e-fundresearch.com: The rather surprising “Leave-vote” of the Brexit-referendum has caused quite some market turmoil, especially in the short-run. How did your strategy (FAFS - SharpeR EUROPE FUND A-ACC-EUR - LU1085157672) manage to perform during those volatile days?
"The fund’s primary focus is on avoiding downside risk. Part of which means trying to ensure that we are not exposed to macroeconomic or geopolitical tail events that we cannot predict."
Alexander Scurlock: In the days immediately after the referendum result MSCI Europe was down over 10%, but a sharp recovery in the final few trading days of the month resulted in a monthly return of -4.3%. Over the month, the fund gained ground, returning +1.5%.
The fund’s primary focus is on avoiding downside risk. Part of which means trying to ensure that we are not exposed to macroeconomic or geopolitical tail events that we cannot predict. Ahead of the Brexit referendum, therefore, we had been taking down the risk in the portfolio. This meant reducing overall net exposure and volatility through hedging, but also reducing exposure to UK revenues and hedging sterling.
In particular, we reduced exposure to financials on both the equity and credit sides, increased overwriting of multinationals with stable, diversifed revenue streams, including BAT and GSK, and also increased the size of the crossover hedge on the credit side.
We also managed the fund’s currency exposure carefully, and were actually short sterling/long dollar after accounting for the fact that a part our UK exposure was to multinationals like the names mentioned. This positioning worked well for the fund following Brexit and the fund rose in the days following the referendum result. We also benefited from our shorts in banks and autos, a short in a UK retailer with a significant dollar cost base, and our equity hedges (where we had short positions in both FTSE and Eurostoxx futures).
e-fundresearch.com: Apart from the Brexit-“fuss”: To what extent has your strategy been able to benefit from this year's market environment and which particular investment themes have delivered the strongest performance contribution on a year-to-date perspective?
Alexander Scurlock: So far in 2016, the market’s thirst for yield has benefitted a number of our equity income positions, with German real estate company Vonovia and British American Tobacco good examples. Short positions in areas such as automobiles and luxury goods have also worked well as these areas have come under pressure amid heightened concerns over global growth. Finally, short positions in highly levered peripheral European banks have worked well for the fund and acted as a good hedge for long positions in the subordinated credit of well capitalised, high quality European banks.
e-fundresearch.com: With regards to the remaining months of 2016: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome?
"We should expect to see further market volatility during the remaining months of 2016 particularly in light of the political calendar."
Alexander Scurlock: We should expect to see further market volatility during the remaining months of 2016 particularly in light of the political calendar. As such, it makes sense to adopt a cautious approach while remaining on the lookout for bottom-up opportunities across the corporate balance sheet. Going forward, we would expect the UK consumer to come under some pressure – we, therefore, have a number of short positions in UK High Street retailers that we expect to be impacted by a worsening consumer environment and rising costs due to the sharp fall in sterling.
e-fundresearch.com: In the current market environment: Why should investors consider an increase in allocation to your asset class and in particular your strategy in 2016?
Alexander Scurlock: In an environment where growth is scarce and volatility high, a risk-controlled product with a broad opportunity set (not limited to a single asset class) which aims to deliver positive returns for investor while protecting the downside, offers a compelling investment alternative in our view.
The flexibility to invest across the balance sheet and take both long and short positions via a number of investment instruments, not only provides a broader opportunity set but also affords the ability to hedge unwanted risk in the portfolio; especially helpful in times of increased market turbulence.
