Christopher Lee outlines the re-structuring by CFM into multi-strategy and multi manager products producing much higher capacity and more diversification.
Christopher Lee is Chairman and Chief Operating Officer of City Fund Management Ltd. and is responsible for risk management, including all aspects of the due diligence process, as well as the company's marketing strategy and material. Christopher also ensures that a robust compliance process is being applied. Christopher's background is in international banking in the City of London with experience spanning forty years, culminating in being included on the Bank of England list of persons authorised to run a City bank. He specialised in running trading operations at Bankers Trust, Chemical Bank, Charterhouse Bank, Christiania Bank, and Royal Trust Bank (where he was also Managing Director of Royal Trust Investment Management), before setting up City Fund Management Limited with John Jackson in 1994.
HW: What is the background to City Fund Management?
CL: We have total FUM of circa USD 50m, comprising of a number of products. Cfm products are primarily discretionary and made up of either single manager or funds of internal managers.
We are not a FOF. Our object has always been to deliver steady returns with low volatility. Our current range of products seeks to deliver a return of 10% to 12% per annum with volatility of between 2% and 5% on an annualized basis. Historically our products have been designed around exchange traded short term interest rate contracts (STIR's), but the collapse in volatility over the last 18 to 24 months has encouraged us to re-structure our products.
We recognized that we were too narrowly based and have identified a number of managers operating across a number of markets, foreign exchange, fixed income, equity indices, and some commodities. The one constant is that we will only use exchange traded contracts thus ensuring both transparency and liquidity.
The net result of this development is that our products are now multi-strategy and multi manager, producing much higher capacity and more diversification. The other major change has been to add some systematic managers to the portfolio, whereas we had been 100% discretionary previously.
HW: How and where do you distribute the fund? What is your current and targeted client base?
CL: We have our own internal distribution database and we also use selective distribution channels. Our target client base falls into the following categories:
- Institutional investors (FOF; Hedge Funds etc.)
- Institutional investors - portfolio managers.
We recognise how important good distribution is particularly as we recognise our main strength is product design.
HW: What is the investment process of your fund?
CL: We have two product types:
- Retail fund structures.
- Tailored managed account products.
This allows us to cater for the retail investor and the institutional client. Our products have historically been high volume and short term, with a heavy bias on intraday trading. We have developed our own proprietary allocator program that ensures fair and equitable distribution of trades and absolute equality of performance where managers are common across clients.
HW: How do you generate ideas for your fund?
CL: Primarily through client research to determine the risk/reward profiles required by investors. Our products are futures and options based and our core platform of products are low risk as defined by margin to equity with a high cash management content. The cash element is proactively managed as part of our products.
Each manager has been through a stringent due diligence process lasting between six and twelve months, and we allocate trading capital based on performance mix to achieve the desired risk adjusted returns. The styles vary between intra-market and cross market arbitrage to short term trend following, with some macro views blended in.
Our bias remains very short term but we recognise that in a multi-strategy non-correlated program there not only needs to be a blend across markets, but also discretionary, systematic, and time frame elements come into the portfolio management process.
HW: What is your approach to managing risk?
CL: We manage risk at pre-trade and post trade levels. We measure the resulting exposure in a variety of ways to ensure individual and aggregate exposures are within out risk limits. Each manager has their own individual position and stop-loss limits which are driven by the risk profile of the product in conjunction with the risk profile of their individual style.
We are fundamentally risk averse, recognising that the product base, futures and options, is highly leveraged anyway and we are very conservative in terms of allocations of trading capital.
HW: How/against what do you benchmark the performance of your fund?
CL: Because of our products are fundamentally multi-strategy we see them as being relative value whilst at the same time because of the low margin to equity usage and resulting high cash content we also look at our products as cash plus.
It is difficult to pigeon hole our products as they are multi market and multi style it is easier to describe the general bias of our products which is exchange traded, discretionary weighted, short term, and relying on a considerable amount of arbitrage.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
CL: During the latter half of 2004 and 2005 the volatility in the market and the contracts we trade in particular, collapsed, resulting in a period of flat returns (still out performing our peers who were making losses). This resulted in our recognizing that we were too single style and traditionally focused on the short term interest rate contracts (STIR). As a consequence we removed some non-performing managers who had become too correlated and sought to replace them with managers who provided multi style, multi market depth to our products. This change in strategy has taken eighteen months to implement in terms of identifying, analyzing, and re-structuring our products. We now have products with greater depth, diversified risk, and significantly greater capacity.
HW: What opportunities are you looking at right now?
CL: We are about to launch an emerging manager product within a fund sponsored by AACMS (ABN Amro) in Chicago(The Lighthouse Global Fund) where CFM will be joint managers with AACMS. The objective of this product is to identify managers too small to be on the radar of the major funds but who have both the track record and capacity to be included in a multi-strategy, multi- manager product. We see this strategy being core to CFM's future growth.
Most importantly the structure of the fund is similar to that of a fund platform thus enabling an endless supply of structured share classes.
HW: What events do you expect to see in your sector in the year ahead?
CL: We expect to see at least one major disruption in the financial markets during 2006 and a resulting pick up in volatility. Although we do not see an immediate return to the levels of volatility experienced in the past we do think volatility has bottomed out.
HW: How will these changes/future events impact on your own portfolio?
CL: Should things develop as we describe then this will be of benefit to us. We remain exposed to volatility driven performance but now also need identifiable short term trending markets. Having re-positioned ourselves and our products we are confident of performing well in any market conditions, but as with the rest of the industry markets that are benign and without any sense of direction are not fertile in terms of generating return.
HW: What differentiates you from other managers in your sector?
CL: Our experience (the company has been in existence since 1994), our heavy emphasis on the qualitative side of manager selection based on trust and partnership. Our risk averse approach to the market and our manager selection process. The company has been operating in the futures and options markets since it was formed but more importantly as individuals our involvement stretches back to the 1970's.
HW: Do you have any plans for similar/other product launches in the near future?
CL: Due to the low risk structure of our 'platform/signature products' we believe much of the expansion in our product range, outside the funds we are already managing and Lighthouse will come from tailored managed accounts for FOF and financial institutions where either we, or the client, create enhanced leverage/enhanced return structures.
(Christopher Lee was interviewed on 20 February 2006)