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CONNECTIONS www.kl-communications.com - February 2015

The aggressive oil price decline has sent shockwaves through the energy-heavy US high yield market

Ardevora wins A$200m Aussie super mandate

Ardevora Asset Management

has been awarded a A$200m

global equity mandate from

Australia’s Commonwealth Bank.

The superannuation fund man-

date is managed by Ardevora’s

highly-regarded team of Jeremy

Lang, William Pattisson, Gianluca

Monaco and Ben Fitchew.

Ardevora’s investment process is

grounded in cognitive psycholo-

gy and aims to exploit biases

inherent in three equity market

participants: company manage-

ment, analysts and investors.

Formed in 2011, Ardevora has

AUM of US$1.7bn and runs four

specialist equity strategies.

“We are extremely proud to be

working with the CBA and it is a

strong validation of the process

we follow,” Lang says.

“We view people as error prone

and see investment as a process

of recognising where others

involved in the market are most

likely to be wrong. Our edge

comes from viewing markets in

this way – how and why people

are wrong – rather than fixating

on why we, as investors, are

correct.”

US high yield (HY) has come under

pressure in recent months as the

energy-heavy market sold off sharp-

ly on the plummeting oil price.

Spreads for the US HY energy sector

more than doubled during the sec-

ond half of 2014, rising from an

average of about 400bp over the

first eight months of the year to

877bp in November. It has since

stabilised somewhat, but spreads

still stand above 700bp.

The energy exodus also led to some

indiscriminate selling across the

entire US HY universe, which is now

at a multi-year valuation discount to

the European HY market.

“About 18% of issuance into US HY

last year was energy. There is an old

rule of thumb in HY, do not buy the

sector issuing the most,” Henderson

Strategic Bond Fund manager John

Pattullo says. Pattullo and co-

manager Jenna Barnard have no

energy exposure.

“Lower oil has not washed through

the numbers yet,” Pattullo adds. “It

is probably better the lending has

gone via the bond market, rather

than the banks, as the risk should

be dispersed.”

The Hermes Credit team is more

bullish, however, moving to a mod-

est overweight position in energy.

“Despite the slide in oil, the US

shale boom is definitely not over,”

senior analyst Ron Daigle says.

CONTINUED ON PAGE 2

Plummeting oil pressures HY

P2 EUROPEAN QE AND THE

ONGOING CRISIS IN GREECE

Three top managers give

their outlook on Europe as

the ECB unveils QE and

Greece changes leadership.

P3 OPPORTUNITIES IN

UNLOVED GLOBAL EQUITIES

T. Rowe Price’s Scott Berg

believes the current investor

caution has created opportu-

nities in quality cyclicals.

P3 ALKEN’S WALEWSKI

SNAPS UP STAKE IN APPLE

Alken Asset Management

founder Nicolas Walewski

initiates a large position in

tech giant Apple.

P4 Q&A: REDINGTON’S

PETE DREWIENKIEWICZ

Redington’s head of manager

research discusses changes

to the consultant’s manager

selection framework.

“Credit is trading at close to all-time tight yields and all-

time high prices, but the quality is deteriorating and the

structure of the market is less stable than in the past”

– Stenham’s Tim Beck

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European volatility: Views on QE & ongoing Greek drama

CONNECTIONS

Plummeting oil price pressures high yield (cont.) Daigle adds: “In the HY space, we

prefer low-cost producers with

substantial existing and untapped

reserves, with a sustainable drilling

program supported by price hedg-

ing of expected production.

“This provides clear visibility of

expected cash flows. We also prefer

companies with a relatively bal-

anced production profile of natural

gas and liquid resources. The most

highly levered balance sheets with

the poorest asset quality will likely

end up defaulting, but we believe

most companies will not.”

The sharp oil price slide is a good

reminder for investors to diversify

globally, T. Rowe Price European

High Yield Bond Fund manager

Michael Della Vedova says.

“While energy companies account

for around 14% of issuance in US

HY, it only represents 1% of a typi-

cal European HY index,” he says.

“The ability to allocate to the Euro-

pean HY market at a time when we

saw heightened volatility in the US

was a stabilising performance tool

at our disposal in Q4 of 2014 for

most of our HY portfolios.”

While HY spreads have widened in

recent months, Stenham Credit

Opportunities Fund manager Tim

Beck says it still does not adequate-

ly compensate investors for the

inherent structural risks in the

crowded credit market.

“Much of credit is trading at close

to all-time tight yields and all-time

high prices, but the quality of issu-

ance is deteriorating and the struc-

ture of the market is inherently less

stable than in the past,” he says.

“If we experienced any shock, be it

credit or interest rate related, there

is no marginal buyer until yields are

substantially higher and prices con-

comitantly lower.

“For traditional investors in credit,

potential returns are constrained

and risks elevated. By contrast, this

creates a compelling case to invest

in specialist hedge funds, which can

short credit and also be a provider

of liquidity at much lower prices.”

Michael Della Vedova - T. Rowe Price

Stuart Mitchell – S. W. Mitchell Capital Most Anglo-Saxon investors have failed to appreciate the will in Europe to make the euro project work. Even in Greece, over

seventy percent of the population want to stay within the eurozone. The arrival of QE is an acknowledgement by core Eu-

rope that the periphery has reformed sufficiently and that the underwriting of peripheral debt can at long last be contem-

plated. It shows just how much the challenged peripheral countries have done to bring their houses into order. We may well

now be approaching a lasting resolution to the eurozone crisis. This all creates an extraordinary opportunity for investing in

the eurozone. Consensus expectations remain framed by fears of a ‘euro crisis’, and valuations are low. In fact, on one cal-

culation, current share prices can be justified only if you accept the notion that half of European companies will suffer de-

clining returns on capital employed into perpetuity. This is a clearly absurd assumption.

Sandro Näf – Nordea (Capital Four) Greece no longer poses the same systemic risks as a few years ago. Firstly, eurozone bank exposures to Greece are now

small. Should the market start to price in broader sovereign debt restructurings (or a ‘Grexit’ of the euro) it would primarily

hurt domestic banks in Greece, Spain and Italy – areas we are not exposed to. In addition, the ECB’s programme of Quanti-

tative Easing and Outright Monetary Transactions of sovereign bonds in the secondary market is now in place. Also, the

banking crisis in Cyprus showed that a deposit run in one eurozone country does not automatically trigger runs in other

countries. That said, Greek voters reflect a general discontent across the eurozone regarding austerity. Eurosceptic parties

are gaining in popularity across the peripheral countries and we believe investors should be prepared for idiosyncratic politi-

cal risks in 2015. We retain a large underweight in the peripheral countries – Greece, Italy, Spain and Portugal.

Neil Williams – Hermes Greece’s election was an untimely curve ball, but reminds us that, while QE may address one of the symptoms of the euro-

zone crisis – deflation – it is more reform that will be needed to solve the underlying problem. That problem is still a mone-

tary union devoid of economic union, which will take years of hard work. Our base case remains that Greece will stay in the

euro – partly, but not wholly, because of the incentive of QE. But, there could be political spill-over. With Spain and Portu-

gal’s own elections coming in 2015, the more Eurosceptic parties there will be watching Greece closely. The wider challenge

is to make sure the eurozone does not follow Japan and let deflation take root. QE has been running for 16 years in Japan,

with little inflation impulse. The ECB’s ‘tap’ may be finally on, but as Japan found out, QE acts like a drug: the more you use

it; the more you need it. Eurozone QE could thus be with us for many years to come – with or without Greece.

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CONNECTIONS

Caution creates opportunities in unloved equities There are clear concerns in the

market that beyond QE, there is no

fundamental improving 'bull' case

for global equities. However, this

aggregate top-down perspective on

the world belies the ongoing

breadth of meaningful stock spe-

cific opportunities.

While it is common for sentiment to

soften in the mid-stages of the eq-

uity market cycle, we believe the

drivers remain in place for econom-

ic stability and improvement.

As growth fears dampen return-

seeking behaviour, we believe stock

specific opportunities are once

again emerging in high-quality cycli-

cal businesses. When comparing

industrials and consumer discre-

tionary stocks to more defensive

peers, valuations are favourable.

The poor performance of many

emerging markets has also led to

EM indices looking optically cheap

versus DM indices. It has certainly

been unusual in the context of his-

tory to see EM stocks perform so

badly in what has been a strong

period for global equities. We be-

lieve the unusually defensive

pattern of this market rally speaks

in part to elevated conservatism

post the shock of 2008. One ques-

tion over the longer term is wheth-

er risk appetites will return.

Perhaps more important than in-

vestor sentiment, we are waiting

for evidence of normalised risk

appetites at corporate level. Man-

agement teams remain cautious of

investing in a period where return-

ing capital to investors has been so

rewarded via stock prices. A return

to risk seeking behaviour by corpo-

rates is necessary to assume a nor-

malisation of global demand trends.

In the meantime, we believe the

caution has created opportunities

within unloved areas of the market,

including cyclical growth stocks in

both the developed and emerging

world. To evidence this caution,

European cyclical stocks have been

weak for much of the last year,

even when European stocks as a

whole were rising. This led us to

add to our overweight in quality

European-listed industrials, as well

as selective consumer discretionary

stocks as the market reached a

point of elevated fear last autumn.

We have also maintained an over-

weight position in emerging Asian

stocks, in economies and industries

that remain fertile with respect to

year-on-year compounded profits

delivery. Such growth may merit a

larger premium, as investors

acknowledge the end of the multi-

ple expansion stage of the equity

cycle and look to other drivers to

stock returns.

Elsewhere, we remain selective and

underweight the most defensive

segments of the market, believing

valuations for the most defensive

businesses will continue to normal-

ise versus the market over the next

stage of the cycle.

Scott Berg is the portfolio manager

of T. Rowe Price Global Growth

Equity Fund

Walewski adds Apple to Alken AR Europe Fund Alken Asset Management founder

Nicolas Walewski has taken a stake

in tech behemoth Apple.

Walewski says Apple will be a major

beneficiary of the falling oil price,

which will undoubtedly boost con-

sumer spending. Earlier this month

Apple became the first company to

close with a market capitalisation

above $700bn.

Walewski took a position in Apple

in the group’s €2.2bn Alken Abso-

lute Return Europe Fund in October

and has steadily built the position

to 5%. Apple’s share price has

climbed sharply over this period.

“Apple is a pure play on discretion-

ary spending, which has received a

massive boost on the plummeting

oil price,” Walewski says.

“Not only has Apple beaten consen-

sus, it destroyed expectations. Its

iPhone sales are incredibly strong

and it is taking share from Android.

It also achieved a better than ex-

pected average sale price, while

exceeding profitability forecasts.

“There is not a similar story to Ap-

ple to play in Europe. However,

Apple’s revenues are now global.”

Scott Berg - T. Rowe Price

Analyst added to the Evenlode investment team

Evenlode, the Oxfordshire-

based young and independent

fund manager, has further

strengthened its team with the

addition of analyst Chris Elliott.

Elliott will join Evenlode in

March from the Oxford Univer-

sity Press, where he has been a

software engineer for the past

five years.

A Cambridge graduate, Elliott

studied economics and mathe-

matics and holds all three lev-

els of the CFA.

He will work alongside manag-

ers Hugh Yarrow and Ben Pe-

ters on the top-performing

Evenlode Income Fund.

Launched in October 2009,

Evenlode Income has delivered

a 105.9% return since its incep-

tion to end January 2015,

against just 73.1% for the IA

UK Equity Income sector.

“After more than five years

since the launch of Evenlode

Income, the time is right to

add some further resource to

the team,” Peters says.

“Chris, with his strong analyti-

cal background, will be a great

addition to the team.”

Apple - ‘destroying expectations’

-20

-10

0

10

20

30

USA Asia Aus Jap UK EU LatAm EMEA

2013 2014

Source: Factset, MSCI

MSCI World regional performance (USD)

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CONNECTIONS

Q&A: Redington’s Pete Drewienkiewicz In this month’s Q&A, KL Connec-

tions talks to Pete Drewienkiewicz,

the head of manager research at

Redington.

Before joining Redington, Drewien-

kiewicz had roles at Royal Bank of

Canada, UBS and Barclays Capital.

Can you briefly describe the new

manager research process?

We see the purpose of our manager

research team as facilitating the

implementation of our strategic

recommendations for clients, allow-

ing them to benefit from systematic

and consistent monitoring of all

invested managers. We wanted to

design a systematic process which

would allow efficient implementa-

tion of each strategy and enhance

our monitoring. We decided to

create short, high conviction Pre-

ferred Lists for each asset class we

recommend to clients.

Why did you make changes to the

manager research process?

Over the past 18 months we have

been able to redesign our process

from scratch. We are a relatively

new consulting business without a

lot of legacy business. This meant

we were able to really think, from a

top-down perspective, what the

research process is trying to achieve

and then build it to meet the needs

of clients and the business.

What have you changed specifical-

ly in how the team is structured or

operates?

Every asset class and strategy that

is supported for investment by our

investment committee has a

‘Preferred List’ behind it, with a

small number of managers. We

continually monitor those manag-

ers, review the preferred lists annu-

ally and use a proprietary ten factor

approach to select, assess and mon-

itor those managers.

How did you go about choosing the

factors to select, assess and moni-

tor managers?

We sat down with everyone in the

business involved in the manager

research process – about 20 people

– and asked: What are the charac-

teristics of good managers?

What are the characteristics of the

firms we think do a great job in-

vesting our clients’ money, and

what are the characteristics in indi-

vidual investment teams and pro-

cesses we believe contribute to-

wards effective investment?

Criteria like information advantage,

execution advantage, conviction

advantage, kept coming up, and

you will see all of these within our

ten selection factors. There was a

high level of agreement over the

factors.

Which asset classes and strategies

are covered by the team?

To date, the team has completed 17

Preferred Lists comprising of 49

preferred managers. They range

from areas of traditional Redington

expertise, like LDI or credit, but also

cover newer areas seeing client

interest, like direct lending, infra-

structure debt, diversified growth

funds and multi-class credit. We

ensure all areas strategically suita-

ble for our clients have two to four

preferred managers.

How do you feel the new process

has benefitted clients?

I think clients value the clarity the

process gives them. There is a sense

that ‘beauty parades’ and extended

manager selection exercises are not

the best way to appoint managers.

We are trying to get away from

testing managers’ presentation

skills and streamline the process.

Our goal is to know our clients’

managers so well that they do not

need to; we want clients to feel

informed and in control, so their

governance budget is better spent

on stuff that matters most.

Clients that do not have a hugely

streamlined governance process

have still been able to make large

changes to their investment strate-

gy. This has been done without

spending a huge amount of time

worrying about the selection pro-

cess of those managers, because it

is efficient and because Preferred

Lists are always available for review

by our retained clients.

twitter: @pdrewienkiewicz

Pete Drewienkiewicz - Redington

T: +44 (0) 203 137 7822

www.kl-communications.com

info@kl-communications.com

Stenham AM launches UCITS Macro Fund Stenham Asset Management, the

pioneering $2bn hedge fund invest-

ment specialist, has launched a

UCITS-compliant Macro fund of

funds portfolio.

Stenham’s UCITS Macro Fund will

draw on more than two decades of

the group’s experience and exper-

tise in macro fund investing, with

Stenham launching its first strategy

in this space in 1993. This is the

group’s second UCITS vehicle, after

the unveiling of the Stenham Equity

UCITS Fund in November 2013.

The weekly-dealing Stenham UCITS

Macro Fund will hold a high convic-

tion portfolio of up to 10 funds

within the rapidly-expanding macro

UCITS universe. Akshay Krishnan,

Stenham’s Head of Global Macro

Strategies, will oversee the new

portfolio – alongside Chief Invest-

ment Officer Kevin Arenson.

The Stenham UCITS Macro Fund will

use the same flexible and dynamic

asset allocation approach the group

has successfully employed for its

offshore Stenham Trading macro

strategy.

“Launching a UCITS strategy is a

natural progression for Stenham.

Up until about 18 months ago we

felt the macro UCITS universe did

not offer enough depth for a fund

of funds product, but we are now

increasingly seeing top quality man-

agers making the move into UCITS.

There is no doubt the pool of in-

vestment talent on offer has devel-

oped substantially in the last few

years,” Krishnan explains. Akshay Krishnan - Stenham