HEAD-TO-HEAD: Blackrock versus Church House

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Investment approach

The Blackrock UK Absolute was restructured upon Nigel Ridge’s arrival in 2013 and is now higher conviction, but typically has a conservative net exposure to the wider stock market, said McDermott.

The fund has three main strategies: long, short and pair trades — a strategy which involves matching a long position with a short position in two stocks in the same sector.

Its positions range from 10% net short to 30% net long, but in practice the fund is usually 10-20% net long.

Ridge has a pragmatic approach to stock selection, incorporating assessments of the macroeconomic environment in a process that examines each individual company’s financial fundamentals, risk factors, ESG characteristics and valuations

“Ideas are generated from the Blackrock team, company meetings and external research,” said McDermott.

The fund’s short positions are typically stocks in commoditised industries, where Ridge and his team look for companies that don’t generate cash, have a history of poor returns, exhibit weak balance sheets or have management that is “out of control”, according to McDermott.

“Ridge also uses the FTSE 100 and FTSE 250 index futures to quickly short the market to manage the net exposure of the fund,” he said.

The strategy of the Church House Tenax Absolute Return Strategies Fund is significantly different from the Blackrock product, according to McDermott.

“It is long-only, which means it is susceptible to a strong correlation with the direction of markets, although volatility is substantially lower. But, it is more conservative than the Blackrock fund, with a strong focus on capital preservation,” he said.

The co-managers — James Mahon and Jeremy Wharton – take a top-down view derived from macro-economic data, corporate activity, political risk, and the interest rate and inflation outlook.

“They establish their view on rates, credit and stock markets within this economic framework,” said McDermott.

One of the main drivers of the investment process is the attention given to interest rates, especially rate spreads, he noted.

Asset allocation is a key component of the fund’s strategy, but the managers also deploy a rigorous selection process for individual holdings.

“The bottom-up process will look at timing, yield curve positioning, duration management, capital structure and covenants. The managers then seek to gain the appropriate exposure across a broad range of asset classes,” said McDermott.

By building a portfolio from fundamentals, the managers can assess the absolute return characteristics of each investment and how that affects the portfolio in terms of its overall volatility.

“The most important factor in the process is avoiding loss, so the managers are not afraid of taking large cash (or near cash) positions to reinforce their absolute return approach,” said McDermott.

Source: FE Fundinfo, Morningstar (Data in US dollars, 8 November 2019)

*also charges 20% performance fee

Top 5 sectors

Source: Fund Factsheets, 30 September 2019

Top 10 holdings

Source: Fund Factsheets, 30 September 2019

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