Short alpha 

The short book has generated absolute returns of c 8% between December 2015 and June 2019. Short alpha has been derived from a broad spread of sectors, and in 2018 was enhanced by a timely move into cyclicals: consumer discretionary; autos; semiconductors; industrials and weaker financials, after Eleva’s proprietary leading economic indicators (LEI), which include global and Europe-oriented metrics, peaked in January 2018. Eleva was prescient here – economists who forecast growth of 2.5% in early 2018, had to revise down their forecasts a few months later. “Our LEI measure was specifically designed to lead the economic cycle, because the share prices of equity market cyclicals are correlated to leading rather than current economic indicators. When we get very positive and upbeat views from companies on a bottom-up level, we are looking for early warning signs of deterioration,” says Bendahan.

Structural short themes have included commercial television, which is clearly threatened by streaming services, and shopping centres, which are losing business to online retailing. Yet Bendahan has also been short of one online retailer – clothing retailer, ASOS. Its high valuation was not sufficient for the short thesis; there was also a risk of earnings disappointments, and Eleva’s earnings forecasts were below consensus. ASOS satisfied other criteria sought from certain types of shorts: it was a popular long that had outperformed for a long time, and was favoured by the sell side and buy side alike. 

Eleva has a reasonably well diversified short book, seldom sizing shorts above 2.5% of its NAV, and has not surpassed the threshold for public EU disclosure of short positions (0.5% of market capitalisation). Two examples of shorts were UK retailer (Debenhams) and a Swiss baker (Aryzta). In some cases, jitters in companies’ credit market instruments alerted Eleva to potential problems for their equity. The team have not previously worked as credit analysts per se but they glean plenty of insights from the credit markets. Bendahan observes that, “some small cap stocks have often been particularly slow to respond to balance sheet issues”. Whereas many hedge fund managers have larger market capitalisations in their short than long books, Eleva has no minimum market cap for single stock shorts that meet its liquidity criteria; indices can also be used on the short side.

Sector and country specialists

Bendahan and Deputy Portfolio Manager, Armand Suchet d’Albufera, (who worked together for seven years at Syz) had no experience of shorting prior to setting up Eleva, however two of the analysts did. Senior analyst, Vincent Resillot, had generated short ideas at Man GLG, and earlier at New Smith, while Pierre-Marie Gerez also carried out short-oriented analysis at Verrazzano Capital (which has now become a family office). The absolute return investment team also includes Antoine de Catheu, who came from BNP Paribas Investment Partners. Each of the analysts specialise in particular countries and sectors and are remunerated primarily on the real money performance of their picks within these countries and sectors (team interaction and firm performance have a lesser influence). They enjoy substantial autonomy and Bendahan seldom exercises his veto. All countries in Europe are covered, but the strategy has not yet invested in Russia, Turkey or Eastern Europe (though some companies from these regions have been met). Nearly all sectors in Europe are followed; biotech is probably the only exception as it is seen as being too binary. Eleva’s Leaders small & mid cap strategy launched in 2018, is run independently by Marie Guigou and Diane Bruno, but has a 7-8% overlap (maximum 15%) with the long book of the absolute return strategy; the two women managers can also alert the team to short ideas.

Dynamic exposure variation 

Tactical exposure variation has also helped: Eleva was adept at covering and taking profits on part of the short book in late 2018. Indeed, varying net exposure (which can range between -10% and +50%) between approximately 7% and 45% over the past three and a half years, has also added value, relative to a counterfactual of maintaining constant exposure of the average net long exposure. Adjusting the gross exposure – up to a maximum of 170% since inception – has additionally boosted returns, measured against the same hypothetical benchmark of having kept it constant at the average level. Sometimes, the balance sheet and net exposure have shrunk together, as in September 2018 after leading economic indicators deteriorated further. At other times, balance sheet expansion has coincided with higher net exposure. Conversely, net exposure swiftly cut by an index hedge has, on other occasions, led to increased gross exposure. The ceiling of 250% for gross exposure would only be touched if Bendahan was confident that bottom-up fundamentals were driving share prices. In June 2019, the gross exposure has come back down to c 113% as he observes that, “we do not want to maximize gross exposure when a huge rally in bonds is driving the markets”.

Style agnostic

There is no structural bias to any style or factor exposures, besides a small tilt to small cap growth. Bendahan says, “we use small caps to access growth, but prefer large caps for value or cyclical plays as we do not want to add liquidity risk to value or cyclical risk”. Over time, the exposure works out as style agnostic, but not neutral: at particular points in the cycle it can accentuate different style factors, partly based on the LEI. For instance, in early 2018, the book moved into growth and quality-oriented stocks that are less dependent on the economic cycle. In early 2019, roughly half of the long book was in value stocks, (which also contributed to beta-adjusted net exposure slightly exceeding raw net exposure; the two are usually pretty close). In 2016, Bendahan admits that he moved into value stocks somewhat too early and the long book underperformed during the first half of the year as investors – flummoxed by Brexit and general volatility – flew to safety and large caps. Thus, Bendahan is to some extent a business cycle investor.

In mid-2019, Bendahan sees record valuation dispersion in European equities, and specifically recognises that “quality” stocks are very expensive relative to other stocks – in the 99th percentile of their historical valuation range – but he also observes that this is partly due to $15trn of debt trading at negative yields, and uncertainty over the macroeconomic outlook. “If we go into a recession, valuations will matter less because earnings for some cyclical non-quality stocks will plummet,” he says. Bendahan would need to get comfort in a sustained improvement in Eleva’s LEI in order to go aggressively short of quality stocks. He does not see enough robustness in the data as of July 2019, but has selected a few “bond proxies” as shorts. Overall, he judges that European equities are slightly below historical valuations on a raw PE basis and in line with history on a CAPE (cyclically adjusted PE) basis. The valuation premium for US equities, on a raw basis, is much smaller after adjusting for the higher US weighting in the more richly valued growth sectors of healthcare and technology, but remains substantial on the CAPE metric.

Long stockpicking

Nearly all of Eleva’s long picks come under four thematic headings: family or foundation owned companies; differentiated business models in mature industries; equities that are mispriced relative to companies’ credit; and firms undergoing momentous change.

Family and foundation owned companies are the ballast of the portfolio, typically making up 50% of the long book versus 20% of the index. Bendahan is of the opinion that such companies generally take a long-term view on value creation, are well aligned with investors’ interests, and tend to have conservative accounting and stronger balance sheets. In addition, the segment tends to outperform over time, but Bendahan is not a buy and hold investor. His average holding period is seven months on the long book and he aims to own his preferred family owned firms at the right point in the cycle, rather than hold them for multi-year periods. Spain’s Grifols is an example of a firm that he has been watching since its IPO in 2006 – a period over which its share price has multiplied eleven-fold – but only bought into it quite recently at Eleva. “The firm makes proteins from plasma,” he says. “It is typical of family-owned businesses in investing a lot and the market is short-sighted over the long-term rewards that the company will reap from its investments.” Conglomerate holding companies, which often trade at a discount to the sum of their parts, are not a core part of the strategy but are sometimes owned when Bendahan perceives a glaring valuation anomaly. “Belgium’s D’Ieteren is not being rewarded for the value of its unlisted car repair unit.” Bendahan is not dogmatically wedded to all family owned companies and has sometimes been short of them.

“Blue Ocean” stocks – inspired by Kim and Mauborgne’s book, Blue Ocean Strategy – are the quintessence of the disruptors theme. Online food retailer, Ocado, is a perfect example. “It operates in a very boring sector of food retailing, which is not growing in general – even if online food retailing is. Sell side analysts have underestimated the growth potential. However, the percentage of UK and US households still buying food from shops is huge, with 88% in the UK and 98% in the US.” Ocado has also periodically appeared in lists of the most shorted ten stocks on the LSE. 

Credit markets can provide insights into equity markets for both long and short positions. “Recently, credit markets have responded to balance sheet and cashflow improvements at construction firms such as Heidelberg Cement and St Gobain, but this has not been reflected in equity markets. A gap exists between free cash flows and dividend yields,” says Bendahan. It is perhaps perverse that many equities in Europe offer a higher dividend income, which may grow over time, than the coupons on their bonds, which are fixed.

The fourth category of longs involves business, shareholder, regulatory or management change, which may also involve restructuring, and which can be underestimated by the sell side. For instance, the value of Prudential’s dynamic Asian business, which was arguably obscured by sitting under the same ownership umbrella as low-growth M&G, could become apparent once the two parts are separated. It could then be more of a pure play for growth investors, and get re-rated, whereas value or yield oriented investors can go for M&G.

Beyond these four thematic buckets, few positions are held. One former example is Diageo, which does not fit into any of the categories, but was undervalued in 2018. 

Research is primarily conducted in house and based on regular company managements and seminars. Eleva does make some use of sell side research. Merrill Lynch International and Morgan Stanley are the two global prime brokers used as derivative providers. Eleva also uses smaller, specialist brokers, such as Goodbody in Ireland, Fidentiis in Spain, and Redburn in the UK to enhance local knowledge. The firm has generally seen some marginal reduction in research coverage post MiFID II, although this has not interfered with the investment process. The investment team also utilise and leverage insights from expert networks; which can involve conversations with industry consultants and operation managers of non-listed companies.

Long term track record 

Bendahan’s “batting average” measures the number of periods long and short stock picks have contributed positively to the portfolio. It is typically above 50%, however the win:loss ratio is higher and is improved through risk management, “We stay very humble, pay much attention to reviewing underperformers and recognise when we are wrong. Stocks are reviewed systematically after a 10% loss, and may be exited,” he says. One example of a long position sold in 2018 was gold and silver mining company, Fresnillo. Bendahan likes the company, but it has recently disappointed the market on output and ore grades. The hit ratio at Eleva is typical of Bendahan’s longer term career. 

Since the long book of the hedge fund has a c 85% overlap with Eleva’s pan-European long-only strategy, it is worth reviewing Bendahan’s prior career in long-only fund management. Bendahan has always run daily dealing funds and the UCITS framework does not constrain his liquid, diversified style; the investment universe is around 1,000 reasonably liquid European companies. He has track records dating back to 2002. At Syz, his long-only Syz Oyster European Selection ran a focused long book of 50 or so holdings, with active share over 80% and a tracking error over 5%, similar to Eleva’s long-only strategies today (and slightly below the metrics for the long book of the hedge fund strategy). This strategy was ranked in the first percentile between December 2011 and August 2014, while his somewhat less concentrated Syz Oyster European Opportunities was ranked top quartile between December 2005 and August 2014. Before that, Bendahan had a meteoric career trajectory at AXA, running €2.5bn while in his 20s, in a Southern European strategy that received a Citywire award for the best performing long-only strategy over a three-year period to 2005. The long stock-picking approach over the past 17 years has been based on the same enduring philosophy, with a strong emphasis on selected family and foundation-owned companies.