Q. What is the basic approach to managing the fund?
The fund is run on a market neutral basis with a relatively low level of volatility. To achieve this we manage the beta of the fund very carefully. The main advantage of this approach is that we produce a unique return stream for our clients which is uncorrelated to other asset classes and, therefore, aids in the diversification of clients’ wider portfolios. This is proving quite valuable given the changing nature of historic relationships between various asset classes. Within the fund we employ three investment strategies – Themes, Best Ideas and Pair Trades. Themes capture our top-down, macro driven investment ideas while Best Ideas ensures we capture the best bottom-up opportunities from our highly experienced UK Equity team. Pair Trades look to exploit dislocations between similar stocks. Our allocation between the strategies will change depending on where we can find alpha and the overriding aim of the fund is to have a diverse collection of investments contributing to performance at any one moment in time.
Q. Are there any particular market conditions that suit your fund?
Given the market neutral nature of the fund, we’re fairly agnostic towards the prevailing market conditions. The very low level of beta in the fund has insulated our clients from the quite vicious swings seen in the stock market over the last few years. For example, during the four major declines of the FTSE All-Share since the fund was launched (Feb ’10), the fund produced a steady, positive return in each of them. That said, given the majority of our risk comes from our stock selection, we favour conditions when intra-market correlations allows stock divergence to take place.
Q. What strategies have been the most successful and unsuccessful over the past twelve months?
In 2013, our Best Ideas have been driving the performance of the fund. Although diverse in nature, highlights would include our long positions in Thomas Cook and Rolls Royce along with short positions in the Consumer Staples and Information Technology sectors. Our Themes have also had a positive impact, notably our long UK Domestics and long Cash Returns themes. Structural Growth as a theme has struggled in the latter part of the year but given the gradual nature of this recovery we believe growth will continue to be re-rated by the market. We have also had a style tilt towards earnings momentum which, having done well in the first part of the year, suffered from the rotation into value during the summer. More recently, though, earnings momentum has begun to reassert itself.
Q. How do you see the UK economy performing over the next twelve months?
We have been positive on the UK economy for two years now having switched from being short UK consumer stocks to long UK Domestic stocks in Q4 2011. The primary focus for our long position was the housing sector but we are now looking to play the broadening out of the housing market recovery into the wider economy. We therefore see the UK economic recovery continuing due to the wealth effect on the consumer, a general increase in corporate spend and a relative easing of fiscal policy ahead of the general election in 2015.
Q. What are the main challenges which will be faced by the fund in the next one to two years?
We are now five years into the recovery of the stock market with major indices close to or making new highs. A lot has been done in fixing the problems left over from the financial crisis. However, large structural issues remain (government debt, impact of withdrawing QE, structural change in emerging markets, etc). The main challenge, therefore, is to keep the fund market neutral so that when the next, inevitable “set back” in the market occurs we continue to meet the objective of the fund which is to generate the steady, positive returns at a low level of risk.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Kames Capital Management Ltd has expressed its own views and these may change. The data contained in this document has been sourced by Kames Capital Management Ltd and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.