Martin Duffy discusses the strategies and investment disciplines driving Claremont Europe Fund, which is being re-opened to external investors this year.
Martin Duffy founded Claremont Capital Management in 2000 and is co-manager of Claremont Europe Fund. Prior to founding Claremont he was a partner of Boston-based investment management company Grantham, Mayo, Van Otterloo & Co (GMO) and a Director of GMO's London subsidiary, which he co-founded in 1987. At GMO Martin was responsible for managing or overseeing assets totalling more than USD 5 billion. Before joining GMO he was an analyst and portfolio manager at Baring Asset Management, having studied finance and investment at the London Business School. After obtaining a Doctorate in Mathematics from Oxford University he held various positions in project planning at Shell.
Co-manager Neil Worsley has more than 25 years investment management experience and was formerly Group Head of Equities at Lombard Odier, where he helped to manage assets totalling more than USD 60 billion. Neil was directly responsible for managing the firm's UK and European equity portfolios and achieved consistent upper quartile performance over the period 1990-2000. Neil began his investment career as an analyst in the private client department of NatWest Bank in 1979 and served as a portfolio manager at Windsor Trust from 1986 to 1990.
HW: What is the background to the fund?
MD: Claremont Europe Fund was originally launched by me at the end of 2000 after 15 years as a partner at Grantham, Mayo, Van Otterloo & Co. The fund performed well initially as a result of excellent stock selection, returning 8.5% per annum with very low volatility (less than 5%), during a period when European equity markets declined by more than 40%. Consequently, assets under management grew steadily from USD 4 million to nearly USD 150 million.
However, following a period of flat performance, caused largely by the unfortunate timing of a shift in strategy to market neutral, just as market momentum began to replace stock selection as the main driver of returns, assets under management declined and I decided to close the fund at the end of 2004.
The fund was re-launched in October 2005 with Neil Worsley, who was formerly global head of equities at Lombard Odier (where he helped to manage $60 billion of assets), joining me as co-manager.
The fund has remained closed to external investors so assets under management (the principals' own money) are currently less than USD 10 million, although this is expected to increase significantly when the fund re-opens to external investors later this year. The objective of the fund is to produce returns consistently in excess of 10% per annum (after fees) with low volatility (normally less than 5%).
HW: Who are your service providers?
MD:Our prime broker is Goldman Sachs, our fund administration company is Goldman Sachs Administration, our auditors are PriceWaterhouseCoopers and our lawyers are Iliad (UK law), Maples & Calder (Cayman) and Seward & Kissel (US law).
HW: How and where do you distribute the fund? What is your current and targeted client base?
MD: Claremont is a performance, rather than marketing, focused organisation and accordingly devotes relatively little time and effort to marketing and distribution. We expect the fund to appeal primarily to US and European institutional investors that are seeking steady long-term capital growth with a strong emphasis on capital preservation.
HW: What is the investment process of your fund?
MD: We expect returns to come through a combination of stock selection alpha, market beta and option premiums, with the relative contribution of each varying with market conditions. Our longs are very much driven by bottom-up fundamental analysis and we are looking, so far as possible, to have an equal split between large caps and mid cap stocks. Bottom up stock selection is also important in selecting shorts and is a key determinant of the fund's overall net long market and sector exposures.
HW: How do you generate ideas for your fund?
MD: Both Neil Worsley and myself have over 20 years experience each in managing portfolios and, as such, we have a great depth of knowledge of the European market place. We have a first hand knowledge of many of the companies in our universe through visits, presentations and meetings with senior management over the years. We also keep ourselves updated through research material and our contacts in the industry. In addition we use quantitative screens as tools to help us focus our fundamental research.
HW: What is your approach to managing risk?
MD: In view of the fund's low volatility objective risk control is considered to be extremely important. We have developed our own proprietary, real-time, risk measurement and management tools as well as having access to independent reports through our prime broker's website.
Particular attention is paid to daily and weekly VAR measures, both observed and predicted (using the BARRA Europe model) are closely monitored to ensure that the fund is running within its longer-term risk targets. Risk is controlled primarily through the portfolio's net market (beta) exposure (which is normally in the range +10% to +40%), sector exposure (normally less than 15%) and stock position sizes (normally 1% to 3%).
In addition, index and stock options are used extensively to control portfolio risk. Stock specific risk is controlled through the imposition of stop loss limits on individual positions.
HW: How/against what do you benchmark the performance of your fund?
MD: As an absolute return fund the fund is benchmarked against its stated return and risk objectives (see above). In addition, performance is compared with other long-short European managers, although we believe that the fund would rank in the upper quartile over a full market cycle if it achieved its stated return & risk objectives.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
MD: The fund has returned 7% with volatility of 3.5% over the six months since re-launch which is nicely ahead of our target for the year. We are happy with this and have no plans to change our style, although we are always seeking to make marginal improvements/refinements to our approach in pursuit of incremental return.
HW: What opportunities are you looking at right now?
MD: Many of our mid cap ideas have done extremely well recently and we have begun to take profits on some of these, as the medium term valuations are looking a little stretched.
On the contrary, we have been building positions in some big cap names such as HSBC, Syngenta and Vivendi where valuations/yield support/outlook make them look more interesting. We also still like many of the stocks in the oil sector for the same reasons and own ENI and BP. Given current market levels and where we are in the economic/interest cycle we are generally focusing on more defensive long ideas and beginning to open shorts in stocks in more vulnerable sectors.
HW: What events do you expect to see in your sector in the year ahead?
MD: The year ahead could become more testing for companies and investors alike. The valuations of many stocks appear to have moved ahead of fundamentals, fuelled by the improved economic environment over the last 12 months and strong M & A activity. Conditions over the medium term could prove trickier as global interest rates rise further and commodity prices hit new highs almost daily. While markets may look reasonable value by historic standards, many indices are flattered by the more lowly rated commodity and energy stocks. Looking at the broader market, ratings do not seem to be making much allowance for any negative news.
HW: How will these changes/future events impact on your own portfolio?
MD: We continuously monitor the individual stock valuations against our future predicted growth rates and outlook. Tweaks to the portfolio are constantly made and we do not envisage having to make wholesale changes to the portfolio.
HW: What differentiates you from other managers in your sector?
MD: We believe that our years of experience and proven track records are the main factors that differentiate us from other managers in the sector. Neil Worsley has managed UK & European equity portfolios for more than 25 years and achieved consistent upper quartile performance over much of that time whilst I have more than 20 years experience of managing UK, European, Japanese & Global portfolios and have managed Claremont Europe Fund for more than 5 years in almost all market conditions.
HW: Do you have any plans for similar/other product launches in the near future?
MD: Our absolute priority is to deliver first rate performance to investors in Claremont Europe Fund and so all our efforts will be focused on achieving that in the near future. However, we would eventually like to use our platform and experience to launch other similar products such as Japanese long-short equity, for example.
Martin Duffy was interviewed on 19 April 2006