Interview with Ian Hunter, Senior Fund Manager, Sabre Fund Management Ltd
Sabre Fund Management is one of the oldest names in the London hedge fund business. Originally founded as a CTA in 1982, the business has evolved through time via acquisition of new teams bringing new experience, and the continual research and development programme.
Sabre’s core business is the management of quantitative strategies (since 1997) and it was the first European hedge fund manager to focus on “Style Investing” as a means of generating alpha (the strategy was introduced to investors in 2002).
The business is privately owned by three principals – two of which are responsible for the daily management of the business and one who is non-executive. Melissa Hill is the managing principal.
Sabre’s clients comprise foundations, funds of funds, hedge fund platforms, private banks and high net worth individuals.
Sabre currently has US$210 million assets under management.
Ian Hunter has 29 years’ investment management, investment analysis and sales experience, specialising in Asian economies and stock markets. Ian had previously worked at Lazard, Midland Montagu and Martin Currie in charge of their Asian investment desks. He also has 12 years’ multi-mandate strategy exposure in a senior sell-side capacity at Nomura and Woori I&S (formerly part of the LG Group).
Ian joined Sabre to start a new active strategy through the management of an Asian ex-Japan long/short fund.
Could you throw some light on why you have picked Asia ex-Japan, in particular, as your investment geography for the Sabre Absolute Return Fund?
Asia ex-Japan was selected because of its superior economic growth compared to that of more mature economic blocks such as the US and Europe. Driven increasingly by China and the demand within the specific countries themselves, the re-capitalised corporate sector which emerged post the 1997/8 economic shock is now well positioned to increase its overseas presence through M&A whilst improved corporate governance will ensure that shareholders’ interests are appropriately rewarded.
Do you feel that government policies (such as not being allowed to short stocks in major countries like China, among others), in regional Asia ex-Japan markets play a big role in the performance of hedge funds? To what extent, according to you, would such policies or policy changes in the future affect your fund’s performance?
Shorting in Asian markets is broadly available at the stock level where desired whilst at the market exposure level, Exchange-Traded Futures are used widely to reduce the market risk through hedging. Changes in government policies such as in India and Taiwan would help to improve performance marginally as the direct availability of stock specific shorts would lead to a reduction in stock borrowing costs. I would however point out that the fund will typically be net long with a smaller number of stock specific shorts held for a shorter period of time for event-driven reasons, such as earnings disappointment. Moreover the market short exposure in the portfolio will be used to hedge the corresponding long exposure, not to generate alpha itself.
What sort of fundamental/technical analyses would you put into your pre-stock selection research? Could you tell us a little about your investment philosophy and strategy?
The stock selection process is earnings-driven using 2-year trailing and 3-year prospective earnings, combined with additional screening for profitability – ROEs and valuations – P/Es / P/Bs. This is then married to the global, regional and country-specific macro views and a time horizon expectation for retention of between two and five years.
How many stocks are you likely to hold at a time, in the portfolio of the Sabre Absolute Return Fund? And what do you have in mind as a typical holding period for stocks?
50 - 80 typically; 2 - 5 years.
Your fund details highlight your bias towards medium and large market capitalisation stocks. Could you explain your rationale behind the same? What’s your take on small caps, in terms of their return-generating potential (of course keeping in mind, the risks involved), as compared to medium and large caps?
Medium to large capital stocks are held due to their liquidity, sustainability of their business models and their ability to sustain growth in a down-cycle through diversification. Approximately 20% of the portfolio will be held in small caps – defined according to the stock market concerned. All holdings, whether long or short, large, medium or small caps, are held to generate alpha and are high conviction stocks. We are fully conversant with each company’s business model and regularly see or communicate with their management. The process is conducted consistently for large, medium and small capitalised companies alike.
To what extent, and on what basis, would you diversify your fund’s investments across the regional markets in Asia ex-Japan? And are you bullish on any regional sectors currently?
The diversification of sector and stocks is an intrinsic part of the investment process, which as I have said, represents our global, regional and local country-specific views reflected consistently at the stock level, through equities which are undervalued relative to their peers in their specific stock market and invested according to specific risk-orientated criteria and market dynamics at all times.
I am bullish on consumption, infrastructure development, steel, shipbuilding, oil and shipping. I am bearish on “commodity- technology”, automobile manufacture, banking and telecoms – except where the growth is still dynamic as in China or India.
How much leverage do you propose to use, usually, in order to optimise the returns of your portfolio? Under normal circumstances, what ratio of long to short positions do you have in mind for your fund’s investments?
Typically leverage will be low at around 120-150%. It is limited to 250%. Under normal circumstances the ratio of long to short exposure including hedging will be 4:1 (long:short).
With hedge funds and financial institutions reporting huge losses since the recent past, on account of being over-exposed to high-risk investments (which earlier seemed profitable), it’s crucial for a hedge fund to be protected by firm risk management tools. What sort of risk management tools do you have in place?
You are correct; not all the hedge funds do what they say. My fund invests in high conviction stocks only, The company’s business model is understood. The managements are communicated with frequently in Asia and in London, in person and by conference call. Hard risk controls governing the limits of net exposure, gross exposure, stock liquidity, stop-loss and position size will be strictly imposed and soft risk controls governing the number of stocks held, the country and sector exposures, warrant and futures exposure, target prices and volatility will be maintained.
What profile of investors are you targeting this fund to? And what competitive edge would you provide your investors with, over other similar hedge funds in the market?
We are targeting HNW investors through funds of funds, institutions and family offices.
The competitive edge is my 29 years of experience, a pure and comprehendible stock selection approach which is always adjusted to be consistent with the dynamic macro views of economies and industries, overlaid by rigorous hard and soft risk controls, described above and underpinned by the 25 years of experience of Sabre Fund Management.
Could you share with us, your short- and medium-term outlook of some of the regional Asia ex-Japan markets?
The Asian ex-Japan markets are undergoing some correction in line with the global concern over lending policies – mostly Western banks – and high oil and commodity prices. China’s demand has been the principal driver of these latter factors, with her economy growing by in excess of 11% currently and that of India by 9.5%. This has been reflected by a partly overheated market in China, which will probably consolidate for a while until measures to contain the heat have had their impact. Countries with high levels of domestic consumption or countries with high levels of trade with China, or both, together with strong earnings growth prospects and undemanding valuations promise to deliver attractive gains from their stock markets in 2008, therefore we like Hong Kong-listed China, India, Korea and Malaysia. In contrast some other markets in Asia such as the Philippines and Thailand may struggle to justify their current prospective valuations, in the absence of such drivers.