Shahid Ikram identifies the opportunities and developments in the market cycle that will influence the future growth of Morley G7 Fixed Income Fund.
Shahid Ikram joined Morley Fund Management as Commercial Union Investment Management in 1990 after a term at the National Bank of Kuwait. He progressed from Gilt Analyst to Head of UK Bonds and Pensions, and later was appointed Director of High Performance Funds in June 2000. Shahid holds a degree in Mathematics, Statistics and Computing and is an Associate Member of the Institute of Investment Management and Research.
HW: What is the background to the fund?
SI: The Morley G7 Fixed Income Fund was launched on the 1 February 2003. The key individuals in terms of running the G7 Fund are Shahid Ikram and Trevor Welsh. The Fund is USD 260million as at 30th April 2006.
HW: Who are your service providers?
SI: Our auditors are KPMG, UK Counsel: Linklaters, Guernsey Counsel: Ozannes; our Custodian/Trustee is Credit Suisse and our Administrators are Credit Suisse Fund Administration.
HW: How and where do you distribute the fund? What is your current and targeted client base?
SI: Our main distribution focus is on Europe (London, Switzerland and Scandinavia) and offshore New York. Our current and targeted client base is fund of hedge funds, family offices, private banks and pension funds.
HW: What is the investment process of your fund?
SI: The Fund normally runs 5-6 high conviction non-correlated themes. Each theme is likely to consist of 1-4 individual positions, i.e. the Fund will normally run no more than c.20 trades concurrently. Position sizing is adjusted to ensure that the level of risk from each theme is largely equal, so the return of the book is well diversified and not dominated by any individual positions.
The Fund will not normally have a material long or short bias. If macro positioning is undertaken, it is conducted via options with a predetermined maximum downside. Geographically, the Fund will normally allocate 70% of its risk to the UK and European markets. The remainder is allocated to other regions depending on profit opportunities.
The Fund has a particular emphasis towards the longer-end of yield curves where actuarial, regulatory and structural insight augments our rigorous top-down and bottom-up process.
HW: How do you generate ideas for your fund?
SI: Trade ideas are largely generated via our internal research. We conduct a regular weekly meeting which starts with input from our quantitative team, this is a scorecard approach which in conjunction with other inputs allows us to set a medium to long-term framework for markets. We then look at bottom up analysis and each of our analysts presents on their specific areas. From this analysis we develop a number of key diversified themes. Each theme is then investigated and a series of specific trade ideas generated. The trade target, stop and timing triggers are then defined which will be used to determine the position size. All open positions are reviewed on a daily basis.
HW: What is your approach to managing risk?
SI: The Fund adheres to the following VaR limits:
5 day, 95% confidence interval: 2% soft limit (5 business day rectification period) and 3% hard limit (immediate rectification)
The Fund has a stop loss limit on any one theme at 1% of the Fund value, in practice we tend to work with a 0.5% limit.
HW: How/against what do you benchmark the performance of your fund?
SI: We benchmark the performance of the Fund in a number of ways. Firstly and most importantly is against our target of 1% absolute return per month, this is of most concern to us and determines our risk levels at any given point. Secondly we compare ourselves against both the Total and the Investable sectors of the CSFB/Tremont Fixed Income Arbitrage indexes. Thirdly we benchmark our return relative to our peers in the market.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
SI: The performance of the Fund has been exactly in line with our stated objectives, the Fund has been running for 38 months (to end March 2006) and has returned c.38%. The Fund has also been extremely low volatility and has experienced only two down months in the GBP share class since inception.
HW: What opportunities are you looking at right now?
SI: We normally allocate our risk within a number of buckets, namely;
- Asset swaps
- Front-ends
- Yield curves (direction and sector analysis)
- Cross market
- Real yields / inflation
- Tactical, basis and FX
We rotate our risk through these buckets depending on opportunities and the point in the economic cycle. Specific themes are normally held on the Fund for a period of 2 weeks to 2 months with individual trades within them rotated more frequently.
Currently our key themes are:
- Long-end flattening in the UK, this theme is coming to an end though and it may well soon be worth taking the other side
- Short Sterling breakeven spreads
- Short the long-end of Canada
- Long Euroland v Switzerland
- Long belly of Sterling curve
HW: What events do you expect to see in your sector in the year ahead?
SI: There are lots of events and movements that we are looking to position for this coming year, but our highest conviction calls are:
- A continuation in the pick-up of volatility
- Withdrawal of liquidity from high-yield markets
- US rates peaking soon as evidence of a slowdown gathers, a chance of rate cuts being priced by year-end
- A steepening of the UK yield curve as the consumer debt burden prevents the MPC from raising rates.
HW: How will these changes/future events impact on your own portfolio?
SI: Our broad strategy of exploiting relative mis-pricing in the financial markets does not change with the market cycle. We do, however, believe that 2006 should be easier to trade than 2005 as volatility levels are continuing to pick-up and we can begin to see clear mis-pricings in the market again.
HW: What differentiates you from other managers in your sector?
SI: The instruments and trades we utilise are common to most fixed income arbitrage hedge funds. There are, however, three factors that we believe primarily differentiate G7 from our competition:
- Very low volatility of fund performance
- Focus primarily on UK & European fixed income instruments
- The Morley resource and market presence as one of UK’s largest active fixed income managers
- Good insight into actuarial and regulatory considerations
HW: Do you have any plans for similar/other product launches in the near future?
SI: No
(Shahid Ikram was interviewed on 10 May 2006)
