Manticore: Global Mastery, Specialist Approach

Market neutral investing in the TMT sector

STUART FIELDHOUSE

If you’re an asset management house looking to launch a global sector-oriented fund, you could do a lot worse than pick the TMT (telecoms, media, and technology) sector. It is an industry with serious cross-border implications, responsive to global trends and the beneficiary of rapid technological change.

Even better, launch a hedge fund in the TMT sector.

That’s what Magnus Angenfelt and Niklas Frost at Manticore did when they and their colleagues launched the Manticore fund in 2001, with the help of Brummer & Partners. “We’ve been operating in this space for most of our professional careers, and we see it as a good source of alpha ideas. It is a sector that is constantly experiencing rapid change, it is complicated,” says Managing Director Angenfelt.


It was this complexity that helped to attract the two managers to the idea of a long/short, market neutral TMT fund. Mastery of the sector held out the opportunity to distinguish themselves from the global long/short equity pack by offering a fund that could respond quickly to profitable trends that migrate quickly across global markets. It is a sector that has outperformed the MSCI, and one that is covered by fewer managers and analysts.In hindsight, the fund’s managers recognise that launching their strategy in 2001 set them up for some hard times in the first few years of its history. Expectations of the potential returns to be achieved in the sector were incredibly high, and what followed was an extensive period of sobering up. “We’ve seen so many profit warnings in this area,” admits Angenfelt ruefully.

Investment strategy

In terms of the fund’s day-to-day management, the principals rely on decent equity research, including plenty of quantitative analysis, to inform their decisions. This is helped by having analysts based in Sweden and New York. The overall portfolio is fairly balanced between the long and short sides: the managers steer away from using indices or structured products to simulate the short book, as they feel there are hidden risks they would rather not have to worry about. The fund derives the bulk of its risk – and profits – from companies of over $1 billion market value. Less than 11% of the fund is invested with companies that have a capitalisation of less than a billion dollars. Geographically, it breaks down into 45% US, 40% Europe, and 15% Asia. With increasing investment opportunities emerging in Asian markets, it is only natural that Manticore is considering an Asian research office in the near future. “We have been able to identify several interesting themes there,” says Angenfelt.

“Valuations are, on average, fairly high, although for the sector, average volatility is down,” says CIO Frost. “This has to be viewed in the context of the market regime we’ve been seeing more recently, with few really turbulent times.” In other words, these are managers who like to see a bit of volatility in the NASDAQ. When that index was off 9% in May 2006, Manticore’s fund was up 0.9%. This, they feel, is the mark of a fund that is not correlated to the world’s main media technology market, despite being sector-specific. “Due to the neutrality of the portfolio, our gross exposure is 275% of NAV,” says Frost.

The strategy is considered to be a scalable product as it stands. With US$260 million under management, Angenfelt reckons the fund can go to a billion in AuM before he would have to consider tailoring the strategy any differently. One of the joys of having a global mandate, even if it is sector-specific, is its scalability. “There is true breadth in what we do,” says Angenfelt. The fund is well-balanced over core sectors: media, telecom service providers, software and hardware.

Roughly 50% of the portfolio is devoted to themes that the managers can identify and follow; consequently, they can profess to being positive about content providers, whilst maintaining a negative stance on television distributors. “Such themes account for 50% of our holdings, while the rest are relative value positions,” says Frost. “That’s where we find our stock-specific performance and valuation. We’re observing change and we’re observing the implications of that change. We will adjust if profitability is above our assumptions. We will also invest only if we feel there is a fundamental value proposition.”

The fund is fairly heavily diversified, with almost 200 positions, well up from when it was launched back in 2001. Then the managers did not have the stamina to hold onto positions, and freely admit it. But who could blame them in the middle of a perfect storm like the TMT sector endured in 2001-02? Nowadays they find it more rewarding when a stock they have held over the medium to long term is yielding profits. The turnover of the fund is considered to be relatively low versus its peers, and Angenfelt likes to think that keeping some of their investments “at arm’s length” will help to give them a chance to appreciate. “Net neutrality does make us different,” he explains. “We’re trying to be as close to market neutral as possible, all the time.” With a positive net exposure of between 15% and 25%, “there is only a marginal long baseline in the fund.”

Like other successful sector-specific hedge funds. Manticore’s portfolio managers have plenty of credit to give to their analysts, whom they feel have played a big role in the fund’s success. In Stockholm, the analyst team is composed of Mikael Kadri, Ragnar Kämpe, and David Rindegren. In the US, the team relies on David Meyer for its coverage, a former Morgan Stanley TMT specialist. The team is not averse to racking up the air miles either. With a global mandate, they need to be prepared to travel to meet company management, and the decision to site Meyer in New York is a big help. In this context an Asia office also makes sense, as the number of Asian companies in the global universe is likely to increase going forwards. Angenfelt estimates that the Manticore team carries out one company visit per week, and he himself spent over two months in Hong Kong in 2005 in order to help Manticore build up its expertise in Asian TMT companies. “We expect Asia to be more important going forwards,” says Angenfelt. “Production levels have been trending upwards for the last two years, and countries in the region have been fast in adapting to new technology. For example, South Korea and Japan are two to three years ahead of Europe and the US in the mobile technology stakes.”

The added value comes from identifying areas of the market where new and successful companies are emerging. While small and micro cap investments are kept to a minimum, usually no more than 10%, the Manticore team rates its coverage of emerging TMT companies worldwide as amongst the best in the market.

Historically, Manticore made money from service providers in the telecoms sector, and later from media companies. More recently software developers have contributed a big share of the return. Although the managers occasionally will look at IPOs (which can provided technology managers especially with sizeable gains), they have not yet seen a need to focus on new issues. These days, they feel more comfortable with a diversified approach, with a good balance of the TMT sub-sectors represented. With nearly 200 positions, this has become far more achievable than it would have been in 2002-03.

“The most interesting thing we’re seeing at the moment is mergers between telecom and media companies,” says Angenfelt. “We’re seeing a theme from the mid-1990s repeating itself. For example, we’re seeing telecoms operators launching their own television channels, BSkyB buying a broadband service provider.”


In addition, Frost is currently seeing consolidation in the software space. For example, US software giant Oracle has spent the last 12 months snapping up a string of software firms such as Hyperion Solutions and Stellent, using a US$25 billion war-chest. Activist investors and private equity firms have also brought activity to a market, creating opportunities for Manticore on both the long and the short side of its portfolio. “So far so good for our ability to navigate our way through these acquisitions,” says Frost. “We have been able to capture more profits on the long side than losses on the short side.”

History

Manticore as it currently stands is the result of some big changes made by the Brummer partnership to the way the fund was managed almost three years ago. In 2004, the fund was up only 0.7% for the year, against 13.22% in 2003. It has meant a radical transformation in the way the fund is managed, and 2005 saw the fund back on track with a return of 9.55%. “Back in the beginning, we used fewer positions, and we were not market neutral,” says Angenfelt. Adds Frost: “We were already starting to change the investment processes in 2003 in order to enhance the risk-adjusted returns in Manticore. We did that by implementing a broader and more market neutral portfolio with higher individual responsibility for investment processes and results.”

At the start of 2005 Manticore decided it was necessary to concentrate the team even further around the proven best-performing managers and processes in order to be more competitive. Since then the managers have gradually doubled their use of risk and consequently been able to deliver consistent and good returns from a multitude of alpha sources within the TMT domain.

Conclusion

Back in the dark days of 2001-02, Manticore was using a very different investment process, and was facing volatility conditions that were five times what they are today. Nowadays, the fund’s asset mix is more towards the mid and large cap end of the market than it was then, and the current investment team has also managed to glean experience from bear market turbulence, and the necessary changes to the team effected in 2005. With its current set-up, Angenfelt says he is not afraid of volatility. He thinks it has taken time for his team to build the optimum strategy, and feels confident the fund would weather a new market crisis, thanks to the lessons learned in 2002.