Church House’s Mahon: ‘2022 was a shocker’ for absolute returns

Portfolio Adviser speaks to James Mahon, co-manager of the £259m Church House Tenax Absolute Return Strategies Fund

James Mahon, Church House
James Mahon


Q: What is the background behind the launch of the strategy?

We set up the Church House Tenax Fund in November 2007 in direct response to a customer of ours who wanted a steady and consistent return for a portion of his wealth. My colleague Jerry Wharton and I had been discussing a multi-asset absolute return approach for a while to facilitate some lower-volatility strategies. So, Tenax was born and has since been utilised as a cornerstone of our clients’ portfolios.

Jerry and I have run the fund since inception and remain as committed to the strategy as ever, despite some severe testing over the past couple of years – thanks in particular to central bank inaction, Covid and inflation. Now, we are witnessing an over-reaction from the central banks but rates are now back to more sensible levels and Tenax has an enticing view again.

Q: What is the secret behind running a successful absolute return fund?

Maintaining a consistency of approach and, preferably, providing consistent returns. These funds are more difficult to explain than most, so it is important to stick to your knitting. This needs to be combined with the understanding to recognise when there are opportunities and, equally, when not. ‘Patience’ is a word that is bandied around a lot here. The opportunities will come but sometimes one has to be prepared to sit on one’s hands for extended periods.

Our objective is to deliver positive returns over rolling 12-month periods at low levels of volatility. This has been extremely difficult to achieve over the past couple of years in an environment where ‘risk-free’ rates were taken down to zero, but our strategy remains unchanged. We made ourselves a shade unpopular over the period 2017/2020 pointing out that consistent returns were going to be difficult to achieve for Tenax as the ‘risk-free’ UK 10-year gilt yield sank to 1% and below, and base rates hit the floor.

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Our approach is to diversify across liquid asset classes while recognising that fixed interest investments are always likely to be the dominant portion of the fund.

Asset class diversification is important, but we also diversify widely across individual investments. Diversification remains the most straightforward method of reducing volatility. But Tenax is risk averse, so this is just the first stage. Essentially, cash (or cash alternatives) is our starting point and we are happy to maintain high proportions while waiting for opportunities elsewhere.

Other tenets are to keep the fund straight-forward and explicable. We avoid gearing along with hidden gearing in prospective investments. We monitor credit risk all the time, including counterparty risk.

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Linked to the ‘straightforward’ point is transparency. As far as possible, we try to bring our investors with us on the ‘journey’, explaining what we do and why we are doing it. We have always been happy to show the complete portfolio to interested investors.

But our experience has been that many investment professionals don’t appear to understand what a floating rate note is, so expecting unsophisticated investors to is a stretch.

To read more, visit the September edition of Portfolio Adviser Magazine

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