The Absolute Insight UK Equity Market Neutral Fund, managed by Andrew Cawker along with three co-managers, is the only fund in the IMA Absolute Return Sector to have posted positive returns over every 12-month rolling period from 31 March 2008 to 29 February 2012, according to Lipper data.
That is 36 out of 36 periods, 100% delivery, top marks.
The fact I am making such a big deal about it alludes to my thoughts about the Absolute Return Sector, something I’ve shared with you in greater detail before.
To its credit the IMA is currently reviewing the sector, a process that is at committee stage, and Jane Lowe director of markets at the association went some way to explaining its short-comings at Portfolio Adviser’s Expert Investor Absolute Return event in February.
So rather than dwelling on the negatives, something easily done by someone with an Eeyore disposition, let’s instead look at what the team at Absolute Insight are doing right.
Winning formula
Matthew McKelvey, product manager at Absolute Insight, says: "The fund’s objective is to deliver positive returns independent of the underlying equity market and do that in a way that shows low risk and low volatility and low draw downs. The fundamental thing we aim to do is end up with a performance track record not only with a relatively smooth series of returns but also very low correlation with the equity market and any other asset class."
All very good and well, but how is it actually done?
"The most important thing that helps us deliver is that we aim to be genuinely market neutral so this is a long/short type of equity strategy. For every long position we have an equal and opposite short position is taken. If you look at our portfolio the net exposure is zero, so the value of longs is equal to the value of shorts even though we have an allowance of 10% either way," he adds.
The team decide their pair trade by taking a lead idea, usually on a stock – be it long or short, and then selecting a hedge against it. The hedge can be another stock, a group of stocks or an index.
For example, if the team decided Barclays was attractive and wanted to take a long position, it could take a short position on the FTSE 100, but this would still be taking some banking-related risk as it has just hedged the broad market.
To combat this, the fund could take a short on the banking sector, with a selection of other banking stocks, such as Lloyds Banking Group and HSBC.
"This tends to be very, very, very precise," says McKelvey, "We try to focus on stock specifics and wash out the effects of the overall market and factor risks."
The term factor relates to aspects of risk associated with sector, growth or value and macro risks, to name but a few.
This also helps Cawker and co keep correlation to other asset classes down. Over the past five years the fund has averaged a 0.02% correlation with UK equities, 0.06% correlation with corporate bonds and -0.03% correlation with gilts.
Guilt through association
McKelvey admits it can be frustrating that the name of absolute return funds is tarnished by so many not sticking to their remit, but he adds that the absolute return sector is not alone in this failing.
"How many good managers are there out there? If you were to look at the UK equity long only space I think I am roughly right that something like 70% of managers did not outperform their index last year. It is not something confined to absolute return.
"Generally with absolute return managers you are trading away the market effects and left with the manager’s own skill and the reality is skill is relatively scarce."
Does the fund’s track record mean Cawker is one of those rare beasts with the skill required to outperform in all markets? I hope so; it would be nice to be of a Tigger disposition for once. Let me know what you think below.
