From the sheer number of funds mentioned in this article, professional investors have clearly been doing their research when it comes to long/short equity.
French fund selector Vania Mareuse explains why: ‘Today we must find new ideas to protect and produce wealth in a globalised world where an event in any area can affect many stock exchanges.’ His compatriot, Pierre Molinero of OFI Asset Management agrees, he thinks long/short strategies can offer an antidote to the current environment and provide attractive return with little directional risk.
He’s on the look-out for managers who emphasise valuation and is paying particular attention to Europe where ‘distressed prices’ are drawing in a host of experienced stock pickers. In terms of geography, it’s the US that’s dividing the fund selection community this month. Singapore-based Eric Mellor is sceptical. While he argues the best long/short talent is US-based, this, more often than not, results in home-bias.
He predicts these funds will struggle when risk on/risk off behaviour returns, which is why he’s narrowed his search to funds focused on the emerging markets and the UK. Judging from our fund of favourites list this month (page 10), it’s a strategy many of Mellor’s peers are employing too.
On the flip side of the debate is Chile-based Miguel Angel Suarez. The Larrain Vial selector is gradually increasing his US equity long/short exposure on the basis of mean reversion, he’s now anticipating some ‘surprisingly good performance’. Let’s hope he’s right as after a rocky few years and questions over fees, this strategy could do with a change in fortunes.
Emanuele Rigamonti, JC & Associati SIM
The possible early tapering of the Federal Reserve’s bond-buying programme has been a wake-up call for many market participants.
This has triggered widespread re-pricing across those asset classes which had mainly benefited from global liquidity. With fundamentals back in play, we expect long/short equity funds to reap the benefits.
That said, liquidity issues will continue to loom large, due to the Bank of Japan steadily pushing down on the QE pedal and the ECB likely to ease further in light of weak macroeconomic data.
Following the recent pullback, we will closely monitor emerging market fund managers. We expect an increasing dispersion of returns in the coming months from this sector, given the headwinds faced by some key sectors in the main EM economies.
We’re currently watching a couple of funds in the Asia EM space: Melchior Asian Opportunities and Indus PacifiChoice Asia as well as Carmignac Emergents.
Pierre Vassart, Dukre Asset Management
Aggressive liquidity injections from most central banks have helped fuel powerful rallies in equity and bond markets, and also boosted world growth.
A key question is whether markets still offer value to investors, given substantial rises in stock prices during the last 12 months. In mid-May, US fund Tweedy Browne, a long-only manager, thought bargains were difficult to find in the markets and was selling selectively.
We tend to agree with them and have adopted a rather cautious attitude. We favour absolute return strategies where managers can perform in both up and down markets, as capital preservation is a key objective for us.
Our equity allocation therefore includes two components. First, we hold long/short funds with a proven track record in unfavourable conditions.
Second, we own pure value-oriented stock pickers, who are able to determine a realistic intrinsic value on the firms they select and will then sell accordingly.
Our favourite is Alken, as it managed to gain in May-June, a period when most funds were negative, and finished the second quarter up 3%. In selecting this fund, we also took into consideration the strong track record of Alken Capital 1, also managed by Walewski.
Elsewhere we have invested in the Reflex Discretionary fund and Carmignac Patrimoine. Among long-only equity, our favourites groups are Bestinver, Tweedy Browne and we like Fidelity’s South East Asia fund.
We also owned Yacktman Heptagon, run by Donald Yacktman for US equity, but we took profits in the first quarter. We are considering the following long-only funds: Syz European Opportunities, run by Eric Bendahan; the Odey European fund run by Crispin Odey; and FPM Funds Stockpicker Germany run by Manfred Piontke and Martin Wirth.
Miguel Angel Suarez, Larrain Vial
Regression to the mean is the prevailing law in finance and periods of below-average returns inevitably set the stage for surprisingly good performance.
From that point of view we are now gradually increasing our exposure to strategies that are set to benefit. We currently favour the Schroder GAIA Sirios US Equity fund run by John Brennan who has shown an ability to generate excess returns on long and short trades.
We have a relatively positive view on the US Market, so we prefer 130/30 strategies to market neutral ones.
Stefan Bauer, Franz Heinrich Bauer Asset Management
Financial markets have shown unusually high correlation over the past few weeks so diversification did not perform that well as a strategy. However, fundamentals are likely to come back into favour again.
One of the alternative investments we like is the Schroder GAIA Egerton Equity fund run by the experienced John Armitage. Armitage and his team did a very good job in the past, and also during recent challenging periods.
In general we look for convincing long/short strategies that are Ucits III compliant. These are hard to find – even in the market neutral sector, where we like the BSF European Absolute Return fund from BlackRock.
We also like the ‘long/short with long bias sector’. Quite often very interesting hedge fund strategies do not work properly in the Ucits III environment.
Pierre Molinero, OFI Asset Management
Do fundamentals still influence investors’ decisions given the recent macroeconomic focus?
The sharp drop in consumer staples is a hard reminder that, sooner or later, fundamentals will come back into favour. The flight to quality has fuelled a strong appetite for some growth stocks that now trade at high multiples, while cyclical ones have fallen off the radar. The recent past has been extremely frustrating for some long/short equity managers.
Yet, no tree grows to the sky. As Fed support is fading away and concerns about China’s economic transition continue to grow, we are currently facing a shift.
The valuation gap that affected value-oriented stock pickers is becoming a source of opportunities, with some domestic European stocks trading at distressed prices. Additionally, in an environment that remains volatile, long/short equity strategies offer an attractive return with low directional risk.
Therefore, we tend to favour managers able to adjust their exposure dynamically and keep a strong emphasis on valuation, such as DNCA Miura or Majedie Tortoise funds, managed by Cyril Freu and Matthew Smith respectively.
This article originally appeared in the July/August 2013 issue of Citywire Global magazine