“The same approach in a different product wrapper,” is how Neil Pegrum, fund manager at Cazenove, describes the new Cazenove Absolute UK Dynamic fund, which will be launched on September 7th.
The ‘approach’ Pegrum refers to is that of his existing offshore hedge fund, the Cazenove UK Dynamic Absolute Return Fund, which will be mirrored in a Ucits III structure. “It is tried, proven and successful,” says Pegrum of his hedge fund, “and has returned 16% per annum.”
The new fund, which Pegrum will co-manage with Paul Marriage, will contain only British stocks with a bias towards mid- and small-caps. Pegrum says that whilst this bias will differentiate the fund from other absolute return funds in the market, he is not looking at the other funds. “I am more interested in carrying on what we have done in the past,” he says.
Pegrum says that the early response to the new fund is good. “There is lots of interest in absolute return as an emerging sector,” he says, “and strong investor appetite, which will increase as absolute return strategies develop.”
“There is a lot of capital around,” he says, “and deposit rates are very low.” However, Pegrum is clear that absolute return is not the only option for investors. “If we return to a period of more predictable stockmarket returns,” he says, “investors may prefer long-only strategies.”
Pegrum is targeting a return of 10% or better per year for the new fund, which he will aim to achieve through stock selection and altering the net positioning of the fund.
On stock selection, Pegrum says his aim is to “unearth decent value in the small- and mid-cap sector,” often by standing back from the concensus view.
He looks for “recovery stocks, management opportunities and growth opportunities.” To choose stocks, he will analyse company financials before meeting with management. “I have over 300 meetings every year,” he says.
“In January, we bought lots of cyclical stocks when the market was weak,” he says, “and we were seeing valuations of one and two times price/earnings, valuations that we had not seen since 2003.”
“It was painful at the time,” he adds, “but the right thing to do for laying the foundations to enjoy the recovery, which came more sharply than we expected.”
One sector Pegrum avoids is mining. “I like to have conviction about what I am investing in,” he says, “and that is hard to get in mining. You are dealing with macro calls such as commodity prices, or how successful a company will be in being able to explore, which is difficult to analyse.”
At times, Pegrum admits that avoiding this sector has been “painful”, but he will maintain his conviction. “In deviating from your principles is where you make mistakes,” he says.
On fund positioning, Pegrum describes his approach as “fundamentally conservative”. However, on occasions, he will take a more aggressive stance against market concensus, as he did in both December 2007 and January 2009.
“In January and February this year we went more net long,” he says, “and used leverage to take greater opportunities. But recently we have come down and taken some of out profit out.”
“In December 2007,” he says, “we took the fund very short, on market indicators such as poor quality IPOs. And on both occasions we were proved to be right.”