Alistair MacDonald co-manages, along with Mike Nicol, the Merrion European Absolute Return Fund. The two, who had worked together in the early ‘90s, reunited in 2008 and soon after joined Dublin-based Merrion Investment Managers. They now run European equities in their UCITS III-compliant fund. FINalternatives’ Senior Reporter Mary Campbell caught up with MacDonald recently to talk about Europe, risk management and leverage, among other things.
What particular European countries are you interested in?
Mike and I both have been managers of global funds in the past, so I think our experience is not limited to the more traditional, large European market—we’ve also covered the larger economies of the former Soviet bloc (including Russia) and so our definition of Europe, frankly, it goes probably from Vladivostok to Dublin. It’s rather broad. We are stock pickers by nature so the construction of the portfolio reflects this rather than country preferences.
However, we have seen a marked recovery in the fortunes of German exporters, boosted by the fall in the euro and a strong position in areas such as autos and engineering. These are both areas where they enjoy a genuine competitive advantage in terms of quality and engineering excellence. An advantage of looking at stocks listed in Europe is that many of the companies are beneficiaries of Asian and Eastern growth. With a large percentage of European earnings now coming from outside Europe it is important to remember that the macro “noise” can hide the fact that there are good earnings stories out there, as well as some which are of concern.
What about Turkey? Is Turkey part of your Europe?
Turkey is a funny one because it does, literally, straddle the divide, doesn’t it? The Bosphorus. Again, it’s one we were actually looking at quite recently in [that] a number of the Greek banks have substantial holdings and substantial businesses in Turkey. I guess the biggest one of those is the National Bank of Greece, which has the potential, at least, to IPO its Turkish arm…Finansbank. So, yes, it’s an area which we’ve looked at in the past…it can be quite volatile; you have to be quite fleet of foot in terms of recognizing opportunities—and also getting out of them.
Are there any market sectors Merrion is especially interested in or do you invest pretty much across the board?
We are very much across the board...We’re stock pickers…the portfolio is constructed very much from a bottom-up point of view. You’re obviously going to be influenced by some of the big macro calls, whether it be events in the banking sector, which has become very interconnected as we all learned in 2008, or more traditional sectors, such as pharmaceuticals and autos which, frankly, have been global in nature for the best part of 100 years. So, for instance, emission control legislation being passed in California will almost certainly have an impact on car companies not just in continental Europe but also in Japan as well as the U.S.. So things like that we tend to be very much aware of but, as I say, our portfolios tend to be very much built from the bottom up. We believe that our backgrounds in being part of, or running global products, do give us a real edge as the markets become more globalized.
We try to avoid a central bias within the portfolios, but after saying that, given Mike’s background and my background, like everyone, we tend to have a natural bias toward some sectors, so we do divide the market up according to natural preferences. Mike, for instance, his background is as an oils analyst, he would tend to look at energy stocks—both in terms of oil and gas and also exploration and production companies; whereas my background has been very much, sadly [laughs] more boringly on the financial side, so I tend to focus on the banks and other financials. That’s just one example, but basically, Mike will cover half of the market and I’ll cover the other half.
I want to ask about your thoughts on leverage because I see, from Merrion’s literature, that you use little and consider that a selling point.
I think…the longstanding argument is that we tend to be quite conservative by nature…Sadly, I think, that term [hedge fund] has been twisted somewhat over the past 10 or 15 years, if not longer, in that people have associated the term with much more of a speculative fund, usually meaning the use of leverage. We tend to be very much more towards the camp where a hedge is exactly that, we try to preserve capital and, in an ideal world, we try to grow it.
In terms of the use of leverage, we have a number of restrictions in place. Again, there’s our natural bias towards capital preservation, growth [and] under the UCITS legislation, there are actually limits on that, in any event.
Speaking of the UCITS legislation, do you feel that it and the proposed EU directive on alternative fund managers impose too onerous a burden on funds or are the regulations something you can live with?
I think in our case it really is something we can live with. I think for some other companies it will put severe pressure on business models which are, without naming names, based on leverage, effectively. I think the UCITS legislation—now UCITS III—which has been in place for the past three years has been warmly welcomed by most people in investment in that regulated hedge funds are much more sellable…in terms of the institutional market, there is some comfort in the fact that you have restraints on liquidity and you’ve got monthly, if not daily pricing. I think it ticks a lot of boxes from both sides of the camp, as it were.
What sort of year will 2011 be for the hedge fund industry?
I think the old analogy about a rising tide lifting all boats is true. I think from a European perspective we’ve seen some very strong market returns over the past year in fact, but it hasn’t exactly been smooth sailing over that period—the market obviously had a crisis of confidence, and that’s putting it mildly, back in April of last year, so we don’t expect it to be smooth going forward but we’re optimistic because I think authorities generally worldwide looked into the abyss and didn’t like what they saw.
I think the volatility is definitely going to continue, even in the past… days … we’ve seen the impact of Tunisia, Libya now, as well as Egypt, all of which are uncertainties that people wouldn’t have even dreamt of two months ago. That’s certainly disrupting markets, with oil prices now over US$100 per barrel, which will stoke inflation concerns. So, we are optimistic but we don’t expect it to be a straight upward line by any stretch of the imagination.