The fund making money in turbulent markets

A lot of fund managers have struggled in the last few months, but a handful have come through with flying colours. One such is David Crawford, who runs City Financial Absolute Equity. According to data from FE Trustnet, this is the most successful open-ended fund over the last 12 months, with an impressive gain of 30.1%.

The Absolute Equity fund aims to achieve a positive absolute return for investors over rolling 36 month periods, primarily through investment in UK and global equities. It can go both long and short, which means that it can use derivatives to sell stocks that it doesn’t own in anticipation of being able to buy them back later at a lower price.

City Financial was created by Rob Hain and Andrew Williams, who have both held senior positions at the investment management company Invesco Perpetual. Their aim was to offer a series of funds that provide straightforward solutions to investors and that are run by highly experienced managers.

Crawford is a good example of the sort of person they were after as he has more than 17 years of investment experience in the industry. He joined City Financial in September 2012 having previously worked at Octopus Investments, Hermes Investment Management and M&G Investments.

Absolute Equity mainly provides exposure to the UK with selective holdings in the US and Europe. Crawford uses an active, unconstrained approach with no reference to any stock market based benchmark and has significant weightings in small and medium sized companies.

The short positions allow the fund to profit from falling prices while also hedging some of the market exposure. This enables it to offer returns that are uncorrelated with the major indices, although it should still be regarded as a medium to high risk option.

Crawford uses a stock specific approach and concentrates on the underlying fundamentals to identify investment opportunities. He has around 300 company meetings a year and also buys in external research by specialist brokers. It is then a case of looking to see if the shares are over or under priced by the market and if there is a catalyst that could result in a re-rating.

Each small cap stock is normally kept to between 0.5% and 1.5% of the value of the fund, whereas the mid and large caps are typically in the range of 2% to 8%. The maximum long position size is 10%, with the largest permissible short being 7%.

At the end of December the top five long positions were RBS (6.9%), teaching equipment provider Wesco (5.5%), mortgage provider Ocwen (4.1%), Fiat (3.8%) and Rolls-Royce (3.5%).

There are normally 40 to 60 short positions. The names are not disclosed in the monthly factsheets, although the largest exposures at the end of December were in companies involved in US shale oil, biotech, US healthcare and security software.

In 2015 the fund returned an incredible 22.66% with the five largest contributors being a short in a copper company – the base metal has fallen sharply in value due to lower global demand – two US shale oil companies that have suffered as a result of the plunge in the oil price, and longs in Kvaerner, a Norwegian engineering and construction business, and the office provider Regus.

At the end of December the portfolio had a net short exposure to the market of -5% with a beta of -0.3, but it has since moved to a 7% net long and a beta of -0.2. This has enabled it to make money during the recent market turmoil with a year-to-date return of 4.41%.

The fund operates in the Targeted Absolute Return sector and has ongoing charges of 1.87%. There is also a performance fee of 20% of the outperformance relative to three-month GBP LIBOR with a high water mark. This little known fund has just £242.9m in assets under management, yet it deserves wider recognition.