07 Oct 2015 Alban Lhonneur, lead manager of the F&C Real Estate Equity Long/Short fund, BMO Global Asset Management
Alban Lhonneur is the lead manager of the F&C Real Estate Equity Long/Short fund at BMO Global Asset Management. He has 10 years of experience, having previously worked in Citigroup and Société Générale. He also manages or co-manages several other funds within BMO Global Asset Management, including the F&C Real Estate Securities Fund.
LuxHedge: Could you introduce F&C / BMO for us?
Alban Lhonneur: BMO Global Asset Management – which acquired F&C Investments last year – is a worldwide investment manager offering a broad range of client focused investment solutions. We are ultimately owned by the Bank of Montreal, one of Canada’s largest banks.
LH: Could you introduce F&C Real Estate Equity Long/Short (REELS) for us?
AL: F&C REELS offers a market neutral strategy targeting uncorrelated, incremental positive returns in all market conditions through investment in listed European real estate. We have a target return net of fees of 5 to 7% driven with a volatility of sub-3%, which translates into average historical daily performance of +/- 10bp. The investment process focuses on bottom-up “pair trade” or “peer group” investing by property sub-sector which, with a strict market neutrality, enables us to capture dispersion of stock performance and reduce directional risk significantly. The fund is a UCITS regulated structure with daily liquidity and a high level of transparency.
LH: Could you detail the performance you had so far?
AL: The fund was launched in December 2012. After nearly one year of quite volatile – and flat – performance, I became lead fund manager and introduced a revised strategy. Together with the team, we designed a framework to try to extract the alpha from our award-winning, sector-leading long-only fund, F&C Real Estate Securities Fund, in a market neutral format. Indeed F&C Real Estate Securities Fund has outperformed its benchmark in 20 out of 22 quarters since inception in April 2010. By following an identical bottom-up portfolio construction and pair investing, we wanted to consistently generate positive returns regardless of the market direction.
Since the strategic overhaul of the fund, based on strict market neutrality at the end of October 2013, F&C REELS has delivered positive returns every month but July 2014 (-0.29%), returning +14.67% net of all fees at end of August 2015.
In the year to end September 2015, the fund’s total return is 5.45% after all fees.
LH: What are the main characteristics of the fund?
AL: As we mentioned, we are absolutely focused on market neutrality, hence strict guidelines on our exposure: the net exposure can only fluctuate between -10 and +10% while the gross is to remain in the +60 / + 120% range. The current portfolio has a gross exposure of 88% and a net exposure of 0.3% only. We try to diversify our positions with 40 to 80 holdings: currently, we hold 33 longs for 33 shorts. We allow ourselves to have top conviction calls with weightings as high as 5 to 7% per position on some occasions.
Controlling the risk is essential to our process. While we discussed a target volatility of 3%, the real figure we exhibited since the revised strategy in October 2013 is a volatility of 1.8%, well below our target. We aim for an ultra-low correlation to general and property stocks. We currently have a 0.13- correlation versus the EuroStoxx. We are also committed to ensure downside protection. The fund maximum drawdown was -0.85% since October 2013.
LH: How would you define your investment process?
AL: Although we are cognisant of macro factors our investment process is dominated by a fundamentally-driven, bottom-up stock selection. It is research-intensive and we have 3 analysts covering around 75 companies which represent c.95% of the FTSE/Europe EPRA Real Estate stock universe by market cap.
We believe that monitoring geographical exposures by country can be deceptive and therefore we designed a framework to classify the Pan-European real estate equity sector into 30 proprietary sub-sectors such as French offices, German residential, hotel properties, European shopping centres, UK student housing.
We endeavour to remain broadly market neutral within each sub-sector and to generate alpha through stock picking at the sub-sector level.
LH: Once this is done, how do you construct your portfolio?
AL: We strongly believe that the merit of the fund strategy is largely due to the high degree of comparability of the companies in the sector, provided they are classified into the relevant sub-sectors. Similar business models, predictability of cash flows and geographical remit enable us to confidently implement our relative valuation calls.
We don’t feel the need to determine target prices and upside potential but rather “compare and contrast” stock valuations and would typically go “long” undervalued stocks with the most compelling prospects and catalysts.
At the sub-sector level, we have a long book and short book and endeavour to maintain a +/-2% net exposure tolerance to enforce market neutrality at the fund level but also at the sub-sector level fund.
As explained before, the size of the position reflects the degree of conviction we have. The average is typically around 2% of NAV.
LH: What is the current exposure of the portfolio?
AL: The current portfolio has a net exposure of 0.3% and a gross exposure of 88%.
We also monitor the Beta exposure of the portfolio very closely in order to keep it close to zero. Indeed we maintain a symmetrical Beta profile between our long and short books.
In terms of position, we have a few conviction calls at the moment, with three of them weighting 4% or more in our portfolio: Leg Immobilien AG, Hemfosa Fastigheter AB and Capital & Regional Plc.
LH: Would you have a recent example of a conviction trade?
AL: In September 2015 we built up a long position in Inmobiliaria Colonial, an investor in French and Spanish office property assets. The shares were acquired at €0.56 per share during a secondary placing from one major shareholder Villar Mir. Following a period of underperformance and a valuation rating close to NAV we believed the placing offered a compelling entry point. The company is fully invested and this high quality office portfolio in Spain uniquely positions itself to benefit from the ongoing market recovery both in terms of capital values and rental growth.
LH: How is the risk managed within the portfolio?
AL: We have a dedicated risk manager to monitor the portfolio on a daily basis. He checks the liquidity profile of the portfolio and produces VaR and scenario models. We also have a risk team which ensures that we stay within the fund’s policy and regulation limits.
The UCITS format also ensures that we follow strict guidelines; the fund cannot hold more than a 10% position in a single issuer. In addition, the sum of the positions that represent 5% or more of the portfolio can’t account for more than 40% of the total portfolio.
LH: Thank you very much, Alban.