Shane O’Neill of Bloxham tells Tomas Hirst about the mechanics of Midas Global Absolute Return.
Q. What was the thinking behind the launch of the Bloxham Midas Global Absolute Return fund last month?
A. Kevin McConnell started with Bloxham around nine years ago and since 2002 he has been looking at technical indicators in the marketplace. In particular he has been looking at when stocks are overbought or oversold, when they are in a trading range or to find out when they are breaking out into a trend on the upside or downside.
The team have been working hard to develop a model, which is called Midas, and it is only now in the last year that we have been able to create a portfolio to take full advantage of what the indicators have been telling us.
Kevin has been looking at around 300 technical indicators over the past eight years and has put together a list of indicators that work well, both individually and in conjunction with one another.
So by last year we were in a position to put a portfolio together within a Ucits III framework and launched our euro share class on October 1. We are awaiting FSA [Financial Services Authority] approval to get our sterling share class up and running.
Q. How is the portfolio structured?
A. It is a blend between equity and cash. What we are trying to achieve is a product that has the volatility of a bond fund but that is equity and cash-based.
We are looking to provide a return of between 8-10% a year with around 35% of the volatility of the market.
The average cash position will be 30% plus but if we are in a situation where the market is very uncertain we can take that opportunity to take the portfolio up to 100% in cash.
As you would expect we can go long and short. Our model will screen 2,000 stocks globally every night. Over recent years you have seen a problem in terms of liquidity so we do not look at anything with a market cap of less than €2.5 billion (£2.1 billion). (article continues below)
Q. What are the key differentiators of this product that distinguish it from other absolute return funds?
A. This year people were expecting much better from the bigger names in the absolute return sector. I think people have been disappointed with returns as what we have seen is a high correlation between stocks so it has been difficult to make money using traditional long/short equity strategies.
This is a big advantage for us. If you look at stocks in the market they are either in one of three states – you can have stocks in a trading range or oscillation, stocks in trends and stocks in confusion.
When they are in a trading range, as Vodafone was between £1 and £1.40, our model would show that when it hit £1.40 it was overbought and when it dropped to £1 it was oversold.
What our model was unable to do for a number of years was to predict when the share price was going to break out of this trading range. In other words when a share price was going from a trading range to an upward or downward trend we couldn’t identify that.
So in 2007 we started to try and unlock that secret. It took a huge amount of work – so much so that in November and December 2009 we were the second largest users of Bloomberg in Europe – but by the end of 2009 we were able to identify stocks in trend as well.
Stocks in trend and oscillation make up around 70-80% of the market at any given time. This product gives us a powerful model that allows us to detect trends long before other established techniques in the market at the moment.
People tend to look at technicals in isolation but very few have been looking into them in as much detail as we have over the past eight years.
Q. How do you go about selecting the positions within the portfolio?
A. Every day we can run the S&P 500 and look at the percentage of stocks in positive trend, the percentage of stocks in negative trend and see the percentage of those that are overbought and oversold in the index. We drill down then into super- sectors, which could be financials, technology, early cyclicals, late cyclicals etcetera, then dig down to 24 sub-sectors before moving down again to the individual stock level.
What we are trying to do is provide something for discretionary managers, funds of funds and top-end IFAs that can diversify their exposure and offers something more truly absolute return than is out there at the moment. This has to be achieved with lower volatility than the market as well as consistent returns.
Although we only launched the fund in October, we have been running a test portfolio since June 2009. Out of the 16 months, we have had 14 positive and two negative with a maximum drawdown of 1.1% in March this year.
Q. What is the fee structure for the fund?
A. In terms of charges, I think given the economic backdrop people are looking at price a lot more. The management fee on the retail share class will be 1.5% and the institutional share class with be 0.75%.
What we are going to do on the retail side is rebalance the management fee by between 75 and 100 basis points and as well as that, while we will have a 10% performance fee it will be based on a hurdle rate of 3% net of fees.
If we are rebasing 100 basis points on the retail share class we put ourselves in a position where if we don’t make the hurdle rate we don’t make a management fee and we don’t get a performance fee.
So we are saying that we will rebase the 50 basis points of the management fee back into the fund if we do not perform.
All we are trying to show is that if we take a performance fee it is not going to be 20% like some of our competitors and we are putting ourselves in a situation where we are taking pain if we don’t perform.
Q. What is the minimum investment?
A. Minimum investment is €25,000 [£21,000] but we may bring that down as you want Isa investors to invest if they want to. What we do not want to be is inflexible. We have set a number as a guideline but it remains at our discretion. We feel that in the current environment it is important to be flexible on costs and minimum investment.
We are not targeting private clients who come to us directly, so we need to concentrate on the big discretionary players, the big IFAs and funds of funds. The last thing I want is for someone to buy this fund that doesn’t understand the mechanics of it.
So far the feedback has been very positive.