Why RSMR Rate this Fund

• A market neutral fund with low factor risk and low net market exposure
• Fund returns have been uncorrelated to equities, the interest rate cycle and bonds
• Fund managed by boutique with proven record in long-short investing
• The fund has a record of delivering returns with limited drawdowns and low volatility
• Pragmatic approach and strong understanding of risk has delivered consistency to investors

Fund Process

The investment universe comprises 1,300 stocks and there are no biotech or pre-revenue companies or brokers.  The market cap cut off ensures there is liquidity.  The team use proprietary research tools to look at around 400 names.  These include macro indicators referred to as ‘thermostats’, bottom-up accountancy work looking to highlight accounting ‘sinners’ together with traditional alpha seeking work and a proprietary ‘GMMI’  macro indicator.  Bottom-up stock selection is always the driver of holdings.  There are typically 40 longs and 40 shorts in the fund with no small caps. 

At the core of the approach is fundamental analysis and here no one size fits all.  The managers look for overlooked quality and value opportunities and on the shorting side they look for challenged business with a catalyst.  Management culture and quality of accounting is assessed, and alternative data and proprietary models are applied together with fundamental analysis and valuation methods focus on cash and intrinsic value.  The full team discuss all ideas at a twice weekly stock ideas meeting, although the co-managers have the ultimate say on what enters and exits the fund. Most of the team’s research is conducted internally by meeting company management, examining company accounts, and seeking alternative sources of data.  All the screens and models have been built internally and are proprietary.

There is a very pragmatic approach with very robust risk management.  The fund does not want to be affected by factor or style moves in the market and ensures that, for example, a move in the oil price, for or against quality names, or changes in the business cycle would not be the driver of performance and neither would a bias to either value or growth.  Around 80-90% of the risk in the fund is idiosyncratic.  The 40 longs and 40 shorts will be in similar businesses rather than trying to favour one sector versus another according to the macro outlook.  Returns have been driven by stocks not factors.

The fund split is roughly 50/50 large cap versus mid cap, but within this there is not a size bias to either the long or short book to avoid factor driven returns. Shorting is largely individual stocks, although the accounting screen throws up a basket of ‘sinners’ which ranks stocks on poor accounting and there is therefore a short basket of around 30 names with a qualitative overlay to this positioning. On risk the team use the Bloomberg Fundamental Factor Model, so there are both quantitative and fundamental risk models.

Evaluation

As a market neutral offering not dependent on market cycles the fund should perform well in most market conditions relative to its cash benchmark but is not seeking to keep up with equity returns in a strong bull market.

Application

The fund is suitable for use by cautious or conservative investors who do not want exposure to equity market volatility. Within the context of an overall portfolio the fund is a useful diversifier from traditional investment options which deliver returns through market beta. 

Our Opinion

The fund has been managed in a pragmatic, risk aware manner, allowing returns with no market correlation since moving to Tellworth. The accurate monitoring of potential factor risks has been important to this outcome and the team have generated alpha through stock selection. The fund does not use net positioning to drive returns but has increased the gross positioning as low levels of market volatility has allowed this within the pre-defined risk budget. The results demonstrated by the team to date show consistency despite a change of one of the co-managers, and fully justify a RSMR rating in the Targeted Absolute Return sector.