An ability to generate healthy returns at time when many equity markets have struggled has led F&C’s Rob Burdett to choose the £1bn CF Odey Absolute Return fund as his investment offering of 2015.
Few investors will have missed the turmoil that has stalked markets over the past year, after strong initial gains – which saw equity indices in the UK and US reach new record highs – gave way to a period of nervousness prompted by the slowdown in China and the timing of the Federal Reserve’s first interest rate hike.
When there was just a week to go until the end of 2015, the FTSE All Share was sitting on a 1.40 per cent loss while the developed market-focused MSCI World index had scraped together a 3.44 per cent gain. The MSCI Emerging Markets index, meanwhile, had dropped more than 10 per cent.
Performance of indices over 2015
Source: FE Analytics
Against this backdrop, some funds have managed to hold up relatively well – and even perform better than some of their longstanding investors might have thought.
When asked for a fund pick for the past year, Burdett – who is co-head of the F&C multi-manager team with Gary Potter – said: “For me it would be the CF Odey Absolute Return fund, run by James Hanbury and Jamie Grimston. Year-to-date, the fund is up about 8 per cent and what I like about that is that it's come during a very tricky year.”
As well as the general volatility that has hit markets this year, conditions seem to have been difficult for hedge funds and UCITS vehicles following similar strategies. Recent headlines about the sector have highlighted how hedge funds have just gone through their worst year since 2008, with some names in the space posting double-digit drawdowns.
CF Odey Absolute Return, however, made 8.14 per cent between the start of the year and 23 December 2015. This is about 6 percentage points more than the average gain in the IA Targeted Absolute Return sector, although that has come with more volatility, and is higher than the return of the MSCI World.
Performance of fund vs sector and index over 2015
Source: FE Analytics
Burdett says that comparisons between the members of the absolute return sector are not always appropriate, as there are a number of funds pursuing very different aims and strategies. When it comes to CF Odey Absolute Return, he views it more as a stock-picking fund rather than a typical absolute return vehicle and is therefore comfortable with its volatility.
“Yet again the fund has delivered decent returns in an especially tricky market for absolute return funds. But we see the fund as a stock-picking fund that has been designed by the managers to suit their skills, rather than a traditional absolute return fund,” he said.
“They've been close to 100 per cent long at various points this year, which is obviously a significant contributor to volatility – but the volatility has tended to be on the upside. So long as you know what you're buying and you keep up to date with its strategy, this an attractive offering.”
Hanbury and Grimston tend to look for stocks that have been overlooked by the rest of the market for various reasons. The process used by the managers may appear to be aggressive, especially for a fund in the absolute return sector, but Burdett says there are in-built safety checks built in that have paid off this year.
“More than anything, this is about an extremely concentrated stock selection approach and they are quite happy holding up to 9 per cent in an individual position. With that you have to be pretty certain that the risk-reward is appropriate,” he said.
“There's a bit of science to the portfolio construction that might not be apparent – the managers scale holdings in proportion to the upside and downside in their price estimations of the best and worst scenarios. From the outside looking in it might appear as though the fund has quite aggressive stock positions but they do adjust the positions a lot as prices change.”
An example of how this paid off in 2015 was the fund’s holding in spread-betting and CFD provider Plus500, which saw its shares hit by a short-selling attack, concerns about its business model and an offer from Playtech to acquire the firm being taken off the table.
As the graph below shows, the stock was struck by a significant plunge in its share price during May. However, CF Odey Absolute Return held up well despite Plus500 being one of its major holdings.
Performance of fund vs stock over 2015
Source: FE Analytics
“Of course, the fund will have the odd hiccup, as you will always get with this kind of approach, but these always seem to be less severe than you'd expect,” Burdett said. “They were involved with Plus500 but had already 'right-sized' their position and engaged with the company. They have made an awful lot of money over their time investing in the stock and avoided the worst of the falls.”
Another notable element to the fund’s performance over 2015 has been how it has maintained a broadly upward trajectory since the summer – at a time when most equity markets have been hit by numerous sell-offs.
The F&C multi-manager said: “I say it’s down to stock specifics, holding small-caps and being risk-off in the FTSE, miners in general and anything with a vaguely cyclical bias so they were so far away from where the problems were.”
“It performed better than I thought it did, to be honest. It's the ideal that when you have something that is so specific in its stock selections, it should behave nothing like the market.”
