Carmignac Gestion

Managing down Eurozone exposure to preserve capital

Originally published in the May 2012 issue

It is a difficult time for Eurozone fund managers, especially for an equities-focused firm like Carmignac Gestion. The Euro is balanced precariously on a precipice with the risk of a system-wide shock from a Greek exit growing by the day. Volatility is rampant.

The implications for investors are alarming. The Euro is sliding against the dollar and other currencies, albeit from historically high levels. European equity markets are on the slide, while the banking system across the zone is listing.

Against this backdrop, Edouard Carmignac, founder and chairman, came to London in mid-May to launch Carmignac Gestion’s new UK operation. Since its founding in 1989, Carmignac has become synonymous with active market exposure control and transparent risk management. Among continental investors, the firm recently ranked second to no less than BlackRock in a survey ranking asset managers by brand distinction. Carmignac now manages over €50 billion.

Managing exposure
The pitch to UK investors is simple. “We think active management should be in high demand for some time,” says Carmignac. “With this we think that risk management is crucial. We feel we have something to add to the UK market, even though it is a sophisticated one.”

Carmignac’s approach has been consistent. It has aimed to identify long-term trends in the world economy – among them, technology, emerging markets and commodities – and find the best way to invest in them. Since such macro views are very long-term themes, Carmignac has developed hedging strategies to help manage directional market risk. The end product is performance combined with risk management and transparency, the latter bolstered by weekly communication with investors.

“Because we don’t have benchmarks it is important for the client to understand what we are doing,” says Carmignac, explaining the approach to investor communication. “We have done this all along and we are one of the most transparent investment managers around.”

Market outlook
Carmignac’s investment outlook has shifted in the first half of 2012. Exposure to European equities and Eurozone sovereign bonds has been cut back sharply in response to the continuing financial crisis surrounding the single currency. Didier Saint-Georges, a member of the firm’s investment committee, articulates the structural dilemma at the heart of the Euro crisis: except in Germany, growth among zone countries is much too low for public debt to stabilise.

“For about two years we have not been buying Euro sovereign securities,” Saint-Georges says, though purchases of US 10-year paper have occurred for hedging. On corporate bonds, profit taking on Euro holdings has been rolled over to US issues. “We hope to generate yield at an acceptable level of risk,” he says. Overall, Carmignac’s fixed income exposure is 75% to dollar issues (or currencies tied to it) and 17% to yen-denominated issues.

Carmignac’s equity portfolios are aligned to ride two key trends. One is domestic consumption in emerging markets, especially China. About two-thirds of exposure is to local companies with the remainder to US and European exporters. “This is a key trend where there is high visibility,” says Saint-Georges.

The second trend is exposure to energy, particularly deep water oil discoveries. Carmignac believes this is a strong reason to buy shares in oil services companies due to the high investment in exploration and development.

UK regulation changing
The firm’s move into the UK is just ahead of the retail distribution review governing how funds are marketed and sold which comes into effect at the end of 2012. Carmignac acknowledged that the opening of a London office had been delayed as the RDR was unfolding. Among other things, RDR will require advisory firms to explicitly disclose and separately charge investor clients for their services. “This change creates opportunities,” says Carmignac. “The idea that some entrenched positions will be weakened appeals to us. The great thing about the UK is that it is both a retail and an institutional market. The key is access to the best investment products. Then it is important for clients to be well advised.”

The launch in the UK comes as Carmignac continues to attract inflows. It gained €1 billion in the first quarter. During the quarter stock markets rose in the first two months, but sold off in March as fears about subdued economic growth and Euro sovereign debt imbalances flared.

Alternative funds
Carmignac’s venture into alternative strategies has been developed through a group of three diversified funds. Two funds, Carmignac Patrimoine and Carmignac Emerging Patrimoine (which invests in emerging markets), use three performance drivers – international bonds, international equities (capped at 50%) and currencies – to dampen risk, while seeking the best sources of returns.

The third fund, Carmignac Market Neutral, is a fully fledged UCITS hedge fund. Launched at the end of 2010, it is run by Maxine Carmignac and currently manages around €150 million. At the end of March it had next exposure of just 2.2% and gross exposure of 145% with consumer discretionary themes accounting for about 60% of gross exposure. Prior to the fund being launched Ms Carmignac was a special situations analyst with hedge funds in London and New York after doing equity research with the family firm.

For his part, the founder is happy with the 20 funds the firm currently offers. “One of the things we try to avoid is the launch of a faddish product every year,” he says. “To quote Steve Jobs, ‘When firms have their sales team running the business that is the end of the show!’”

At a time when other asset management firm founders are cashing in, Carmignac scotched suggestions of a near-term exit.

“The succession will happen in a natural and orderly manner,” he says. The aim, he adds, will be to maintain the firm’s culture with the Carmignac family remaining the chief shareholder.