Former JP Morgan star Ajay Gambhir (pictured) has form in launching funds into dreadful market conditions and he is confident that European firms can weather the current economic storm, as he gears up for the launch of a Ucits III version of his hedge fund.
RWC Partners’ European equity long/short specialist launched his hedge fund right at the start of the credit crunch in October 2007. He chose to name the vehicle Samsara, which in Sanskrit describes the continual cycle of death and rebirth.
That the fund was bursting with life during the two years that followed is testament to Gambhir’s investment prowess.
According to RWC, Samsara has returned more than 7% compared to a 30% decline in the MSCI Europe Equity Index over the same period. This return came at a time when a number of hedge funds were forced to shut down after incurring heavy losses in the credit crisis.
The secret to Gambhir’s success is remarkably simple. ‘We aim to cut out the noise in the market and try to spot anomalies in expectations. Within all this lies a strong value discipline, which plays out on both the long and short book,’ he says.
‘The key driver of the short book is taking uncrowded positions where we identify a negative turning point in the future prospects of companies. In the long-only world too many people are preoccupied by focusing on stocks which can ride recovery,’ Gambhir adds.
Overall, the hedge fund strategy, which he began running in 2003 for JP Morgan, has stood up well in all market conditions, producing annualised returns of around 13.1% compared with a 3.7% gain on the MSCI Europe Equity index over the same period. This has been achieved with a volatility of 7.9%, less than half the 16% on the benchmark.
Gambhir has also demonstrated his talent on the long-only side. At JP Morgan he managed the European Dynamic fund between December 2000 and March 2007 during which time, according to Lipper, he returned 91% in sterling terms. This compares to an average gain of 15% in the peer group and a 32% gain in the FTSE Europe TR index. He was also rated by Citywire for every one of the 47 months he qualified.
If he can replicate these returns in the Newcits world, Gambhir’s RWC European Absolute return fund – scheduled for launch in July – is a tantalising new investment proposition for investors.
Gambhir believes the time is ripe for the launch. ‘The reason we are launching now is because we have a tried and tested platform at RWC. Also Ucits III is coming of age and there is a better understanding now of how it should fit into a broader portfolio.’
While he accepts there are major problems in Europe, he says his bottom-up perspective is throwing up a number of opportunities on the long side.
‘While we spend around a quarter of our time thinking about the macro position, I always believe the bottom-up signals are the more important ones.’
He adds: ‘The bottom-up perspective we see across Europe is supporting valuations and there is a much stronger focus by company management on shareholders. European corporations have changed in many ways since 2000 and the second bear market has got them focused on margins. This dynamic, combined with valuations, is compelling.’
Gambhir says the decline in the value of the euro as another factor powering equities. ‘The weaker euro is very positive for the competitiveness of European companies.
‘For exporters a 10% depreciation in the euro can add 5% to 6% in earnings per share and the euro has dropped by 20% in recent weeks.’ However, he does not think the euro will collapse.
‘There is a 5% to 10% chance of this happening. This is a serious multi-decade project and if it fails it will have massive ramifications. Has this scenario been discounted in share prices; has the baby been thrown out with the bath water? I think yes and this has produced a number of opportunities on our long book.’
Samsara contains 121 holdings with 62 on the long side and 59 on the short. It has a net long position of 60% and a gross exposure of 180%
UK and German firms best value
The UK is Gambhir’s most pronounced position on the long side at 30%. ‘The UK went into the recession earlier and more sharply and therefore come out sooner. While there are negatives on the horizon, especially with the spending cuts, which will hurt certain stocks, overall valuations in the UK are very supportive.’
He is 10% long on German stocks: ‘Germany has a strong economy with plenty of emphasis on shareholder value, which began with the labour market reforms in 2004.’
He also praises German companies for their fast response to the Lehman’s crisis. ‘When financial markets went into meltdown in September 2008, the German firms were quick to respond.
While a number of them held a positive outlook in July 2008 they were quick to admit they were wrong. A vast amount of German companies cut down production immediately and adopted a sensible cautious approach.’
Italian red tape
However, Gambhir is less excited by Italian firms, where he is running a 10% short position.
‘While the macro picture in Italy is stronger than many perceive, we find consistently in Italy that companies are involved in red tape, bureaucracy and regulation even right down to regulation on the price of insurance in the motor industry. It’s hard to believe,’ he says.
On a sector level he has shorted the oil services firms, fearing overcapacity will hurt the sector. ‘We are finding there is too much capacity in that sector and pricing power is declining. We think this is a negative turning point for a number of oil services stocks.’
However, he also sees several long opportunities among banks. ‘There are a number of value opportunities in this sector. It is an area where investors are very negative and this makes it a fertile hunting ground for stockpickers.’
He is bullish on DnB NOR Bank. ‘Norway is a strong economy and has a manageable debt position. It is overcapitalised under tighter regulations and its bad debt is better than expected, while its share price has been held back by the general malaise in the banking sector.’