Interview with Steven Bulko, CIO, 1798 Fundamental Strategies, Lombard Odier Investment Managers…
Equity markets are close to or at their historic highs. How do you see the big picture for equity investors?
While developed economies have been recovering since the 2008 – 2009 global recession, the pace of that recovery has been varied. The US economy has improved but growth in Europe and Japan has stagnated, leading to a divergence in monetary policy – the Fed is progressively moving out of its accommodative monetary policy while the ECB and BOJ are embracing new strategies involving Quantitative Easing to provide stimulus.
These differences are reflected in domestic equity markets. Our focus is heavily weighted towards the US markets where Quantitative Easing has helped improve business and consumer confidence, driving stock markets higher with lower levels of volatility. Additionally, as much of the market’s growth has come via multiple expansion, we think the opportunity exists for companies to differentiate on the “E” in the P/E ratio. This could lead to opportunities for active managers, but it’s our expectation that such opportunities will be accompanied by heightened volatility and lower returns versus what we’ve experienced in recent years. So opportunity exists, but we need to be mindful of the potential market impact of heightened volatility.
The story is different for Europe and Japan, where economic growth is challenged but central banks have been slower to implement programs to support financial markets and bolster economic activity. Therefore, we expect the equity markets in these regions to be driven more by the macroeconomic environment than companies’ fundamentals.
Can you describe the investment approach of your fund?
We launched our flagship hedged strategy in 2007 and it has USD1.2bn AUM as of January 2015. In July of 2014, we launched a fund with a very similar process under a UCITS format.
Our UCITS fund pursues an equity L/S strategy via a multi-portfolio manager approach. We have five portfolio managers specialised by sectors targeting Consumer, Healthcare, Industrials, Energy and TMT (Technology, Media, Telecom). Capital is allocated monthly by the CIO and the Portfolio Managers are responsible for initiating positions and managing their sub-strategy within a defined set of risk limits.
Our teams share a similar investment philosophy, which centres on a bottom up stock picking approach with deep fundamental analysis. The fund is focused on alpha generation within a low net environment, where single name shorting is favoured over portfolio hedging. Additionally, we are not a rapid trading fund looking to monetise small pricing inefficiencies but, rather, focus on longer term performance trends that will play out over several quarters.
What dimension has risk management within the investment process?
The risk management team sits alongside the investment team while our real-time risk system aids our Chief Risk Officer in monitoring limits at the fund and investment strategy levels, as well as keeping portfolio managers informed about their overall positioning and risks.
We view risk management not simply as an oversight function but as a guide toward enhanced portfolio optimisation: advising our investment teams on position selection and portfolio construction, in order to eliminate any significant, unintended risks to their portfolios.
What have the results of the fund been so far in terms of return and volatility?
Performance in 2014 was +2.87% with a volatility of 4.4%. Over the same period, the S&P500 T.R. returned +4.88% with a volatility of 12.4%. The fund was up +1.94% in January vs. the S&P500 T.R. down -3.15% (as of January 15th 2015), demonstrating a strong ability to protect on the downside. Since inception, the fund is up +4.86% versus +1.58% for the S&P500 T.R.
Disclaimer:
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If the funds are denominated in a currency other than that in which the majority of the investors assets are held, the investor should be aware that changes in rates of exchange may affect the value of the strategy’s underlying assets. The risk management process includes an effort to monitor and manage risk, but does not imply low risk.
The strategy may include the use of derivatives. Derivatives often involve a high degree of financial risk because a relatively small movement in the price of the underlying security or benchmark may result in a disproportionately large movement in the price of the derivative and are not suitable for all investors. No representation regarding the suitability of these instruments and strategies for a particular investor is made.
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