interview
Matthew Stylianou
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23
Canyoustart byexplaining
what anabsolute return fund
is andhowit differs frommore
traditional, long-only funds?
In a long-only fund, where the policy is of
only holding‘long’ positions in assets and
securities, most of the risk comes from
exposure to the equity market, which can
be volatile.An absolute return fund can
take‘short’ positions – that is, it can sell
shares it does not own in the expectation
that they will fall in value.These effectively
reduce the equity exposure of the fund
so that absolute return funds have a lower
market risk.This also means they have a
good chance of producing positive returns
even when stock markets are falling.
Howareyouable touse this
additional flexibility?
The fund can use‘pair trades’, where we
will take a long position in one company
in a sector and a short in another because
we believe that the first one will do better
than the second. In addition, we can also
introduce shorts where we have a negative
view on a specific stock or indeed sector.
Sinceyou tookover the fund, in
October 2013, performancehas
beengood.What havebeen the
keydrivers of this?
There have been a number of factors
that have been positive for the fund.We
agreed with St. James’s Place a change
to the mandate to allow us to take bigger
positions in our highest conviction areas.
While it has been challenging in recent
months to make money from shorts, as
most shares have risen regardless of news
flow, the market environment has recently
become more benign.
Youhavearelativelyhighexposure
tofinancials. Canyouexplainthe
attractionsof thissector?
While we expect interest rates to rise,
we also expect global economic growth
to be muted; so the trajectory should be
gradual, with a peak somewhat lower
than the cycles of the past.We believe
that investors continue to look backwards
rather than forwards and are still scarred
by the global financial crisis.Time should
be a healer, which should result in the
financial earnings from companies being
re-rated.Also, we hope that the stronger
financial positions enforced by regulators
should result in lower volatility, which is
particularly attractive for absolute return
investment. I would highlight Lloyds Bank
and Paragon as great examples of shares
where the valuation does not adequately
reflect the potential for future growth.
Technology, utilitiesand telecoms
areareasof lowest exposure.Why?
While the UK does have some excellent
global technology companies, like
ARMHoldings [the chip manufacturer],
the reality is that it is a very small sector
in the UK equity market.Telecoms
and utilities are highly regulated,
making them very difficult to short.
However, the current environment of
long-term low interest rates means they
are highly rated versus history, making
them also a risky long. Our approach is
to tactically flex our position dependent
upon market conditions.
Inwhichareasdoyoucurrently
have short positions?
We have maintained our short position in
the food retailing sector, where we remain
convinced that there are a number of
pressures – namely the rise of the discount
chains, the move to online sales and the
growth of convenience stores – which will
continue to undermine the performance
of food retailers.
What is theoutlook?
Interest rates will rise, which should be
positive for performance, equity markets
are less likely to be as constructive and
more balanced liquidity should see a
return to fundamentals.All three of
these are positive for the absolute return
sector. I also have sympathy with those
who say that stock markets are looking
fully valued.They have been buoyed by
the accommodative monetary policies of
central banks. Now that there are signs of
economic improvement in the UK and the
US, I am pretty confident that volatility
will start to rise and equities will no
longer be the one-way bet they have
been in the past few years.
Viewpoint
Nigel Ridge, BlackRock
The UKAbsolute Return fundmanager on the world of long short
We believe that
investors continue to
look backwards rather
than forwards
