Jake Moeller reviews highlights of a meeting with Haig Bathgate, joint CIO/ CEO of Tcam on June 2, 2016.
In the “Brexit debate”-induced atrophy that is currently gripping the U.K. funds industry, sales of funds in the Investment Association (IA) Targeted Absolute Return (TAR) sector have remained comparatively buoyant. The sector contains around £59 billion of assets as of the end of April 2016, with estimated net inflows of some £2.4 billion year to date (May 31, 2016).
VT TCam Absolute Return Portfolio, although not yet an elder statesman, has a reasonable pedigree in a sector that has seen nearly 20 new funds launched since 2014. Formally launched in UCITS form in December 2010, it was preceded by a segregated client mandate from April 2009. Tcam itself is the recently born entity of a management buyout of the investment arm of Edinburgh-based law firm Turcan Connell. This MBO was finalized in November 2015, with Mr. Bathgate taking on a dual CIO and co-CEO role.
Haig Bathgate, CIO/ CEO – Tcam. With permission.
Philosophy
The IA TAR sector is characterized by a peculiar lack of homogeneity. It contains corporate bond funds, equity long/short funds, and a number of multi-asset structures. The Tcam offering falls into the latter category and is designed to provide a positive capital return over 12 months in any market environment, with low realized volatility. “Our heritage comes from conservative legal clients,” states Mr. Bathgate. “We are strongly committed to beating a Libor +2% benchmark; however, we often take strong directional views. We don’t expect positive returns every day.”
Construction
This fund is remarkably straightforward in construction and has a refreshingly clear top-down/thematic construction process. There is no complex black box or optimizer driving asset allocation. Rather, Mr. Bathgate divides the fund into a number of strategy “buckets” that reflect the dominant macro themes he and his team see as the potential drivers of returns over a two- to three-year horizon.
The core bucket consists of diversified low-correlation holdings. Currently, this is 35% of the portfolio (but could be as high as 50%) and is populated by a number of active mutual funds. There are four other themes in play in the portfolio: an inflation bucket populated by a U.S. Treasury linker, a European recovery bucket populated by high-tracking-error mutual funds, a LATAM debt bucket populated by a bespoke Brazilian bond instrument, and a U.K. property bucket populated by a REIT.
The fund has no asset allocation or geographical constraints, and asset-class exposure is generally obtained via active mutual funds (although direct securities, passive instruments, and bespoke structures can also be used).
Figure 1. Growth of VT Tcam Absolute Return Portfolio within IA TAR sector quartiles (to May 31, 2016)
Source: Lipper, Lipper for Investment Management
The underlying fund selection uses an initial quantitative screen, with tracking error being a particularly important metric. “We are seeking high-conviction and like-minded fund managers to implement our views,” states Mr. Bathgate. Intensive qualitative due-diligence meetings take place with the fund managers prior to a mandate being awarded, but Tcam actively seeks new and small funds. “The best time to invest with a fund is in its first three years,” states Mr. Bathgate. “Our experience shows we are usually rewarded for seeding a new fund and are prepared to do so, provided the underlying asset is sufficiently liquid.”
Performance
Lipper analysis reveals that 60% of funds in the TAR sector have returned a negative amount in the 12 months to May 31, 2016. TCam Absolute Return Portfolio is among those having had a difficult start to 2016. This has largely been driven by an underweighting to mining and resources–a position with which Mr. Bathgate remains comfortable. “An improvement in Chinese data has been instrumental in driving the recovery, but it looks unsustainable,” he explains.
Figure 2. Performance Summary of VT Tcam Absolute Return Portfolio (to May 31, 2016)
Source: Lipper, Lipper for Investment Management
Longer term, the fund has maintained steady risk-adjusted returns, and over three years it sits in the second quartile of the sector (see Figure 1. above). It also has a favorable Sharpe-ratio profile. The average of its monthly rolling one-year Sharpe ratio sits at 0.14 for the four years to May 31, 2016 (see Figure 3. below). This ranks the fund nineteenth in the sector on this basis. It has also delivered positive returns in 68% of the months since its inception and scores strongly in Lipper Leaders categories.
Outlook
Mr. Bathgate voices a number of concerns on markets, despite the stabilization following the turbulent first quarter 2016. In addition to his views on China he thinks the dynamics in many of the oil-rich nations give rise to concerns. “Depressed prices early in the year caused sovereign wealth funds in these countries to liquidate significant stock holdings,” he states. “It is not clear that the implications of this have yet been fully felt.”
Figure 3. One year Sharpe ratios of VT Tcam Absolute Return Portfolio – rolling monthly (to May 31, 2016)
Source: Lipper, Lipper for Investment Management
Similarly the uncertainty of the referendum EU Britain faces has created another layer of uncertainty is driving an increasing defensive bias to the portfolio. “With the outlook for the next few months so opaque, it’s imperative to exercise caution in the markets at present and to cut back on investments in riskier assets” states Mr Bathgate.
Conclusion
Investors who seek an absolute return solution should approach the IA TAR sector with a good degree of vigilance because of its highly heterogeneous composition. VT Tcam Absolute Return Portfolio offers a genuinely diversified exposure and has largely achieved its stated objectives, with a good risk-adjusted return profile.
Mr. Bathgate is a passionate and driven investment manager, and after 18 years with Turcan Connell he holds a deep respect for risk management. This fund is built on basic and straightforward principles and is run by a small but well-qualified team. It would likely appeal to those investors for whom portfolio construction is as much art as science.
Disclaimer:
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.
