Richard Sherwin, partner and head of investment research at Blacksquare Capital, says the newly-launched IFSL Blacksquare Multi-Manager Absolute Return Fund, of which he is portfolio manager, is accessible and affordable to a large majority of investors thanks to a minimum investment of GBP1,000 for its UK retail share class and the absence of a performance fee – a unique characteristic for a multi-manager absolute return fund.
GFM: What is the background of your company and fund?
RS: Blacksquare Capital is a specialist alternative asset management company whose primary focus is to manage sector-specific multi-manager investment products, comprising best of breed asset managers that have demonstrated the ability to generate superior risk-adjusted absolute returns throughout a variety of different market conditions. The firm is authorised and regulated by the FSA in the UK.
The partners have more than 50 years of combined financial market experience at blue-chip investment banks and fund management companies including Salomon Brothers, Citibank, JP Morgan, Deutsche Bank, Prudential Securities and Scudder Threadneedle Investments.
The company’s aim is to manage innovative investment strategies that leverage off its collective knowledge base and expertise in working with absolute return managers employing a range of trading styles across stock, bond, currency and commodity markets.
I am the portfolio manager for the IFSL Blacksquare Multi-Manager Absolute Return fund; I am also a partner and have responsibility for investment research at the firm. Prior to joining Blacksquare Capital I was head of fixed income, commodities and foreign exchange for Europe, Middle East and Africa with JP Morgan Private Bank in London.
I also previously worked at Salomon Brothers International, Citibank and JP Morgan Investment Bank, where I focused on evaluating and marketing global macro and fixed income trading strategies to both traditional and alternative asset management companies.
GFM: Who are your key service providers?
RS: The IFSL Blacksquare Capital Multi-Manager Absolute Return Fund has Investment Fund Services as its authorised corporate director, Royal Bank of Scotland as depositary, BNP Paribas Securities Services as administrator, custodian and registrar and Ernst & Young as auditor.
GFM: What is your investment process?
RS: Qualitative, quantitative and operational due diligence is conducted on all prospective managers and funds to assess suitability. Allocations are made from the pool of qualifying funds that have been approved for investment by Blacksquare Capital’s investment committee as a result of trading strategy, performance, risk management and infrastructure analysis as well as correlation to other selected funds in the portfolio. The fund will be actively managed and rebalanced on a daily basis.
GFM: How many funds and strategies are in your portfolio?
RS: The fund is launching with some 15 absolute return funds whose managers are selected for maximum diversification and minimal correlation. Asset classes include stocks, bonds, currency, commodities and cash; geographic regions include the UK, Europe, North America, Asia and emerging markets; and manager trading styles include discretionary, systematic, directional, relative value, bottom-up and top-down.
GFM: What makes a manager or strategy special enough for you to select them?
RS: Our selection process is both quantitative and qualitative. We identify managers with a strong track record of performance in their asset class and their chosen strategy. We have a very strong preference for managers that have demonstrated an excellent adherence to risk control at the trade and portfolio level. Finally, to bring genuine diversification benefits, the fund must have a low correlation to the other funds in our portfolio.
GFM: What are your criteria for removing managers from the fund?
RS: The decision to sell a fund is typically discussed at length at the investment committee level, and the aim is always to invest over a rolling 6-12 month period. However, if a manager either underperforms or appears to be deviating from their original investment thesis, our research team will conduct further due diligence to determine whether this is due to style drift, poor risk control, infrastructure changes or external factors. If we determine that the manager is unable to explain or improve the fund’s performance, we will immediately begin to redeem our holding.
GFM: How many managers do you have on the substitutes’ bench?
RS: The initial portfolio of around 15 funds will be chosen from a list of about 25 managers approved by the investment committee following completion of the due diligence process.
GFM: What events do you expect to see in your sector in the year ahead?
RS: We expect the growth of the Ucits-compliant absolute return sector to continue throughout the next year. Blacksquare currently tracks around 100 Ucits absolute return funds, and we expect this number to double over the next 12 months.
The Ucits fund vehicle is favourable for both investor and manager. From an investor’s perspective, Ucits funds are onshore, regulated and transparent, with favourable liquidity terms. From a manager’s perspective, Ucits funds bring an opportunity to access a very wide range of investors, giving managers new pools of savings for investment and a diversified investor base.
GFM: How will these developments affect your own portfolios?
RS: As the number of Ucits absolute return funds increases, Blacksquare will add to its pool of funds approved for inclusion in the Multi-Manager Absolute Return Fund. In time we may be invested in as many as 25 funds. However, we would be unlikely to exceed that number greatly, as we would like each underlying manager to be able to make a strong contribution to the fund’s performance.
GFM: What differentiates you from other managers in your sector?
RS: Primarily, our aim is to make the fund accessible and affordable to a large majority of investors through two key features. First, the minimum investment for our retail share class is GBP1,000, allowing the fund wide distribution across client types. Secondly, Blacksquare will not charge a performance fee on the fund. We understand that at this time, the fund will be the only available multi-manager absolute return fund without a performance fee.
Blacksquare’s rationale not to levy a performance fee stems from our belief that to make this fund a core holding in a client’s portfolio, it needs to deliver to investors as much of our underlying managers’ performance as possible. We believe that over time we will be able to outperform any competing absolute return multi-manager funds with this extra layer of fees.
GFM: What is your attitude toward risk in the current environment?
RS: Irrespective of the current market outlook, we always aim to hold a diversified portfolio of funds to spread risks across multiple asset classes and trading styles.
GFM: How would you assess investors’ expectations and how do you deal with them?
RS: Our investors expect the fund to be a genuine source of positive absolute returns in their portfolios that are uncorrelated to stocks and bonds. Our aim will always be to deliver positive, diversified and non-correlated returns regardless of market conditions.
GFM: How and where do you distribute the fund?
RS: The IFSL Blacksquare Multi-Manager Absolute Return Fund will available for investment through various distribution platforms as well for purchase directly via IFSL. For the IFA market the fund will be listed on platforms including Transact, Ascentric, James Hay, Axa Elevate, Novia, Hargreaves Lansdown and Co-Funds Instititional. We will also distribute the fund through our existing sales channels to private wealth managers, family offices and high net worth investors.
GFM: Are you planning any further launches in the near future?
RS: We will be launching other currency share classes, but we are currently focused on establishing the IFSL Blacksquare Multi-Manager Absolute Return Fund as the premier Ucits multi-manager solution in the absolute return sector in the UK.