Hedge Fund Interview with Angus Baxter, Investment Director of Valu-Trac Investment Management Limited

For Angus Daxter, Investment Director of Valu-Trac, the fund's investment philosophy is that an investment in bonds or equities is essentially an exercise in buying future income streams. Valu-Trac systematically measures, projects and values those future income streams using objective assumptions on a globally consistent basis. They are then compared to price, which gives the “Intrinsic Value Yield” which is a measure of the potential income generation expressed as a compound annual real rate of return. The measurement of “Intrinsic Value Yield” is at the heart of the investment management process and allows comparison of assets on a globally consistent basis. The aim is to buy high Intrinsic Value Yield and hold it while it falls, and to avoid low and rising Intrinsic Value Yield. The Intrinsic Values for non-income producing assets and currencies are made by reference to central banks monetary base. Experience and analysis shows that investment according to the level and behaviour of Intrinsic Value Yield leads to superior investment returns.

Valu-Trac Investment Management Ltd (VIML) has US$604 million of assets under management and direct advice in long-only and long/short strategies. Among the portfolios managed, VIML manages two private label open-ended funds (where VIML is the appointed investment manager). The first, managed on behalf of a European bank, is primarily an equity fund with the ability to diversify into bonds and/or “alternatives” (by which we mean gold mining and precious metal stocks). The fund has outperformed the MSCI World Equity Index by an annualised 11.27% over the last three years. The second is an equity-only fund domiciled in Australia and has outperformed the MSCI World Index (ex Australia) benchmark by an annualised 9.0% over the last three years (all figures as at end August 2006).


The Valu-Trac World Wide Strategy Fund (WWSF) is an equity market allocation fund focusing on both capital growth and capital preservation. As such, it can diversify into bonds and/or “alternatives” (by which we mean gold-backed securities and/or gold mining & precious metal shares). It is an Open Ended Investment Company listed on the Irish Stock Exchange. There is an active currency hedging overlay, and shares classes are available in US dollars, euros, sterling and yen.

  1. It is stated in your investment mandate that the long-only equity-focused WWSF allocates to markets rather than stocks. What is a typical breakdown of your regional allocations? How dynamic are changes to these allocations?

    There is no typical breakdown of allocations. The allocations are made using an entirely systematic and disciplined approach according to the level and behaviour of Intrinsic Value. In our allocation process, we disregard equity index benchmarks since they are based on price not valuation, and our portfolios frequently have significantly different allocations and weightings from these benchmarks. The extent of changes that are made to allocations depends principally on changes to the level and behaviour of Intrinsic Values, although we have internal controls including turnover controls to help keep transactions costs down.

  2. What is the rationale behind your essentially “top-down” equity strategy, as suggested by the “using markets, not stocks” clause? Do you have other mechanisms in place to identify superior returns through undervalued securities?

    Research by a number of leading consultants, including the WM Company, has argued that the asset allocation decision is the key determinant of overall portfolio returns. Valu-Trac has a good record of making allocations both within equity markets and also across asset classes.

    The same methodology is applied to around 20,000 global stocks. The WWSF uses these measurements to select stocks in the gold, metals and mining sectors. Research on individual stocks is distributed by ISI Group in New York (

  3. Would you contend that, from an investor’s standpoint, a fund such as yours (global long-only equity fund with dynamic allocations to bonds and gold-related securities) is a better proposition than a long/short fund targeting similar opportunities? Why? What factors do you think would go into the investment decision?

    The benefit of all funds managed by VIML is that they use the same investment process based on the level and behaviour of Intrinsic Value. The issue of whether these measurements are applied to a long-only fund or a long/short fund is largely a matter of investor preference. Many investors do not feel comfortable with long/short funds. We think the key factor is that the fund focuses on both capital growth and capital preservation.

    The long-only WWSF complements our long/short fund, the Valu-Trac Strategic Fund, which uses the same measurements of Intrinsic Value.

  4. It is also stated that the cap on the fund’s dynamic allocations into bonds and gold/gold-backed securities is 100% for either asset class. What is the current breakdown of your allocations by sector/asset class?

    The current position is approximately 52% in global equity markets, 48% in bonds and zero in “alternatives”.

  5. These past few months have seen volatile equity markets and sharp mid-month reversals. Could you shed some light on how these reversals affected your fund’s sector allocations as well as performance, in the past three months?

    In March 2006, before the new fund was launched, we published a research note entitled “Change in the Air” which warned of an imminent downturn in equity markets. Our model allocations substantially reduced exposure to global equities and gold, and made allocations to bonds (where previously we had been at zero). The subsequent volatility and setbacks in markets were not a surprise to us.

    The performance simulation of the fund model has been flat against the MSCI World equity Index over three months and outperformed by over 9% over the past six months.

  6. Do you foresee any significant shift in your sector exposure in the near term? Why or why not? What are the typical holding period of an investment and the turnover of the portfolio?

    The Valu-Trac process is systematic and reacts to signals given by the markets themselves. It is the markets which tell us where and when to invest. Thus we do not forecast what our exposures are likely to be over any time frame.

    Although allocations tend to be long term in nature, higher turnover can occur especially when our measurements call for a move between broad asset classes (for example, movements between bonds, equities and “alternatives”). If there is significant risk or opportunity in markets, changes to the fund can occur in a short space of time.

    We have imposed turnover constraints to help keep transaction costs down.

  7. The investment mandate mentions active currency hedging for each share class. What other risk management measures does the fund have in place?

    Currency overlay is an integral part of the asset allocation process. Exchange rate movements are ultimately a function of relative monetary debasement and Valu-Trac uses Purchasing Power Parity based on CPI as the basis for valuation of currencies. Measurements in the ratio of Spot:PPP and its behaviour inform on likely currency developments.

    We believe that the true risk management measure in WWSF is that the investments are underwritten by our measurements of Intrinsic Value. We are not constrained by the need to hug a benchmark, nor do we have to be invested in equities when the measurements show that they exhibit little value or poor behaviour. WWSF shall certainly not be one of those funds that crows about outperforming a falling index.

  8. There are eight global equity-focused funds in the Eurekahedge Long-only Absolute Return Fund database. What competitive edge does your fund have over other funds with similar allocations?  

    WWSF is focused on both capital growth and capital preservation. It aims to deliver strong returns over the long term through a combination of equity market selection and the ability to move into bonds and/or “alternatives” when they are more attractive than equities. Who wants to remain invested in a fund that remains 100% invested in equities during those periods that occur from time to time when equity markets are looking overvalued or risky?

    Our key advantage lies in the focus on Valu-Trac’s measurements of Intrinsic Value. The systematic Valu-Trac approach is a unique, objective investment discipline that has performed consistently over time.

  9. And lastly, what is your take on the current volatility in the financial markets? What is your macro view for the short term and what opportunities do you foresee?

    Our measurements warned us of the current volatility in markets in March 2006. At launch in September 2006 WWSF was invested 52% in equities and 48% in bonds, reflecting the measurements’ caution over the outlook for equities and indications that there remains room for bonds to perform. In the equity markets, WWSF is allocated to the Netherlands, Australia, Sweden and Hong Kong. On the bond side, the fund is allocated to Australia, Japan, the UK and New Zealand.

Contact Details
Angus Baxter
Valu-Trac Investment Management Limited
+44 20 7353 9166