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Killik adds Odey fund to buy list

17 April 2014

One analyst at the group says that Odey Odyssey would be a useful acquisition for investors who want to diversify away the risk of a long-only global equity fund.

By Alex Paget,

Reporter, FE Trustnet

Killik & Co have moved Tim Bond’s Odey Odyssey fund to a buy rating for investors who want a different way to access the global equity market.

The stockbroking and investment company rate the manager’s in depth econometric modelling, his proven track record of delivering equity like returns while using a multi-asset approach and the fact he has a significant amount invested in the fund himself.

Gordon Smith, who is a fund analyst at the group and a member of the Adviser Fund Index (AFI) panel, says that though the Odey Odyssey fund isn’t in the same mould as a standard targeted absolute return portfolio, it is a useful fund for investors who want to diversify away the risks of a long only global equity fund

“It is slightly different to a lot of absolute return funds as it can be volatile given Bond is able to go long equities or use Odey’s analyst team to find good single stocks that offer good value,” Smith explained.

“While it does give you single stock exposure, the fund gives you a different way to access equities.”

“He is able to play the market regardless of the environment and if he doesn’t like equities, he doesn’t have to own them or can go net short. I think it suits investors who can deal with periods of volatility, but it can act as a good diversifier.”

Tim Bond has run the £150m Odey Odyssey fund since launch in October 2011, having previously spent 12 years at Barclays Capital as managing director and head of global asset allocation.

According to FE Analytics, the offshore recognised fund has returned 37.55 per cent since its launch. As a point of comparison, the average fund in the IMA Global sector has returned 32.54 per cent over that time.

Performance of fund vs sector since Oct 2011

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Source: FE Analytics

Bond uses a complex investment model, econometrics, to generate ideas and returns.

Using this approach, Bond and his team attempt to forecast asset class valuations and where we are in the business cycle. On the back of that, the manager will try to locate the best opportunities – both long and short – across various parts of global financial markets.

Bond will take long and short positions across the global equity markets as well as government bond and corporate credit markets.

Mick Gilligan, also an analyst at Killik & Co, says that Bond has the ability to make that strategy work effectively.

“The investment process has proved to be effective since the fund’s launch and the manager’s econometric models provide a strong backbone of objectivity to the investment process,” Gilligan explained.

“As such, they help to reduce natural biases that exist in investment decision making. Losing positions may be a sign that the manager may be too early into positions, that the market is focused on something else or indeed that the forecasts lack accuracy.”

“Therefore, the forecasting objectivity that is inherent in the use of the models is combined with strict risk controls which seek to cut losing positions.”

This model, does however, mean that the fund can lose money over the short term.

For instance, equity markets have been broadly flat so far this year with investors using periods of weakness such as concerns over the outlook for emerging markets and geo-political risks in the Crimea to take profits from last year’s strong gains

According to FE data, Bond’s Odey Odyssey fund has failed to protect investors from less risk-on environment and lost 3.24 per cent so far in 2014. The MSCI World index, however, has lost just 0.59 per cent over that time. Gilligan expects the fund to outperform in future, though.

Performance of fund vs index in 2014

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Source: FE Analytics

“Bond’s models estimate that global growth has been running at 3.4 to 3.6 per cent annualised for the fifth month in row,” he said.

“He sees the lack of increase in the delta [rate of change] in the growth rate as a reason for a pause in equity market improvement. He expects the rate of change to turn positive again and is therefore maintaining a long equity position.”

Gilligan also likes the fact that Bond is looking towards out of favour areas of the market such as emerging markets, which as FE Trustnet recently highlighted, have started to rally.

“The models also suggest that emerging market capital flows are sensitive to US interest rate volatility but much less so to the overall level of US interest rates,” Gilligan said.

“This observation and positive signals from emerging market manufacturing PMIs have led to an increase in emerging market equity exposure during March.”

Currently, Bond is net long North American, Japanese, European, Asian and global emerging market equities. The Odey Odyssey fund also has long exposure to government bonds, but is short the UK equity market and interest rate futures.

While Gilligan and Smith do rate the fund, they warn that the running costs, which include performance fees and transaction costs, of this fund are higher than that of a typical open-ended fund.

For instance, the fund’s ongoing charges figure (OCF) is 1.01 per cent but it has a performance fee of 20 per cent.

Click here to learn more about absolute return investment strategies, with the FE Trustnet guide to absolute return.

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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.