26 May 2015 Cyril Freu, Fund Manager DNCA Invest MIURI, DNCA
Cyril Freu, manager of DNCA Invest MIURI, has a post-graduate degree in finance from Science-Po Paris and a Bachelor’s degree from Paris-Dauphine University. Furthermore, he became Deputy CIO of the company in September 2014.
Cyril joined DNCA Finance in September 2009 in order to develop and manage Absolute Return products. Cyril has already granted us an interview for DNCA Invest MIURA a few months ago.
LUXHEDGE : DNCA Finance is an important player in the Asset Management Industry. Could you tell us more about its history and its recent developments?
CYRIL FREU: DNCA Finance has been set up in 2000 and first developed activities in long only and diversified funds. The company’s DNA has been built on cautiousness and on the fact that asset valuation has to be fundamental in the investment process. In 2007, the company managed €5bn of assets. To pursue its development during the past seven years, DNCA Finance recruited new talents in order to evolve from a long only French company to a European one with a large range of products. We achieved this goal without jeopardising our company’s DNA, and today each manager, whatever its universe is (bonds, absolute return, equities with either a value or growth approach), has to put a strong emphasis on asset valuation in its process. This evolution has been well-received by our clients. Today, we are managing close to €15bn of assets with a positioning which is clear and less cyclical than before thanks to the strong development of diversified and absolute return products.
LH: The two absolute return products you run, MIURA and MIURI, are both absolute return equity funds. What are the differences between these two funds? And what are the main features of MIURI?
CF: MIURA is a pure Long/Short Equity fund where alpha is built both from long and short ideas. MIURI is different since alpha is coming only from the long part of the portfolio. Indeed, MIURI is what we call a hedge long fund where we hedge long ideas with sector or market future indexes. For MIURI, the mandate of the team is to find companies which should outperform either their sector or the equity market. When we have this conviction, we buy the identified companies and sell sector or market futures indexes for the same amount. The performance of the fund comes from the fact that the companies we invest in outperform the equity market or their activity sector. Like MIURA, MIURI operates on large and mid-cap companies listed in Western Europe (Euro Zone, United Kingdom, Switzerland and Scandinavia). The fund has been set up with a “market neutral” philosophy (and is classified as such in the LuxHedge Database) with limited leverage. Consequently, the gross exposure is limited at 200% and net exposure must remain in the range of +/-30% of AUM. MIURA and MIURI have the same objectives. Within the absolute return category, the official objective for these funds is to reach each year a positive return above Eonia (serving as the risk-free rate) with a lower volatility than those of European equity market represented by the EUROSTOXX 50 index. In addition to these official targets and to offer more guidelines to our clients, we communicate our internal targets which are to deliver on a 5-year period (market cycle) an average annual return of +4% to +5% above Eonia with an annual average volatility close to 5%. In terms of assets, MIURI has today €130m of AUM while MIURA currently has AUM of €700m. The two funds are managed by the same team composed today of four people. I am the portfolio manager and Mathieu Picard is co-manager. I have been working with him for more than 10 years. In addition, Boris Bourdet, helps us as an analyst and Wladimir Poux as a trader in charge of execution.
|Cyril Freu||Matthieu Picard||Boris Bourdet|
LH: Where do you stand regarding your objectives so far?
CF: Since inception on December 14th, 2011, MIURI’s performance has been positive each year and Institutional NAV share has returned +19% over the period while Eonia increased by +0.5%. Consequently, we have delivered our targets until now. The average annual return of MIURI since implementation has been EONIA +5% for I share with an average volatility of 4%. This can be compared with 14% annual volatility for EUROSTOXX 50.
|The graph above compares the performance of MIURI, MIURA and LuxHedge Equity Market Neutral UCITS Index since MIURI’s inception (December 14th, 2011). While the shape of MIURI performance is quite similar to MIURA, MIURI outperforms both MIURA and LuxHedge Equity Market Neutral UCITS since a couple of months after inception. According to Cyril, the difference between MIURA and MIURI came from two points. First, MIURI has been a little longer in term of net exposure which was favourable in the bullish market we had between in 2012 and 2013. Second, on this period it’s more the long part of the portfolio that generated alpha than the short side and some shorts have weighted on the performance of MIURA.|
LH: Could you make a few comments regarding your recent performance?
CF: Between summer 2012 and summer 2014, our two funds increased their NAV between 12% (MIURA) and 18% (MIURI). Since June 2014, the environment has been increasingly difficult. We have a YTD performance close to 0 for MIURA and to +1% for MIURI, but -3% since June. On top of a “maybe” normal consolidation after 2 excellent years and 5 positive consecutive months (January to May), I see two main reasons behind this disappointing performance. First, we have been hit by “French bashing” with some French stocks declining more than 30% in a stable market. This was due to the very bad but understandable perception of French politics and economics. We think that the market has been too aggressive and we find interesting values in the French market at the moment. The second point which affected our performance has been the fact that most of the expensive stocks within the market (consumer staples for example) outperformed since this summer, which was a consequence of a new phase of interest rates decline in a majority of western countries. These stocks are more on the short part of MIURA portfolio and are under-represented in MIURI. Consequently, it impacted our performance. As for bonds, we think that the valuation of these expensive equities starts to be problematic and could be under pressure either by an increase of US rates or by the ongoing emerging market slowdown.
LH: What is your strategy for the coming months?
CF: First, we avoid the most cyclical companies because global GDP growth is disappointing and these more risky companies should be hit by growth lack of momentum, mainly in the Euro zone and in the emerging markets. We favour companies which offer good visibility and dividend yield which can be favourably compared to what bond market can offer. We also like companies which can be concerned by M&A in either direction (target or acquirer) and companies which can benefit from a likely ongoing strength of the US dollar. In this landscape, our main positions are Imperial Tobacco, Cap Gemini, Volkswagen, Thalès or LVMH. In terms of net exposure, we are at +8% with a defensive bias (net exposure +2% including beta impact).
LH: A word to conclude?
CF: We do this job on the long run. I have been working for 17 years in the cash equity market, 8 years as a sell side analyst and since 2006 as a portfolio manager. With Mathieu Picard, we faced successfully the subprime crisis and the sovereign debt crisis. Nevertheless, the period has been and continues to be difficult for long/short equity strategies based on a fundamental approach. Indeed, as many players in the industry, we are stock pickers and during the past 5 years, we have to acknowledge that company’s fundamentals were not the main drivers of stock market evolution, but rather macroeconomic conditions… Fortunately, when macroeconomic leads the way, you can have a lot of relative excess or incoherence between stocks within the market. Even if it can impact your performance over the short term you have to invest in these incoherencies because you feed your future performance. We were in this situation at the end of 2011 and beginning of 2012 and we had returns in 2H 2012 and 2013. We might have entered a similar phase since this summer. It has been impacting negatively the recent performance of our funds. However, if we manage to do correctly our job, in line with our DNA (company valuation, deep knowledge about companies we are covering, proprietary models of forecasts and valuation), we should see the returns of these investments in the coming months or quarters.