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GAM: The absolute return funds we’ve stuck with despite the performance drag

06 June 2017

Charles Hepworth, investment director of GAM’s model portfolio range, outlines the absolute return funds he still owns despite the sector being a “dog”.

By Jonathan Jones,

Reporter, FE Trustnet

Underperforming absolute return fund strategies has prompted GAM investment director Charles Hepworth to move to his lowest ever weighting to the sector in across the firm’s model portfolio range.

Hepworth runs five model portfolios – defensive, cautious, balanced, growth and global equity – for GAM and the absolute return sector is the only part that has failed to deliver a positive return so far this year.

He said: “Every area apart from absolute return, which has admittedly been a ‘dog’, has delivered this year but it is a tiny allocation for us now.

“Certainly this year and even last year it hasn’t really covered itself in glory for all the reasons people are already talking about: Central bank manipulation of the markets has made it much more difficult for some of the hedge styles to really navigate, the higher fees that they are charging and anything else. A lot of it is explained by the press already.”

Indeed, 31 of the 104 funds in the sector with a long-enough track record have made a loss since the start of 2016, with the sector averaging a disappointing 3.28 per cent over the period – although it should be noted that the sector average is not advised by many advisers due to the disparate investment approaches in the sector.

Hepworth said: “It has been an area where we have reduced and reduced over the course of the last year and it is now certainly the lowest allocation that we’ve ever held to absolute return.”

However, he said the sector can still offer benefits to those investors that require diversification in their portfolios.

“If you’re looking at it from a purely cynically contrarian view then you could argue that it is time to start adding slightly more money to it because it has had such a mediocre return over the last three or four years,” he said.

While he does not agree with this per se, he remains invested in four absolute return strategies.

He currently holds two global macro-style funds which he hopes over the longer term should be able to provide good returns.

The investment director said: “They are hopefully going to deliver that 5-7 per cent – that is we are trying to get – but so far it’s been much more difficult for them to do that.

“But I think really that kind of style of management should start to come back into play now you’re getting more divergent policy paths coming from central banks – the Fed obviously going one way and the ECB [European Central Bank] and Bank of Japan staying in their stimulation mode.”

The first is JP Morgan Global Macro Opportunities run by James Elliot, Shrenick Shah and Talib Sheikh.

Since the start of 2016 the fund is down 1.5 per cent but since its launch in 2013 it is up 31.1 per cent.

Performance of fund since launch

 

Source: FE Analytics

The £768m, three crown-rated fund aims to provide positive returns over a three-year period in all market conditions and is currently 79.2 per cent weighted to equities with 16.5 per cent in fixed income and 4.3 per cent in cash.


It invests in themes such as ‘China in transition’ and ‘US economic strength’ and has 25 per cent in equity options and futures. The fund has a yield of 1.23 per cent and a clean ongoing charges figure (OCF) of 0.78 per cent.

The other macro strategy Hepworth uses in the space is GAM Systematic Diversified Macro, an offshore fund launched in December last year following the company’s acquisition of systematic hedge managers Cantab Capital Partners.

Another fund he is currently invested in but admits he may not remain hold for too much longer is the Odey Odyssey fund run by Tim Bond.

“He had a great run – if you look at his performance charts it’s almost like a tent it is straight up and then straight down again,” Hepworth said.

 

Source: FE Analytics

As the above shows, the fund is down 0.06 per cent since launch but had been up as much as 68.45 per cent in June 2015 before falling back again.

“He has been really caught out ultimately by the support that central banks have given markets – that’s my own interpretation really of what’s been going on,” Hepworth said.

“He’s been net short on equities and fixed income and though he is reducing the fixed income short he is very, very short on equities which has clearly not been the right place to be over the course of the last year.”

Indeed, the fund is 104.9 per cent short in the US market with 19.4 per cent short in Europe and 11.6 per cent short interest rates.

While this has been the wrong place to be, Hepworth added that when there are market dislocations he does provide some protection.

“Unfortunately his net short position probably doesn’t agree with our [current] view of markets so we are more than likely to be exiting that in the short term.


“But again this fund will offer protection to those investors that want to take that view further down the line so we can always revisit that one.”

The final fund is the £421m offshore fund GAM Star Merger Arbitrage, which invests in companies undergoing through mergers & acquisition (M&A) activity.

“We’ve got a ‘merger arbitrage’ fund which we included in June or July last year,” Hepworth said.

“On the bid target it will go long the acquired and short the acquirer – obviously only if it makes economic sense to, they wouldn’t just do it willy-nilly.

“If there’s an arbitrage spread that they can make from that then they will just ‘arb’ out the price differential so the only risk that you have to that is obviously if the deals fall apart or another bidder comes in.”

He added that manager Roberto Bottoli used to run the same kind of strategy at Allianz and then moved over to GAM last year, where he is focused on the M&A space.

Since its launch in July last year, the fund has made 2.69 per cent, but the manager sees it improving over the long term, aiming at returns of double this.

Performance of fund since launch

 

Source: FE Analytics

“It’s doing those kind of slow and steady returns. I guess it’s been the best out of our absolute return allocation but the returns are really quite sub what we’re looking for which is around the 5-7 per cent estimate that we’re trying to get from a lot of these managers,” Hepworth said.

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