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Sector Asset Management (SAM) is a leading edge,
independent, specialist capital management firm,
managing both absolute return and long only mandates.
Current AUM is in excess of US$1.2 billion. Starting
2004, SAM has decided to diversify its product
offering outside the energy and transportation
areas. Hakon Halvorsen joined SAM to form a new
investment team who will manage an equity market
neutral fund based on Hakon's proprietary investment
models.
This new fund by the name of Sector ERV (Enhanced
Relative Value) was launched on 8 June 2005, with
US$23 million from institutions and professional
investors. The fund targets average annual returns
of approximately 12-22% and volatility of approximately
10-13% (a Sharpe ratio of 1-1.5). The Dublin-based
and listed fund is offered in euro, dollar and
Norwegian kroner share classes.
- Could you tell us briefly about
your investment strategy?
Sector ERV is a market neutral, global equity
hedge fund investing strictly according to a
proprietary contrarian method. The fund basically
plays two spreads in managing the portfolio;
a relative value spread and relative share price
spread. The fund is focused on sectors where
the investment process has yielded strong results,
and those are telecoms and banking.
- Your investment mandate is global
equities. How do you go about selecting your
investments?
The "relative value" part is the foundation
of the ERV process. We divide our universe into
peer groups based on geography and sub-sectors,
performing valuation analyses separately for
each of these. After "cleaning" analyst
estimates, primarily to get a common financial
year-end for all companies within each peer
group, we graphically display specifically-chosen
valuation multiples relative to the factor we
feel are most important to each multiple (eg.
P/E versus growth in E, or P/BV versus ROE).
Exponential correlation analysis is applied
to calculate each share's upside or downside
on each valuation graph, and the results are
then weighed using the various correlation coefficients
to determine the share's overall upside or downside.
Due to thresholds for target returns the relative
value analysis allows us to screen away 70%
of the universe at any given time, so that we
may focus our fundamental work only on the most
interesting long and short candidates. This
includes quality control of estimates, understanding
the investment case for the share within the
investment community, and the identification
of fundamental triggers (events). Being based
on correlations, the method by definition identifies
as many short candidates as long candidates,
and we thus avoid the typical hedge fund trait
of buying single stocks against shorting indices.
- Can you tell us more about the
significance of the "timing tool"
used in your investment process?
The timing tools constitute the "enhancement"
part of the ERV process. While we consider fundamental
and market data input, the main timing tool
consists of proprietary designed relative share
price graphs to which we apply trading rules
that we have developed and extensively back-tested.
The aim of these graphs is to identify when
a share price has deviated from its peer group
to an extent that the probability of a short-term
mean reversion is significant. We use the graphs
to (i) get a good start to a new position as
we will wait to take it on until the timing
looks favourable, and (ii) to control risk as
we will close the position when the timing looks
unfavourable. Thus we may take on and close
a desired fundamental position several times
en route to our share price target.
- Do you have any preference for
small-cap, mid-cap or large-cap stocks? Any
reasons for that?
We do not have any such preference although
at times we may have a specific bias if we believe
that any of the above are overvalued or undervalued
as a group, or have short-term outperformed
or underperformed beyond reason. For instance,
with the VIX-index presently below 11 for the
first time since 1995, we have gone long large-caps
and short mid/small/micro caps. This implies
we have taken a short-term measured bet versus
the current mergers and acquisition frenzy,
which is also what the timing tool is telling
us.
- What is the exit point of your
investments? Do you have any predefined standards
for that?
Fundamental exits happen either due to changes
in estimates or because the target price has
been reached. Temporarily we may exit any investment
based on our "timing tools" as described
above.
- How strong is your research on
companies in which you invest? Do you conduct
company visits, attend industry seminars, etc?
Although we visit companies and attend industry
seminars, traditional research is only performed
on the long and short candidates we feel the
strongest about. But we never make our own estimates
on the companies.
- Do you have had any direct experience
of managing a global long/short fund?
My experience consists of 43 months managing
two global long-only equity funds and 11 months
managing two market-neutral equity hedge products
(including 6 months with Sector ERV, which started
as a discretionary mandate on 1 Jan 2005). The
common denominator for these 54 months is the
ERV approach, which continues to be developed
to this day.
As a long-only manager I managed a total of
US$100 million, and for the hedge products the
weighted average capital under management for
the 11 months is US$10 million.
The long-only funds outperformed their benchmark
by 1% per month, and both achieved Morningstar
5 rating. The average monthly performance over
11 months for the hedge products is also 1%.
Overall, measuring long-only performance relative
to benchmark and hedge performance relative
to zero, I have 9 negative months out of 54.
However, due to a bad June (first negative month
since Dec. 2003), the Sharpe ratio YTD for the
ERV product is only 1.04.
- Could you briefly tell us about
your other team members?
I have been able to recruit my trader from the
long-only days, Inger-Anne Varmann Vikre. She
will join me 1 September from DnB NOR Asset
Management, where she has seven years' experience
from global equity trading. Her responsibilities
will include surveillance and maintenance of
the timing tool chart library, trading, back-office
registration and corporate actions. Inger-Anne
holds a bachelor's degree in finance from the
Norwegian School of Management.
Mads Andreassen (born 1980) will join late September
from an internal team. Mads will work as an
analyst, assisting me with maintaining and developing
the relative value models, project analysis,
and will also add earnings surprise competence
as he has worked on earnings surprise methodology
the last year. Mads holds a master's degree
from the Norwegian School of Economics and Business
Administration.
Sector Asset Management will provide all other
functions.
- What makes you different from
other funds based in Europe offering a similar
product?
We do not know of any other fund offering a
similar product. What makes us different is
that Sector ERV is a market neutral, equity
hedge fund yet with a relatively high risk/return
objective (10-13% target volatility); we combine
our relative value fundamental valuation techniques
with an active trading strategy instead of a
buy-and-hold approach. And we are not starting
from scratch, the ERV method has achieved double
Morningstar 5 track record within long-only,
good returns over 11 months within market neutral
equity hedge, and has averaged only two negative
months per year these last 4½ years.
- Finally, you already have raised
US$23million for your fund. What do you target
your fund's closing size to be?
We expect to soft-close the fund at around US$200
million but believe that ultimate capacity could
be higher due to the nature of the sectors chosen.
Are you confident of raising additional money?
Yes, we are reasonably confident of raising
additional money as people seem to like the
logic of the method and the track record. The
AUM has already risen to US$30 million, and
we hope to pass the US$50 million mark during
the fall.
Contact Details
David de Picciotto
Sector Asset Management
47 2301 2900
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