Cazenove’s Cat laps up the cream

After a quiet start as a demerged business, Cazenove Capital Management is poised to take centre stage with the excellent performance of its Absolute Target fund, writes Tomas Hirst.

Cazenove Capital Management
Cazenove Capital Management provides investment management services to a range of clients. The company is split into three main areas: specialist investment management, private clients and charities.

Since its demerger from JPMorgan Cazenove in December 2005, Cazenove Capital Management has remained an understated business that has rarely pushed itself into the limelight.

Despite this, the group has steadily built a reputation among retail investors and is poised to take a stride to the centre of the stage.

Like many IFAs and fund of funds managers, Alan Stokes, the head of multi-manager at Lawrence House, suddenly found Cazenove forcing its way into his attention after a difficult year had battered many of its competitors.

“We’ve not been a buyer of Cazenove funds as they’ve not really come on to our radar,” says Stokes. “We’ve looked at their numbers, however, and they are looking pretty good.”

Stokes’s view is seconded by James Davies, investment research manager at Chartwell, who suggests that Cazenove’s lack of public exposure was a result of the firm’s previous business model, which kept it away from the mainstream.

“You have to look at the make-up of the Cazenove group,” he says. “They’ve traditionally been a private client and institutional-based firm which isn’t a shouty kind of business.”

The performance figures of the Cazenove range this year may appear mixed, having suffered along with the rest of the asset management industry from difficult market conditions. That said, none of the fund range listed in Investment Management Association (IMA) sectors are bottom quartile and half of those with a three-year track record have achieved first-quartile performance.

However, the group made what was arguably its biggest impact when Lipper Feri showed that it had become one of the top 10 in the industry for net inflows in the third quarter of 2008. Cazenove took in GBP 79.1m while many in the industry were labouring amid increasing redemption demands and falling asset prices.

Robin Minter-Kemp, the managing director of Cazenove Capital, says: “I think we had a more realistic expectation of the scale of the downturn which was going to affect investor confidence, whereas a number of people thought that it would be a temporary blip and we would return to the heyday of 2007. This hasn’t been the case at all.”

Minter-Kemp told Fund Strategy in January that the economic cycle was shifting from a period of expansion to one of contraction. He says this meant that the group did not buy into new investment philosophies that predicted continual growth and the end of the traditional cyclical nature of markets.

“We are strong believers in delivering returns in a risk-adjusted way over a full market cycle, which usually has four distinct phases in terms of recovery, expansion, contraction and normally some kind of recession,” he says.

“In terms of our investment objectives from the beginning of the year, I’m very pleased with our relative performance, but from an investor perspective you can’t sell relative performance.”

This focus led the group to look to its hedge fund range to provide British investors with a vehicle capable of providing smooth positive returns irrespective of market conditions.

Although these plans were initially considered early in 2007, it was felt that the Financial Services Authority (FSA) might stymie any moves to bring hedge fund-like powers to the British retail market. The advent of Ucits III, however, removed these obstacles and this year the firm has launched an absolute return product into a space formerly dominated by Mark Lyttleton’s UK Absolute Alpha fund.

“We have focused a lot of our efforts on trying to take advantage of uncorrelated returns from markets in terms of introducing our track record from our hedge fund in the launch of the Cazenove UK Absolute Target fund (Cat),” says Minter-Kemp.

“There has been very strong demand for multi-asset type investing and absolute return investing. Whether this demand is circumstantial we will have to wait and see but I suspect it’s probably here to stay.”

The UK Absolute Target fund, which took £60m at launch in July, is GBP 142m in size. It is managed by Tim Russell who also runs two of the group’s hedge funds domiciled in the Cayman Islands on which the new fund is modelled, giving investors an impressive track record for his long/short strategy.

Since launch the fund has returned 5% against a FTSE All-Share index fall of 23.7%. This compares favourably with BlackRock’s offering, which fell by 6.5% over the same period.

“The question we always ask ourselves is whether there is a sound investment rationale for launching a fund,” says Davies. “In the case of the Absolute Target fund this is certainly the case.”

The problem for BlackRock is that the short financials and long commodities play that provided much of the outperformance of the Absolute Alpha fund at the beginning of the year has come unstuck and its fund risks being outshone by the new product.

Tony Stenning, the head of UK retail at BlackRock, told Fund Strategy that he welcomes the competition for Lyttleton’s funds as it provides a healthier market. Stokes says: “I have looked at the Cazenove Absolute Target fund and in current markets it is likely to shine through. It has produced creditable performance figures in any market, but particularly under current conditions.”

When the fund was first announced in the press it was also suggested that the launch would be a double one with a European Absolute Return fund being given to Chris Rice, who also manages one of the firm’s Cayman-domiciled funds. The European fund never materialised, however, leading some commentators to wonder whether there was sufficient investor demand.

Minter-Kemp says the decision not to give Chris Rice a Ucits fund, far from a problem of lack of demand, was taken to protect the Cayman product.

“We thought about giving Chris Rice a similar Ucits vehicle,” he says. “The difference between a Cayman hedge fund and these Ucits funds is obviously liquidity. You can daily deal in a Ucits fund and you can only deal once a month in a Cayman fund, so you can see that the former would be more attractive than the other if you can produce the same performance on both products.”

Tim Russell manages two Cayman-domiciled funds, one more highly leveraged than the other to increase returns. This meant that unlike Rice, who manages a single large European focused hedge fund, Russell was not concerned about investors transferring wholesale into the new product.

“Already we’ve had some clients wanting to switch from the hedge fund into Cat, but Tim was happy for that to happen as he has another hedge fund, which is the leveraged version with a higher gross exposure to risk and therefore higher returns,” Minter-Kemp says. “Those clients won’t be tempted to switch out because they want a different type of product.”

The interest in the Absolute Target fund is given as one of the main reasons for the sudden meteoric rise to prominence of Cazenove over the past few months. The fact that it has more than doubled in size since it was launched during a severe economic downturn is testament to the surge of enthusiasm among investors that the product has generated.

Although only a single fund in the range, the firm benefits from its small size in that the success of a single manager represents a significant success for the business as a whole.

Ben Yearsley, investment manager at Hargreaves Lansdown, says the fact that Cazenove does not have a large range means that “if only one of their managers is doing well, that makes for a pretty good year for them”.

By focusing on what the company says are its core areas Cazenove aims to be competitive with the larger asset management houses that try to offer products across the investment spectrum.

This strategy has impressed Davies, who says “now is the time for good-quality businesses who understand their clients to gain market share”.

Importantly, if one of the products stands out to the market it also draws attention to some of the group’s other offerings. The Multi Manager Diversity fund, which is a multi-asset vehicle, has received significant interest from investors as it is ranked 18 out of 108 funds over one year and fourth of 70 funds over three years.

Stokes, who went for his first meeting with the group last week, says he was also impressed by its European offering.

“We have been looking at the Cazenove European fund as at £400m in size it is large enough to do what you want with but not too big to be unwieldy,” he says.

Although the range is small in terms of number of funds, Minter-Kemp says the firm’s investment universe is anything but narrow.

“Despite specialising in terms of pan-European equities we actually have quite a wide range of products,” he says. “Obviously we’ve got strong credentials in the UK with the Cat fund and the risk-adjusted Growth and Income Fund, and if you want a bit more spice you can buy Neil Pegrum’s UK Dynamic fund – all of which have really delivered this year with second and first-quartile rankings.”

The main challenge that the group, and indeed the industry as a whole, will face in the year ahead will be one of government policy, Minter Kemp says. Already there is a gulf opening between the action the government are taking and what the market is demanding.

“There is a reality of what I think is still happening and a fallacy of what the government appears to be doing,” he says.

“We’ve got a government which is determined to increase lending and increase spending, even though that’s what caused this problem in the first place, when there really appears no appetite for more geared consumption.

“The more this economic difference of opinion continues the more fundamentals will deteriorate, so I’m not overly optimistic for 2009.”

The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.