How to win the Dubai Gold Cup

Having interviewed and 'digested' the view of market 'bull', James Forster at Brewin Dolphin, the search for a different view took me across Stella Pengilly, Head of Ansbacher Investment Services.

Whilst not a total 'bear', Pengilly veers towards describing a volatile and confusing investment arena where future 'winners' will emerge, only if they change their management style.

Pengilly's preferred style is that of the 'multi-manager' approach, so first question is "what is a multi-manager"?
Pengilly: "Our portfolios are never built on one manager. Within each sector, we would choose a number of managers and a number of different management styles.

"Diversification to us is important. If we take a major horse race like the Dubai Gold Cup and let's say it featured 40 horses, we would take the view that there were five of the 40 entrants who had a real chance of winning. Even if we were beaten, our five choices wouldn't be beaten by much. I could take the analogy further by saying we wouldn't enter a steeplechase horse into the Dubai Gold Cup, so our selection obligation includes picking the right horse for the right race and the right track".

Q: What do you feel is superior about this style?
Pengilly: "You can't rely on past performance with fund managers, as the managers are always on the move. Only 7.8 per cent of fund managers have a 10-year track record; less than 20 per cent have a five-year track record; 50 per cent have spent two years or less at the helm of their funds. You need to have an intimate knowledge of funds and managers, and blend them appropriately to get the out-performance potential".

Q: So if I gave you a brief of out-performing the Eurotop 300, where would you expect the Ansbacher performance to position?
Pengilly: "We would firstly seek to out-perform the benchmark. Let's create a simple example. In the stats below, the benchmarks performance (for European equities, FTSE Eurotop 300) was - 28 per cent for one year. The best performing fund had done - 12.30 per cent, the worst performing fund has done - 35.12 per cent.

"So the variation is huge within one sector. We would have expected to have chosen the top three to four out of the list of 28 by using our skill at selecting and blending managers".

Preferred style

The example Pengilly quotes, reaffirms a standout investor lesson of the last three years, that is, for investors who have chosen relative or equity index-linked benchmarks, then a bear market will mean falling valuations.

Pengilly's preferred style is not purporting to provide positive results when the system is down, but results towards the top of the results range.

Q: With markets down at such lows, where do you see them going?
Pengilly: "We see the equity markets as broadly moving sideways from here. Sporadic investment opportunities will occur, but as soon as gains are made, 'sell-offs' and profit taking will occur which will increase volatility. So a 15 per cent rise and a 10 per cent fall within one month could well become a common feature of markets".

Q: So how do you feel about the 'relatively benchmarked' funds against other types of benchmarked fu-nds?
Pengilly: "A wise investor would include an element of absolute return funds within their overall portfolio, especially capital investors (compared to regular savers). I say this because any recovery will include massive volatility. This volatility will reflect fundamental shifts in the way investment markets function.

Hedge funds

"This feeling has been created by high profile company collapses, mistrust of accounting data and an uncertain geopolitical environment. Traditional valuation methods such as discounted cash flow analysis (relied on by fund managers in the past), lack credibility if you can't trust the underlying financial data. Add into the mix, the trend towards a plethora of new investment styles, driven by the emerging Hedge Fund industry (where they have the ability to 'short' the market, or adopt innovative, non-traditional trading strategies), further impact on the unpredictability of how a market will react to any piece of news".

Q: With all this unpredictability then, where are you putting your own money?
Pengilly: "I am increasing my allocation to 'Alternative Investment Strategies' (Hedge Funds). These managers can perform even in falling markets. Distress managers, for example, do well when a number of companies are filing for Chapter 11 bankruptcy in the U.S., such as United Airlines recently.

"However, I would caution that the outcome of the above is the boom in Hedge Fund volumes and managers. So the 'skill' required by the investor is to pick the cream of the managers in this area. A multi-manager approach is an ideal solution to this type of problem."

Key points

1) Interview with Ansbacher Investment Services (Stella Pengilly – a Multi-Manager).

2) "Multi-Manager" defined - managers of managers. "No single manager knows everything".

3) A "relatively benchmarked" multi-manager should still expect to see negative results in a bear market, but purport to be near the top of the results range. Investor benchmark choice is therefore critical.

4) View of the market short-term - sideways for the year. Sporadic investment opportunity.

5) View of the markets in the future - a mass of changes in market conditions all lead to increased volatility, unpredictable behaviour.

6) As a result of points four and five, including a good hedge fund manager into a portfolio should be the winning medium-term strategy.