver real returns of CPI+6-8 per cent, but with much lower volatility and downside risk than the wider equity market.
The potential for real returns from equities looks attractive relative to other asset classes such as index-linked or conventional bonds. The drawback for many investors is the higher volatility of returns from equities and the memory of recent losses. We believe Stable Global Equity can help to bridge that gap.
We have been running the strategy as a paper portfolio since March. Up to the end of July it returned 3.22 per cent gross in US dollar terms, a period during which the CPI has risen by around 0.4 per cent. By comparison, the MSCI World Index has fallen 3.04 per cent in gross US dollar terms.
GFM: Are you looking at any particularly attractive opportunities right now?
CMQ: We see a number of attractive opportunities at present. US health management companies are interesting at present, particularly United Health, the market leader with strong management, scale advantages and a track record of double-digit growth in earnings and cash flow over the past two decades. The company is well positioned for future outsourcing of US government health programmes. Despite these strengths, the company trades at a discount valuation, offering a free cash flow yield of more than 9 per cent.
GFM: What developments do you expect to see in the coming year?
CMQ: With bonds looking expensive and equity valuations so attractive, we believe investors will begin to shift funds toward riskier assets. We believe the Stable Global strategy offers an attractive bridge, targeting equity type returns but with considerably lower volatility. As an equity house, we would expect to gain assets under management, while as a stock-picker, we expect to do well for our clients in performance terms.
GFM: What do investors currently expect from managers?
CMQ: Clients expect managers to deliver on their objectives and to be kept well informed.
GFM: What differentiates you from other managers in your sector?
CMQ: FOUR exists to deliver exceptional performance and client service, and our ownership structure gives us a direct alignment with our clients. Our managers average more than 20 years’ experience, and we are adept in all market conditions. We are very open and transparent with out clients and pride ourselves on our reporting. Finally, we have the backing and support of the Sanlam Group, a USD7bn financial services firm.
GFM: How do you view the environment for fundraising over the coming 12 months?
CMQ: At present it looks difficult, with investors sitting on the sidelines, but we expect low valuations to attract more investors into equities.
GFM: How do you expect your business to be affected by current and proposed regulatory changes?
CMQ: We use a combination of internal and external resources to ensure we keep up with the evolving regulatory environment. In the UK, the retail distribution review is the biggest development for 2012-13. We have changed classes in our pooled funds for a clean fee structure. We expect the greatest impact from RDR to be on our clients and prospects.