Julian Mayo outlines the strategy and thinking behind the development of Charlemagne Capital's suite of emerging market funds.
HW: What is the background to the firm and its principals?
JM: We were founded as a specialist emerging markets manager by Jayne Sutcliffe and David Curl, both of whom have extensive experience in the sector. Jayne is CEO and David is responsible for our successful private equity business. They were joined in 2001 by Stefan Bottcher, who runs the portfolio management department, and in 2002 by Anderson Whammond as COO.
HW: What is your current AUM and what are your products/strategies? How much is under management in each fund and when were these funds launched?
JM: We now run about USD 2. 5 billion. We manage the OCCO range of four hedge funds (Global Emerging Markets, Asia, Eastern Europe and, most recently, Latin America) and the Magna Umbrella Fund plc, an Irish mutual fund, with six sub funds. In addition, we run a number of segregated accounts and private equity portfolios.
The OCCOs now total almost USD 240 million: USD 115 million in Eastern Europe (launched in Dec 2001), USD 52 million in Asia (converted to its current strategy in Jan 2002), USD 53 million in Global Emerging Markets (May 2003) and USD 18 million in Latin America (Apr 2005).
HW: How and where do you distribute your hedge funds? What is your current and targeted client base?
JM: We have an in-house sales team. Their relationships are with family offices, pension funds, private banks and other private client managers, foundations, charities and other institutional investors.
Our client base is global but with a clear European focus, logically since our sales team is based in London. This is not expected to change in the near to medium term.
HW: How do you generate ideas for your funds?
JM: Ideas are internally generated from the stocks on our focus stock list. In addition, the experience of our team (six portfolio managers, each with over ten years' experience) means that ideas are shown to us by market participants.
HW: What is your approach to managing risk?
JM: Risk management is an integral part of the investment process. We use the Barra system and track risk real-time. We manage risk at the 'whole portfolio' level: that is, we do not exclude an individual idea purely if it is risky. Instead, we look at the risk profile of the entire portfolio.
HW: What is the investment process of your hedge funds?
JM: We seek to profit from what we see are inefficiencies in emerging markets, both on the long side and the short, using a disciplined, focused, bottom up investment process. The process is symmetric: we buy undervalued situations, which we think will outperform, and short overvalued stocks (expected underperformers).
We analyse companies in detail, the portfolio managers meeting management in each portfolio company at least four times a year. We assess companies' management: cash flows: profits: sales; and balance sheets.
Finally, we value these findings with reference to both relative and absolute valuation yardsticks and establish price targets. Portfolio construction involves buying and selling the outstanding under- and overvalued situations respectively, taking into account the desired risk profile of the portfolios.
HW: What are the biggest gains/losses in your Asian fund over the last 12 months? What were the reasons for these variations?
JM: The biggest gains/losses in OCCO Asia are as follows, in the last 12 months:
+1.2% Nov 04
-2.2% Jun 04
These were as a result of stock selection. June 04 was a weak market for Asia as a whole, as markets bottomed out at the end of a three month long correction. In our portfolio, we held a number of long positions who had, as planned, performed quite defensively in the previous two months (remember that Apr/May 04 was a time when a number of other emerging marktes funds performed poorly). However, some of these stocks fell sharply in June, more than wiping out any gains made in the short positions in the portfolio.
In November 2004, the Fund rose. There was in general a good performance from the Korean component of the Fund, with an especially strong gain in Dongkuk Steel, whose shares gained over 40% in the month.
The other standout was a Taiwanese semiconductor company, Vanguard, whose shares rose 30%. This was a month when the dollar fell sharply, although the Fund did not gain as its currency exposure is hedged into US dollars as a matter of policy.
HW: What are you looking at right now?
JM: As we are bottom-up, we do not look at sectors (or, for that matter, countries) per se. However, we have a bias on the long side to financials in our hedge funds. We see, from our meetings with management, that they are prime beneficiaries of recovery in domestic demand in emerging markets.
HW: Do you expect any style shift in your funds going forward?
JM: No. We see no reason to shift our style.
HW: What events do you expect to see in your sector in the year ahead?
JM: Markets remain, in our view, inefficient. This means that opportunities are abundant. Volatility has itself been volatile over the last 12 months and there have been unusual price movements, with short term rises in overvalued stocks and declines in cheap stocks. We expect to be able to profit from these inefficiencies in the coming year.
HW: How will these changes/events impact on your own portfolios?
JM: We hope that we can continue to benefit from the existence of these inefficiencies, as we believe that inefficiencies are greater in the short than in the long run.
HW: What differentiates you from other managers in your sector?
JM: We have a more focused approach; the business only invests in emerging markets; and, we have a smaller number of positions (and therefore bigger positions, indicating greater conviction and no 'tail' to the portfolio).
Also, our managers themselves, rather than a team of analysts, spearhead the company visits and research.
Finally, risk management is an integrated part of the process, and, with a relatively low maximum vol, we have generally a much lower 'net long' exposure than most peers, most of which are very directional.
HW: Do you have any plans for product launches in the near future?
JM: We have recently launched the OCCO Latin America fund. This essentially completes our range of global and regional emerging markets funds. We see a lot of opportunities in the Latam region and shorting is relatively easy and inexpensive, either locally or via the NYSE-listed ADRs. At the same time, we have had a number of client enquiries for this product and we are pleased to have raised USD 18 million already.