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Three pair trades from the Insight Market Neutral fund

23 February 2014

Insight’s Matthew McKelvey explains how the fund manages to make a positive return in all market conditions.

By Jenna Voigt,

Features Editor, FE Trustnet

Few funds are able to deliver positive returns in every market condition, but the four crown-rated Insight Absolute Insight Equity Market Neutral fund has done just that.

It is perhaps the most cautious way to invest your money, only slightly riskier than cash, so it likely comes as no surprise that the fund hasn’t shot the lights out in the IMA Targeted Absolute Return sector over any period.

It has made 15.11 per cent over the last five years, putting it nearly 10 percentage points behind its peers, but well ahead of its LIBOR Libid GBP 3m cash benchmark, which gained just 3.31 per cent over the period.

Performance of fund vs sector and index over 5yrs

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Source: FE Analytics

It has, however, achieved its target of delivering positive absolute returns year-in, year-out, in all market conditions.

The fund pins its performance on a rolling 12-month period, aiming to achieve positive returns in that range.

It undoubtedly acts as a bit of ballast in troubled markets, highlighted by the fact that it achieved strong gains in the crisis year of 2008 and in the down markets of 2011 when the sector was shedding capital.

In both years the fund also continued to beat cash – indicating it could be a better shelter for capital given the ongoing threat of inflation.

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Source: FE Analytics

Matthew McKelvey, head of product management, specialist equities at Insight, says the fund’s success is down to a series of pair trades, where the managers pit one stock against another in order to balance returns.

This means the team will go long on one stock and balance that trade by going short on another that it expects to perform poorly in the short-term.

“Everything we do is a pair trade,” McKelvey said.

“It does not mean we’re rampantly bullish or bearish, it means it makes sense to use these stocks as a hedge.”

With this in mind, McKelvey highlights three pairs that have helped keep the fund market-neutral.



Ashtead vs construction companies


One of the Insight team’s favourite stocks is international equipment rental company Ashtead Group.

ALT_TAG The firm was previously based in Leatherhead, Surrey, but it has since moved its head offices to London.

McKelvey (pictured) says the team likes stocks exposed to pockets of activity around the world where recovery is difficult, which is why it likes Ashtead.

He says that given the tentative recovery in the construction industry in the US, Ashtead is better positioned to grab the upside because it offers equipment to rent rather than buy, meaning companies engaged in construction activities don’t have to sink as much capital into the business to produce growth.

“[Ashtead] stands to benefit from improving construction trends,” he said.

On the other side of this trade sits a mixture of construction-related companies facing less attractive markets, according to McKelvey.

While he is unable to name the specific stocks due to the sensitive nature of short trading, he says the areas he expects to perform poorly are large civil engineering companies exposed to state-funded contracts.

He says the theme on the short side is companies exposed to state spending where the market believes in a stronger and faster recovery that the team at Insight doesn’t think will come through.

“It’s a difficult environment for these guys,” he said.

“The competition has increased and the margins have diminished.”

Performance of stock vs index over 1yr

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Source: FE Analytics

Ashtead has managed to pick up nearly 70 per cent over the past 12 months, compared with just 10.59 per cent from the FTSE 100.


F&C Asset Management vs emerging markets


Market-neutral funds are able to achieve their neutrality at the global level, but McKelvey says in current markets, the team tends to balance each side of its long/short trades at a narrower level – by region, sector or industry.

This makes the portfolio more tightly hedged and theoretically less sensitive to wide global economic swings.

In the case of F&C Asset Management, the Insight team bought the stock on the long side because it was engaged in what he calls “self-help” practices after chairman Edward Bramson stepped down from the firm last year.

Canada’s Bank of Montreal (BMO) also recently bid for it at £708m, another boon for the asset manager’s future according to McKelvey. F&C’s share price spiked following the announcement in late January.


On the opposite side of the trade, Insight is taking a wary stance on asset managers that are heavily exposed to emerging markets, expecting further volatility from the downtrodden sector.

McKelvey says the beating equities took, coupled with the huge amounts of money that previously went into emerging market debt, could have signalled a peak in the asset class.

This means these firms are likely to see limited growth.

F&C has experienced steady growth over the last one, three and five years, though it has lagged behind the FTSE 350 Financial Services index and the FTSE 250 over the latter period.

The firm has actually lost money over the past decade while the indices have made stellar gains – hence Insight’s self-help bet on the firm.

Performance of stock vs indices over 1yr

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Source: FE Analytics

The stock has performed in line with both indices over the past 12 months, returning 25.17 per cent.


Grifols vs Grifols

Another way market-neutral funds can hedge risk is to take bets on currencies.

In the case of Spanish blood plasma firm Grifols, Insight is taking a long view on the firm’s US-listed non-voting shares, known as American Depositary Receipts (ADR), and taking a short view on the stock listed in Spain.

“It’s a low-risk trade capitalising on an anomaly presented by local market liquidity factors,” McKelvey said.

The US-listed stock is trading on a discount to the Spanish stock that the Insight team thinks is unjustifiably wide.

Insight Absolute Insight Equity Market Neutral requires a minimum investment of £3,000 and has ongoing charges of 1.17 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.