Fund Manager Briefing: SVS Church House Tenax Absolute Return Strategies Fund

Jake Moeller reviews highlights of a meeting with James Mahon, Chief Executive Officer of Church House Investment Management and co-manager of Tenax Absolute Return Strategies Fund on January 26, 2016.

Dorset-based Church House Investments has been quietly flying under the radar since 1999. Formed from a small regional bank (sold to Virgin’s Richard Branson in 2010) with a private client base, Tenax Absolute Return Strategies Fund was created in 2007. Originally seeded with around £10 million of an individual client’s money, the fund has recently begun to gain a wider following, picking up a number of industry awards and ratings along the way.

James Mahon, Church House CEO and co-fund manager: Tenax Absolute Return Strategies Fund.

There can be no doubt that the start of 2016 has been tumultuous for investors. The FTSE All Share Index has fallen nearly 12% since the start of the year (to February 11, 2016), and the CBOE VIX is trading at a year-to-date high of $28 (as of February 11, 2016)—up from $18 at the start of the year. For Mr. Mahon the only solution for such a market is diversification. “We are committed to beating a risk-free rate,” he states. “This simply comes from our founding ethos, which was preserving client capital in all types of markets.”

Table 1. CBOE Market Volatility Index – year to date (February 11, 2016)

Source: Eikon.

The Tenax fund aims to generate a positive return over any one-year period; it follows a three-month Libor GBP benchmark. The fund is a highly diversified portfolio of assets including shares; “plain-vanilla” bonds; alternatives; and real assets such as property, infrastructure, and some private equity. The fund’s current largest exposure is to floating-rate notes (+30%), which Mr. Mahon (and comanager Jeremy Wharton) have implemented as an interest-rate hedge, and over 10% cash and short-dated sovereigns. “Buying bonds to hedge our interest-rate risk was too expensive,” states Mr. Mahon, “so we have been patiently building up our FRN position, since we see these as the most effective instruments in this current rates environment.”

Table 2. Five year performance of Tenax Absolute Return Strategies Fund within quartiles of IA TAR sector (in GBP to 31/1/16)

Source: Lipper, Lipper for Investment Management.

The asset allocation process of this fund is by Mr. Mahon’s own admission “more art than science.” Both Mahon and Wharton are fans of Swensen’s Yale asset allocation model, which they loosely use as a theoretical underpinning for fund construction. However, they don’t advocate the high exposure to equities that Swensen does. “Both Swensen and Buffett have been vulnerable to short-term volatility,” states Mr. Mahon, and Church House has rarely exceeded 20% exposure to equities across the total portfolio. Indeed, any equities exposure traditionally exhibits a defensive high-quality value bias with lower betas and incorporated stop-loss positions.

Table 3. Five year performance of Tenax Absolute Return Strategies Fund vs FTSE All Share & Libor ( to 31/1/16)

Source: Lipper, Lipper for Investment Management.

The managers have a macroeconomic top-down overlay that they use to help identify preferred sectors in which to invest. In the absence of a neutral strategic asset allocation position it is difficult to quantify how these tilts manifest themselves. There is no black-box or resampled optimizer to be found here. Mr. Mahon again refers to the “art” of blending. “Our focus is on the selection of individual securities,” he states. “For each asset class the primacy is on finding the highest probability of meeting our positive return objective–it’s how we think about everything, even equities.”

Portfolio turnover is very low in this fund, and it is clear that trading on short-term opportunities is not a high priority. “We recognise there is a weakness in equities markets at the moment and some value is appearing,” states Mr. Mahon. “However, we’re not rushing in to buy equities just yet.”

Table 4. Five year risk/ return chart of Tenax Absolute Return Strategies Fund within IA TAR sector (in GBP to 31/1/16)

Source: Lipper, Lipper for Investment Management.

The performance of Tenax Absolute Return Strategies Fund within the IA Targeted Absolute Return sector has generally remained within the second quartile (see Table 2.) but with one of the lower risk profiles of all constituent funds. Risk/return analysis sees Tenax on the border of the preferred northwest quadrant over five years (see Table 4.) and the fund is a top Lipper Leader scorer over both the three- and ten-year periods (see Table 5.). The fund has fallen only 1.6% year to date (as of February 11, 2016) compared to an 11.4% fall for the FTSE All Share.

Table 5. Lipper Leader Scores – Tenax Absolute Return Strategies Fund (to 31/1/2016)

Source: Lipper, Lipper for Investment Management

The Tenax fund is marketed as a potential preretirement-phase investment, and although this fund is by no means a cash substitute, it will be appealing to a wider group of investors in these volatile times. It has a durable, low-volatility track record and has two highly experienced and unapologetically conservative managers at the helm.

For highly process-driven investors the fund’s lack of formal asset allocation constructs might pose a problem, but for investors seeking genuine drawdown resilience and a diversified portfolio this fund has readily attractive features. The fact that the original seed investor remains in the fund is some reflection of the regard in which the managers of this fund are held.