Dino Fuschillo outlines the strategy and investment process that underpins the performance of Martin Currie's European-focused fund.
HW: What is the background to the fund?
DF: The fund was initially launched in June 2003 with Mike Nichol as the lead manager. Mike was introduced to Martin Currie following his departure from SVM. The fund was launched as the Martin Currie European Absolute Return Fund and at launch USD 25m had been raised as initial seed capital.
I took over as lead manager of the fund on 1 June 2004 following Mike Nichol's departure. At that time the fund size stood at approximately USD 1.5m following the withdrawal of the seed capital during the previous three months.
Current assets under management are approximately USD 32.5m following new investment by a handful of clients/seed investors. The objective of the fund is to return 10-15 per cent per annum with a maximum volatility of 15 per cent.
HW: How and where do you distribute the fund? What is your current and targeted client base?
DF: The Martin Currie Sales Team is the principle means of distribution for this strategy. Our main focus is UK, Europe and North America and our target clients are a range of family offices, institutional investors, private banks and fund of funds. There is growing interest from Far Eastern clients principally Family Offices and Fund of Funds.
HW: What is the investment process of your fund?
DF: The investment process for this strategy is predominantly bottom up i.e. focusing on stock selection and this is manifested in the narrow range of stock positions (both long and short) within the portfolio. There are no country or sector constraints. The process is a natural extension of my 19-year investment experience with respect to long only strategies. To ensure that stock selection is the overriding contributor to the portfolio returns generous individual stock limits are in place in both the long and the short book.
HW: How do you generate ideas for your fund?
DF: Idea generation is a two-way process, with myself and my immediate colleagues, Stewart Higgins and Eric Woehrling, within the European Product Team, primarily responsible for idea generation. We are, in turn supported by a team of thirteen highly experienced and competent sector managers. The latter are incentivised and remunerated for their ideas for both the long and short books. There is a claw-back in place to ensure equal emphasis is placed on the generation of long and short ideas.
HW: What is your approach to managing risk?
DF: The management of risk takes place predominantly at the portfolio level. In practice this means that our independent risk team, headed by Dan Gardner, have set volatility and value at risk targets which cannot be exceeded. The maximum volatility permitted is 15 per cent whilst the VAR (1 month, 95 per cent confidence level) stands at 7 per cent.
In the 18 months since I assumed the role of lead manager for this strategy the maximum realized volatility has not exceeded 10 per cent. The other main form of control is at the stock level. For long only positions the normal range for individual stock positions at purchase is 3-5 per cent with an absolute maximum of 7 per cent (marked to market). For the short book the normal individual stock position is 2-3 per cent initially with an absolute maximum of 5 per cent. It is not Martin Currie's policy for its hedge fund range of strategies to instill stop losses for individual positions given that the overriding risk control is managed at the portfolio level.
HW: How/against what do you benchmark the performance of your fund?
DF: As the fund is an absolute return fund, it does not track a benchmark. However, the fund uses the FTSEurofirst 300 benchmark as an indicator. We also monitor the funds progression compared to other European long/short strategies.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
DF: Our target return is 10-15% p.a. over the cycle clearly we are pleased to have exceeded this return over the past 18 months since I took over the fund. We hope to continue this positive performance trend with the same investment philosophy.
HW: What opportunities are you looking at right now?
DF: We continue to look for individual stock ideas which during the course of the next 18 months will provide us with absolute returns of in excess of 30 per cent. This again is consistent with the investment philosophy we have applied since 1 June 2004.
HW: What events do you expect to see in your sector in the year ahead?
DF: European equity markets have enjoyed a stream of positive corporate news flow during the past 2-3 years and valuation levels have broadly remained unchanged. Corporate activity has picked up significantly as companies are awash with cash and operating cash flow is at record high levels. We do not envisage a material change to this environment.
HW: How will these changes/future events impact on your own portfolio?
DF: In the medium term under the aforementioned scenario we do not believe that the portfolio will need to be changed materially from its current structure.
HW: What differentiates you from other managers in your sector?
DF: We are genuinely bottom up with a long term investment time horizon. We will not be phased by short term noise, such as the market distortions experienced during the months of April and October of this year. During this period we adhered to our individual stock positions and fund structure and have since been vindicated in our position not to respond to short term fluctuations. This is not a strategy designed to produce positive returns on a month-by-month basis.
HW: Do you have any plans for similar/other product launches in the near future?
DF: The short answer is no on the basis that there is sufficient capacity within this strategy. In other words we expect to raise up to USD 500m for this particular strategy.
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