The Evolution of Absolute Return: Robert Thorpe, Cazenove ...


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  • 3 subjects are all interlinked. Market volatilty and risk aversion has driven the demand for lower, alternative investments as identified by the FSA. We discuss what investment risk is, how it is measure and how asset allocation can reduce risk wi
  • But then cash became a problem – LIBOR collapsed as the MPC slashed rates. 5% returns from cash at the start of the year have now collapsed to about 1%. At this point, the search for alternatives and absolute returns increased in earnest..
  • The number 1 question asked of a Absolute Manager is how much should be allocated to a clients portfolios. Clearly that question is client specific. What is apparent is that the risk return characteristics shown on the efficient frontier slide show that these funds are arguably the most efficient asset class after cash. To help you answer the question, here is an example of the affect of adding different percentages of a Absolute Return portfolio to the a core portfolio.
  • Self Explanatory
  • Double click on chart, second tab, click on chart lines and then go over to the numbers and drag down to the latest month end. Then you will need to readjust the chart to increase the lines to cover month end.
  • The Evolution of Absolute Return: Robert Thorpe, Cazenove ...

    1. 1. The Evolution of Absolute Return Cazenove Capital Management Limited 12 Moorgate London EC2R 6DA Telephone +44 (0) 20 7155 5600 Registered Office 12 Moorgate London EC2R 6DA Registered in England No 3017060 Authorised and regulated by the Financial Services Authority Cazenove Capital Management Limited provides independent advice For professional advisers authorised and regulated by the FSA only. This document must not be distributed to non-regulated persons or retail investors Robert Thorpe - Director, UK Advisory Sales
    2. 2. Agenda <ul><li>Part 1 </li></ul><ul><ul><ul><li>Demand for Absolute Return </li></ul></ul></ul><ul><li>Part 2 </li></ul><ul><ul><ul><li>Absolute returns - reducing marketing risk and volatility </li></ul></ul></ul><ul><li>Part 3 </li></ul><ul><ul><ul><li>The Evolution of Absolute return </li></ul></ul></ul>
    3. 3. Defining Absolute Return IMA: Absolute Return Sector: A return above zero in any market condition <ul><ul><ul><li>A return above inflation </li></ul></ul></ul><ul><ul><ul><li>A return above cash </li></ul></ul></ul>
    4. 4. What Absolute Funds are not Guaranteed to deliver positive returns each month - but potential for fewer negative months Immune from volatility - but expect volatility to be lower than traditional funds A new way of investing - but techniques now accessible to retail investors Hedge funds - but borrow techniques from them, and are regulated funds
    5. 6. A truly global crisis
    6. 8. A truly global crisis
    7. 9. 2008: Correlation Year Average UK All Companies Fund -32.07% over 12 months Average UK Corporate Bond Fund -10.01% over 12 months Average UK Property Fund -30.43% over 12 months Average Global Equity Fund -24.37% over 12 months Average Asian Equity Ex Jap Fund -33.59% over 12 months Average Emerging Markets Fund -37.14% over 12 months Source: Lipper mid to mid, net income reinvested over one year to 31/12/08
    8. 10. Reduced return from cash
    9. 11. Who could Absolute Funds be suitable for? Investors seeking positive returns above cash Investors seeking low correlated asset classes Investors seeking the potential for excellent returns with low volatility Investors seeking to reduce risk in their portfolio Investors seeking exposure to outstanding investment talent Most investors….? Investors close to retirement/drawdown With-profit holders? Those who didn’t invest last year!
    10. 12. Absolute return funds – enhancing returns/reducing risk -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 6.00 6.50 7.00 7.50 8.00 8.50 Core Portfolio 95% Core - 5% Abs Ret Fund 90% Core - 10% Abs Ret Fund 85% Core - 15% Abs Ret Fund 80% Core - 20% Abs Ret Fund Source: Cazenove Capital. Abs Ret Fund (50% Caz UK EQ Abs Ret GBP/50% Threadneedle Abs Rtn Bond Fund) 3 years to 31 st Dec 08. Core Fund is average IMA Cautious Managed Fund Volatility Return
    11. 13. Absolute Returns – reducing market risk and volatility Part 2
    12. 14. Shorting – simple explanation of profit from falling prices £100k profit Buy back £100k Sell £200k 20 60 100 140 180 Property market crashes 50%!
    13. 15. FSA: Alternate Strategies to enter retail space <ul><li>March 2007 – Consultation Paper CP07/6 </li></ul><ul><li>1.2 A wider range of investment products is increasingly entering the retail market and there is little, if any, possibility of preventing this. Indeed, because of the recent downturns in the equity market retail consumers appear to be actively seeking out alternative investments to increase their returns. </li></ul><ul><li>1.3 For this reason we have considered how we might create a regime to accommodate these diverse products in a well-regulated environment. The advances that have taken place in portfolio management mean that the traditional, long-only style of management typically found in retail investment products may no longer be the only appropriate strategy for every investor. </li></ul>
    14. 16. A market neutral fund <ul><ul><ul><li>Beta : Sensitivity of a share price to wider market movement (e.g tracker has a beta of 1) </li></ul></ul></ul><ul><ul><ul><li>Alpha : Return over and above market or index </li></ul></ul></ul><ul><ul><ul><li>Market neutral : no sensitivity to market risk (e.g beta of zero) </li></ul></ul></ul>50% Long (beta +1 ) 50% Short (beta -1 ) = Zero Beta
    15. 17. Example Source: Datastream 1 December 2008 Stock: Reed Elsevier Sector: Media & Entertainment Style: Growth Defensive Stock: ITV Sector: Media & Entertainment Style: Consumer Cyclical
    16. 18. The Evolution of Absolute Return Part 3
    17. 19. Absolute evolution <ul><ul><ul><li>Relative objective </li></ul></ul></ul><ul><ul><ul><li>UCITS 3 (EPM) </li></ul></ul></ul><ul><ul><ul><li>CGT/Income tax (up to 32%) </li></ul></ul></ul><ul><ul><ul><li>Daily dealing </li></ul></ul></ul><ul><ul><ul><li>3-5 year outlook </li></ul></ul></ul><ul><ul><ul><li>High transparency </li></ul></ul></ul>Traditional <ul><ul><ul><li>Range of targets </li></ul></ul></ul><ul><ul><ul><li>Unregulated collective investment </li></ul></ul></ul><ul><ul><ul><li>Income tax only (to 32%) </li></ul></ul></ul><ul><ul><ul><li>Monthly dealing </li></ul></ul></ul><ul><ul><ul><li>6-18 month outlook </li></ul></ul></ul><ul><ul><ul><li>Lack of transparency </li></ul></ul></ul>Hedge Efficient Portfolio Management : A set of standards in the U.K. for prudent management of investment accounts. The standards call for economically appropriate transactions, i.e., transactions that reduce risk, reduce cost, or generate additional capital or income. <ul><ul><ul><li>Cash+/above zero </li></ul></ul></ul><ul><ul><ul><li>UCITS 3 (EPM plus derivatives) </li></ul></ul></ul><ul><ul><ul><li>CGT qualifying </li></ul></ul></ul><ul><ul><ul><li>Daily dealing </li></ul></ul></ul><ul><ul><ul><li>1-3 year outlook </li></ul></ul></ul><ul><ul><ul><li>High transparency </li></ul></ul></ul>Absolute
    18. 20. Aide memoire to Absolute Due Diligence <ul><ul><ul><li>What is the volatility compared to the market? What is the Beta? </li></ul></ul></ul><ul><ul><ul><li>Has the fund manager used a rising market to achieve performance? </li></ul></ul></ul><ul><ul><ul><li>How much has the fund lost in any one month? </li></ul></ul></ul><ul><ul><ul><li>How many negative months? </li></ul></ul></ul><ul><ul><ul><li>Where have the returns come from? </li></ul></ul></ul><ul><ul><ul><li>How successful has the shorting record been? </li></ul></ul></ul>Experience and evidence is crucial
    19. 21. Cazenove UK Absolute Target Fund Launched July 2008 Targeting between 8 and 10% per annum, net of fees (Not guaranteed*) Volatility significantly less than the equity market UCITS Fund, daily priced and liquid Managed by Tim Russell. Experienced, track record Rated by OBSR and S&P £213m under management * There is no guarantee that either the target or positive returns will be achieved Broadly market neutral (BETA 0) Cazenove UK Absolute Target fund
    20. 22. Tim Russell’s Absolute Record at Cazenove Capital (rebased) GBP Class Source: Cazenove Capital/Bloomberg at 31/03/09.
    21. 23. Tim Russell Absolute Portfolio 12 Months period Performance attribution by sector – UK Equity Absolute Return Fund 1 year to end March 2009 (basis points) 120 352 -231 Mining Totals Short Long 1 Yr to 31/03/09 UK Hedge 9 157 -148 General Retailers Totals Short Long 1 Yr to 31/03/09 UK Hedge
    22. 24. Tim Russell’s Absolute Record at Cazenove Capital As at 30 March 2009 Source: Cazenove Capital 2.20 13.3 1 n/a n/a -13.24 6.26 25 40 n/a FTSE All Share Index 14.40 Average net exposure (%) 131.60 Average gross exposure (%) -0.02 Beta 3.36 Volatility 7.50 Annualised return (%) -3.50 Maximum monthly loss (%) 2.5 Best monthly return (%) 8 Monthly negatives 57 Monthly positives 65 Months since launch UK Equity Absolute Return
    23. 25. Tim Russell’s Absolute Strategy Performance: 10 biggest fall of FTSE since launch
    24. 26. Cazenove UK Absolute Target Fund <ul><li>Monthly statistics since launch July 2008 to May 2009 </li></ul><ul><li>Months since launch 10 Fund positive months since launch 8 Index positives month since launch 5 </li></ul><ul><li>Fund negative months since launch 2 Index negative months since launch 5 </li></ul><ul><li>Number of months fund out-performed index 6 Number of months fund fell further than index 1 </li></ul><ul><li>Fund Volatility since launch 9% Index Volatility since launch of fund 39% </li></ul><ul><li>Relative performance to all-share since launch: + 15.6% Fund return since launch +1.3% (avg IMA Absolute +1.2%) Index return -14.3% * Performance 18.7.08 to 27.05.09. P2 share class mid to mid, source Financial Express. Index FTSE All-Share </li></ul>
    25. 27. Disclaimer <ul><li>This document is issued by Cazenove Capital Management Limited (Cazenove Capital). It is for information purposes only and does not constitute an offer to enter into any contract/agreement nor a solicitation to buy or sell any investment or to provide any services referred to therein. </li></ul><ul><li>This document is solely for the use of professional intermediaries and is not for general public distribution. </li></ul><ul><li>The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness, and Cazenove Capital or connected companies, directors, officers and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein which, moreover, are subject to change without notice. </li></ul><ul><li>This document has been produced based on Cazenove Capital Management’s research and analysis and represents our house view. Unless otherwise stated all views are those of Cazenove Capital Management. It may not be reproduced in any form without the express permission of Cazenove Capital Management and to the extent that it is passed on, care must be taken to ensure this is in the form which accurately reflects the information given here. Unless otherwise indicated, the source for all data is Cazenove Capital. </li></ul><ul><li>Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount invested and may be affected by fluctuations in markets and exchange rates. </li></ul><ul><li>Cazenove Capital Management is the name under which Cazenove Capital Management Limited (registered No. 3017060) and Cazenove Investment Fund Management Limited (registered No. 2134680) each authorised and regulated by the Financial Services Authority and of 12 Moorgate London EC2R 6DA provide investment products and services. </li></ul>