LONDON -- Eldon Capital Management Ltd. is marketing a unique fund-of-funds product that invests through global sector funds.
Playing on the growing globalization of industries, the fund's underlying thesis is that significant added value can be won by using star stockpickers who follow industries worldwide. If successful, the fund could herald a shift away from traditional top-down country allocation approaches.
Some funds that make bets on global themes exist, but none uses Eldon Capital's approach of combining active sector funds with a completion fund, under a passive asset allocation approach.
Based on backtested results, Eldon Capital's new GloSec fund would have provided 7.7 percentage points in alpha over the Morgan Stanley Capital International World and World (ex-U.K.) indexes during the 81/4-year period ended March 31. Tracking error was held to six percentage points per year.
The concept "makes a certain amount of sense," said Pam Garrud, head of manager research at William M. Mercer Ltd., London.
"It's certainly an interesting idea," said Andrew Duthie, manager-pension fund investments, Vauxhall Motors Ltd.'s L1 billion-plus ($1.64 billion) pension fund, Luton, England.
L125 million hopes
Piotr Poloniecki, Eldon Capital's chief executive, has just started marketing the fund. While no commitments have yet been made, he hopes to raise at least L125 million ($205 million) by the end of the third quarter, chiefly from U.K. institutional investors. That is the minimum amount that must be raised in order to create segregated portfolios suitable to tax-exempt investors, Eldon Capital officials say.
Some experts believe money managers will shift to sector approaches globally over time, abandoning or reducing emphasis on traditional country allocation. Many continental European managers are moving toward sector strategies with the imminent adoption of the new single currency.
While brokerage firms have been reorganizing their research staffs along global industry lines, money managers have been slow to do so. The problem for managers with large existing books of business is they face the umbrage of the consultant community if they change their investment styles, Mr. Poloniecki said. This creates considerable inefficiencies that sector-focussed managers can exploit, he said.
Institutional investors typically avoid sector funds -- such as technology funds -- because they don't track a typical benchmark and can be volatile.
Not only do sector specialists better understand companies that compete against each other globally, but different industries require differing valuation methods, Mr. Poloniecki said.
The GloSec fund will use a combination of five sector specialists to manage 40% of the portfolio. A completion fund of about 160 stocks run by First Quadrant Ltd., London, will cover sectors where there are no managers with established track records, and balance out other risk factors, such as sensitivity to foreign exchange, geographic areas, long-term bond yields or unwanted style bets. This way, volatility is dampened and tracking error is kept to about 6% per year.
Jason MacQueen, chairman of Quantec Ltd., London, said the strategy is designed to deliver "pure alpha arising from the ability of sector specialities to find value within the sector and at acceptable levels of volatility." Quantec's cross-country global risk model was used in designing the product; the firm also assessed whether managers were truly adding value.
Rather than make active sector bets, each sector specialist will be allocated 8% of the fund's assets, with rebalancing occurring at the end of each year.
SECTOR WEIGHTS NIXED
Eldon officials rejected an initial approach of weighting allocations by the size of the relevant industry sectors, because the fund would be too dependent on performance from the manager of the largest sector. Also, sectors are not always easily defined: technology, for example, overlaps with health care, Mr. Poloniecki said.
Managers used by the fund are Henderson Investors for technology stocks; Mercury Asset Management Ltd. for mining and commodities stocks; Fleming Investment Management Ltd. for energy stocks; Framlington Investment Management Ltd. for health care stocks; and Eldon Capital for financial services stocks. All of the firms are based in London.
Other active managers may be added for different sectors as track records are established. At present, Eldon is tracking a universe of only about 20 sector funds with track records of at least five years.
Mr. Poloniecki intends to target U.K. pension funds initially, but also can tailor the product to U.S. institutional investors. However, Eldon Capital plans to offer a global equity product only to U.S. investors.
Also, the firm is developing the capability to offer the product on a market-neutral basis.