Skyline UCITS Fund

Best Performing Long/Short Equity Global – Emerging Markets Fund

Originally published in the February 2013 issue

The Skyline UCITS Fund under Geoff Bamber’s stewardship delivered 25% net of all fees in 2012, while the more concentrated Cayman fund – that has bigger holdings in the same names – surged by 33.4%. Impressive gains have continued in 2013 YTD with the Skyline UCITS Fund up 6.1% and the Cayman Fund up 7.1% as at the end of February.

Performance has surpassed the emerging market equity index since inception, and has been delivered with beta-adjusted net long exposure averaging around 55% (in the case of UCITS). Thus we can conclude that significant alpha generation drove the returns. The fund has attractive volatility properties, with a realized volatility of 10% which is under 50% of the index volatility over the same time period. Moreover the fund’s correlation to emerging market equity indices has been as low as 0.3 since inception, reflecting the sector specialism and the use of stock-specific shorting technology.

Three key top-down themes in the portfolio are near-sourcing, globalisation of shale extraction technology, and emissions reduction. The Skyline idea generation process dovetails macro thematics with deep fundamental stock research, and looks to generate an edge on company earnings.

One fact not lost on Skyline is that Mexico now has lower unit labour costs than China, which, combined with a shorter supply chain to the USA, results in a significant competitive advantage. Bamber thinks Pena Nieto’s pro-reform government could widen the cost gap as they aim to broaden Mexico’s industrial base. While there are currently few equity names that meet Skyline’s quality criteria, a deep pipeline of IPOs ahead should broaden the investment universe.

Shale gas is “the first sea change the global energy landscape has seen in a long time,” says Bamber. The less well understood opportunities lie outside the USA, in places such as China, South Africa and India, all of whom aim to reduce their reliance on energy imports over time by developing an indigenous supply base.

Emissions are an increasing concern as China’s air pollution reaches hazardous levels, especially on the East Coast. The political elite in China are now committed to improving the quality of growth and quality of life. Given the policy agenda, industrial companies that can improve efficiency, through improved power plant technology or superior fuel economy for cars, can outgrow domestic GDP.
The team includes award-winning consumer staples analyst, David Tovar, who was hired from Bank of America Merrill Lynch. Chief executive officer Vernon West oversees all non-investment matters, including risk management, which provides a weekly challenge to the investment team.

Physicist Bamber cut his investing teeth at established emerging markets funds, Matterhorn and Nevsky. At Matterhorn, Bamber was an emerging markets generalist analyst, whilst at Nevsky Bamber focused on industrial goods and consumer companies. Bamber is generally constructive on the outlook for emerging markets in 2013. He cites strong liquidity, encouraging economic indicators, US fiscal cliff resolution and a smooth China leadership transition as potentially positive factors. At the same time the Skyline funds can tactically scale back exposure when and if the managers think that markets are over-bought.

Skyline was attracted to UCITS because of the transparency, liquidity, and robust corporate governance the fund format offers. The fund was originally launched 18 months ago at the request of a UK insurance company. The strategy leverages the heritage Cayman track record but adjusts the risk limits to reflect the UCITS risk parameters.

Montlake was chosen as the UCITS platform due to their independence, cost efficiency, and differentiated business model. The Montlake platform relies upon a blue-chip roster of service providers: Citibank does custody, administration and trustee services whilst KMPG is responsible for auditing the fund.

Fund manager: Skyline Capital Management
Portfolio managers: Geoff Bamber and David Tovar, co-Portfolio Managers