(Including global long/short, regional long/short and income overlay (options) strategies)
Global and regional long/short funds have the ability to protect portfolios in falling markets through market timing (increase short or cash positions), but have also been able to keep pace with, and indeed in some cases outperform, in strong up markets. A key reason for this is the greater flexibility that global long/short managers have to engage in truly active management. For example, in more recent market upswings, many funds have moved down the market capitalisation spectrum or into sectors that most of the market has been reticent to enter for fear of being caught in a liquidity trap. With the ability to hold higher levels of cash or use short index futures/individual stock shorts to offset these positions, long/short managers have been able to keep a certain amount of powder dry. Other long/short managers have utilised their ability to increase gross leverage to maximise the value of their high conviction ideas. As the market has normalised out of the risk on/risk off environment, in some cases, this has paid off handsomely.
Income overlay funds employ derivatives to enhance and/or protect income generation. Dividends from the underlying holdings are still captured as a source of income; however, the level of income generated may be augmented through derivatives. The degree to which each fund uses derivatives to enhance income generation varies between funds. The most commonly used is the buy/write option strategy. This involves holding a stock while simultaneously committing to sell the stock to a buyer at an agreed price in the future (through selling a call option), in return for option premium income.
Winner: Platinum Investment Management Limited
Zenith says: 2013 has been a successful year for Platinum, with many of the firm’s funds performing very strongly. There have been some changes in responsibilities at the firm, but in Zenith’s view this has been in step with the gradual succession plans of the business. Andrew Clifford is now the chief investment officer (CIO) and Jacob Mitchell has become deputy CIO. This replaces the previous structure of Kerr Neilson (CIO) and Andrew Clifford (deputy CIO), which had been in place since 1994. Importantly though, Neilson is maintaining his portfolio management responsibilities and has assumed the new role of CEO of the business. Zenith continues to rate Platinum highly and we note the deep portfolio management experience below Neilson and Clifford. While Neilson in our view is an exceptional investor and is difficult to replace (as he slowly reduces his role), we believe Platinum is well covered with Clifford’s experience and the portfolio management responsibilities that have been given to other members of the team over time. We believe the key individuals within Platinum remain passionate about markets and are across all the issues in their portfolios. From a performance perspective, Zenith feels that investors that hold the course with Platinum are likely to be rewarded. While portfolios tend to be well diversified by stock numbers, many of Platinum’s themes are contrarian and the use of currency as well as short positions means that performance can turn quickly. For example, Platinum International Fund’s rolling excess return chart shows that the fund can go through periods of underperformance and outperform in a very short space of time. On an absolute basis, while the fund is not immune to periods of poor performance, we believe Platinum is a proven performer over the long term.
Interview
To come
Finalists:
– K2 Asset Management
• Successful long-term management of international and Asian mandates using full suites of investment styles and investment tools (use cash, shorts, FX hedges).
• Stable and highly experienced team, strong transparency in capital allocation amongst team and a clear performance-based culture.
• Generally been successful in adding or removing market risk based on the market environment.
– PM Capital
• Firm is run by a deeply contrarian and experienced investor in Paul Moore. Moore has managed the business and flagship Absolute Performance Fund successfully since 1998.
• One of the truly unique high conviction, benchmark agnostic offerings in the market.
• Long-term performance focused approach that has rewarded investors that have held through the cycle.
