RWC US Absolute Alpha racked up a 16.34% return in 2012, with three key themes responsible. The fund had a positive view on US housing, which contributed one-third of the returns. After the demand for housing had languished at 50-year lows for four years, a turning point was correctly identified. Another third of the profits came from US retailers, such as GAP – which doubled. A third of returns also came from the short side, where the fund temporarily went heavily net short of energy and industrials at the end of first quarter. Clearly the returns came from taking contrarian views on certain sectors.
The returns were achieved with volatility stable around the 5% level for the past two years, and other risk factors also within controlled ranges. Net long exposure averaged 20% over the year, and has ranged from flat to 40% long since 2009; the fund can also go slightly net short. Net exposure is consistent on a raw cash, beta-adjusted or volatility-adjusted basis. Gross exposure has averaged 115% and never gone above 180%. Concentrated stock positions are generally not taken, with average long position sizes of 2.5% and the average short sized at 1%. Value at Risk, at the 99% one-month level, generally hovers around one-third of the UCITS limit of 20%. At the position level, a 20% peak to trough drawdown limit applies. The book is plain vanilla, mid and large cap US equities with no small caps. Consequently 95% of the book can be liquidated within three days, fitting well with the fund’s daily dealing.
Lead manager Mike Corcell’s style has developed over years at Threadneedle, and “has stayed consistent throughout varying market conditions including the transition from Threadneedle, to SAC, to RWC,” he says.
Three main idea generators are cyclical reversion, capacity change, and optionality. The cyclical reversion approach lay behind the house-builders positions in Lennar and DR Horton, which were cheap against their history at a time when buying a home in the US was cheaper than renting. Capacity change can inform trades such as a short in coffee shops chain Starbucks, which had a high valuation threatened by escalating capital spending. Optionality was the rationale for buying Genon Energy and NRG Energy, which were candidates for consolidation that eventually merged.
The current strategy started life at Threadneedle in 2004, before migrating to RWC in 2009. Corcell and co-manager Alexander Robarts have worked in parallel for eight years. They are assisted by analyst Adrian Bottega, and dealer Dion Purll. Corcell has final say on position sizing and risk.
Corcell admits that 2011 was a challenging year, when the fund lost 2%. It took some time for the managers to adapt to the more macro-driven market environment and pay more attention to politics. Now, he says, “the US market is now acting more normal in terms of ability to generate alpha”. As the very high correlations of recent years begin to drop, fundamental stock picking can start to re-assert itself. Corcell arguesthat it’s “the first 15 minutes of a stock-pickers market”. He thinks stock correlations have a lot further to fall, opening up a swathe of opportunities for stock selection.
Recent stock picks included energy futures exchange Intercontinental Exchange, which announced an offer for NYSE. Macau casino operator Melco Crown made a good contribution in January, and illustrates that US-listed firms with activities in Asia are investable. Delta Airlines also rallied on hopes of an improved industry pricing environment. Net exposure at 30% is towards the top end of the range.
High dividend paying stocks might not be the candidates for market leadership however. A Great Rotation back into equities could even curtail returns from equity income strategies, RWC think. Returns for anything yield-related over the past five years have been so phenomenal that they might not continue.
Fund manager: RWC
Portfolio managers: Mike Corcell, Lead Portfolio Manager, and Alex Robarts, co-Portfolio Manager