Making a clear case for risk and return

Marc Gordon is the co-founder and managing director of Close Fund Management, the specialist investment arm of Close Brothers Group. Gordon was formerly a director and head of the UK equity department at John Govett. Before that he was at NM Rothschild in the institutional funds department.

Q: What was the rationale behind your recent launch of the Close Enhanced Commodities fund?

A: There are very few investment vehicles that allow investors to gain exposure to commodities. In fact, most of the vehicles that are around only allow exposure to the underlying shares of companies that are in the natural resources or commodity area. There are two rationales for launching a commodity fund. One is the investment case and the other is what I describe as a portfolio construction rationale. The investment rationale is well known, to the extent that there are a lot of people who think commodities are going to perform well over the course of the next five to 10 years. There are those who speak persuasively about the price of oil reaching $100 (£53) at some stage, so there is a good case for investing in commodities themselves. People are also looking for assets that are uncorrelated to equities to hold in their portfolios, and commodities are well known to be totally uncorrelated to the way equities perform.

Q: What is the investment universe of this fund and does it have any competitors?

A: I don’t think there are any competitors. We are the only London-listed investment trust offering 100% capital protection against any falls in commodity prices together with 200% of the upside of the portfolio in commodities. The real problem for investors is that most investment trusts and unit trusts are not allowed to buy commodities directly. Until we launched our fund, if you wanted to get exposure to commodities you could buy one or two of the unit trusts or investment trusts around. But they invest in the shares of companies associated with this area. There really is no other vehicle that I am aware of where you can get exposure directly to the rise of the underlying commodity.

Q: How does this new fund fit in with your existing range of closed-ended investment companies?

A: This is the sixth fund in our closed-ended range and it fits in extremely well. The vast majority of our business is about putting together investment vehicles that provide extremely high levels of definition of risk and return. Investors know at the outset the risk they are taking on board in investing in our vehicles, and they know exactly the parameters under which they will achieve their returns. We believe in putting together investment vehicles in the closed-ended arena that are very specific in their investment objectives. We also provide a great deal of clarity in terms of their upside and potential downside.

Q: How did you decide which commodities to include in the fund, along with their specific weightings?

A: That was done in conjunction with investors. What was important was that we put together a vehicle that had a balanced portfolio of the most economically important commodities. Our combination was to have a third of the portfolio in oil, a third in gold and a third in industrial metals, split equally between zinc, copper and aluminium. The other important thing was to currency protect the portfolio for investors. If you are a sterling investor, given that the commodities are all priced in dollars, you do not want a scenario where the underlying commodities go up, but the currency goes against you. The portfolio is fully hedged into sterling.

Q: Are you concerned that the volatile price of oil may affect fund performance, given that a third of the portfolio is invested in crude oil?

A: That is the reason for the capital protection. While there is a very persuasive story about the performance of commodities over time, we know that commodities can be volatile. We know too that the price of commodities can be affected not only by normal economic supply and demand, but also by geopolitical events, which can give the underlying commodities greater volatility. So having the capital protection is important.

Q: Why have you chosen to invest directly in underlying commodities rather than through companies?

A: If you invest in the shares of companies that invest in industrial metals or oil, you are investing indirectly. If you believe the price of commodities is going to go up, then your most efficient methodology to benefit from that is to be invested in the commodities directly. The problem with investing in the shares is that there are other variables. The share is obviously an equity, so it is going to be affected by market movements as well as quality of management and strategy.

Q: Why does Close Fund Management favour a team approach to investing?

A: Our team are all experts in running funds based upon indices and in options and futures. We are running vehicles that are not based upon the star fund manager concept. The star fund manager concept, to some extent, is satisfying the requirement of investors for spicy and hopefully massive returns without a great deal of thought to risk. The vehicles that we are managing have got both risk and return as the bedrock of their principles. For that, you need investment managers with a different type of expertise – not picking individual stocks, but finding different strategies of achieving the highest possible return for the lowest level of risk.

Q: Would you describe Close’s investment process as active, given that you have many index funds?

A: It is active in our area of expertise. We are not a conventional fund management organisation. Conventional fund management organisations are businesses that normally provide actively managed equity funds. We are expert index and derivative fund managers, providing defined return and risk. Within those parameters, we are active in seeking out the best strategies and the best ways of achieving the investment policies that we set out. The rest of the industry is doing the same thing. They are managing active money in equities and bond portfolios and they are all competing against each other for the same slice. Our competitive edge is based on the fact that we focus solely on our areas of expertise.

Q: How many fund managers are involved in running each fund?

A: There is currently a team of five investment managers running money.

Q: Do your plans for the fund range involve some more closed-ended funds along the same lines as the commodities fund?

A: Yes, I am sure we will be launching more closed-ended vehicles, perhaps based on other markets or other asset classes. All of the closed-ended funds that we run have defined investment terms. I am sure we will be looking to offer good alternatives when it is time for those funds to roll over.