04 Jun 2017 Thomas Péan, Head of Business Development, DNCA Investments
Thomas Péan is Head of Business Development at DNCA Investments, an asset management company founded in 2000 by three wealth management specialists. DNCA focuses on simple, understandable and performing funds organized in four areas of expertise: Fixed Income, Absolute Return, Diversified, Equities, managed by a team of 30 portfolio managers based in Paris.
LH: Can you please briefly introduce the DNCA fund offering to us?
Thomas Péan: Today DNCA Finance manages close to 20BEUR in assets and offers 4 categories of investment solutions: European equities, Fixed Income & Convertibles, Mixed diversified funds and funds with an Absolute return objective. The first three of these categories use long only investments in equity, fixed income and cash. The absolute return funds are designed to provide a positive return irrespective of market conditions and make use of short exposure either to the global market, a sector or to specific equities.
LH: Can you present the DNCA team that manages the absolute return funds to us?
Thomas Péan: The principal fund manager is Cyril Freu, assisted by co-manager Mathieu Picard and equity analyst Boris Bourdet. Both Cyril and Mathieu have a strong background in sell-side analysis and have been working together since 2006 managing a long/short proprietary portfolio at Natixis. They are well known for having delivered consecutive positive returns in 2006, 2007 and even in 2008; very different years to say the least. This is absolute return fund management like it is supposed to work.
In 2009, our clients started showing strong interest in funds that are not exposed to the market, which is when Cyril and Mathieu joined our company. DNCA made a clear choice there by not selecting long-only managers to be in charge: our absolute return managers have always been true long/short managers from the start.
LH: According to your view, what is the competitive edge of DNCA in managing absolute return funds?
Thomas Péan: In my opinion, the DNCA absolute return funds differentiate themselves by their investment management strategy based on fundamentals. Our approach is very traditional and based on stock picking, much less on global macro-economic views. We keep our models simple and keep a clear focus on the European Equity markets where we are in close contact with the management teams and boards of the companies that we invest in.
Our fund management team is very experienced and has developed a unique and proprietary valuation model for equities. They currently apply this to a universe of approximately 200 stocks. DNCA deliberately stays away from more complex constructions such as event driven strategies because we have a philosophy that keeping things simple works best. In line with the management philosophy of DNCA Finance, the volatility our absolute return funds are significantly lower than the equity market
LH: When did you then launch the first absolute return funds from DNCA?
Thomas Péan: In 2009 we launched Miura, a European equity long/short fund with exposure between +20% and -20%. The short positions are taken on specific stocks out of the same sector to cover the directional risk of the long positions and provide additional alpha because we have a strong conviction that they will underperform their peers. We mainly use Contracts For Difference (CFD) derivative contracts to gain our short exposure in a UCITS compliant context. Miura is the only absolute return fund that takes short positions in specific equities, the other funds take long positions in stocks that we believe will do well and we cover the directional risk of the market via a short exposure to a sector or to the total European equity market.
LH: How do you see Absolute return funds in a broader portfolio of equities and fixed income?
Thomas Péan: Our clients very clearly see Absolute return funds as a replacement for their fixed income portfolio. Interest rates are at historic lows and both government and corporate fixed income markets are simply not yielding anymore. The alternative is to turn to equity markets, but many of the investors we serve would rather stay away from the risks involved with exposure to stocks.
Hence our absolute return funds offer a solution for an investment into equity that is independent of the general market direction. We very clearly decorrelate from Equity markets. When the market dropped -9.2% and -5.2% in August and September of 2015, we managed to keep the equity market neutral funds Miura and Miuri at a very small loss. More recently in January and February of 2016 when markets dropped again with -6.8% and -3.3%, we managed to record a gain for both those funds. This is exactly the alpha that our clients are looking for when they turn to Absolute return funds.
LH: More recently in 2015 and 2016, you also launched long/short funds that are not completely equity market neutral. Can you please explain how these funds are managed and why you added these to your offer?
Thomas Péan: In 2015, we launched DNCA Invest Velador which is a fund that is more directional and can go between 0% and 50% of equity market exposure. More recently we also launched DNCA Invest Venasquo which can go between 0% and 100%. These are covered long funds where we pick the best stocks on the long side and then cover part of the market risk via a short exposure to a sector or geographic index. We could for example be invested in Louis Vuitton Moët Hennessy and cover part of the market exposure via a synthetic short in an index that tracks the sector of luxury goods or a more general synthetic short on the total European equity market.
We decided to extend the equity market neutral offer with these funds when European equity markets started to rebound and we felt that there was an interest in covered long strategies where investors can also favourably participate in a rising equity market. We still achieve a decorrelation from equity markets with these funds though because we dynamically adjust the exposure and can even go to 0%.
LH: How do you adapt the exposure between 0%-50% or 0%-100%? Is there a regular process defined where this is for example re-assessed every month?
Thomas Péan: There is no strict rule implemented because we want to stay flexible in deciding on our market timing. We’re looking at this on a day-by-day basis to judge if and when we adjust. We are guided by macro-economic developments of course, but more importantly by the investment ideas and specific opinions of our fund managers.
We generally hold 2 types of convictions at DNCA. With absolute convictions, we are more or less certain that a company will do well irrespective of other conditions and we will take a long position without covering the market risks. For relative convictions, we hold a positive opinion on a company versus its sector or versus its geographic benchmark and this is when we will take a covered long position. In general, our exposure will of course vary based on the amount of absolute and relative convictions held by our fund management team, which in general is divided 50/50 between absolute and relative convictions.
LH: How do you think the market of Alternative UCITS will evolve over the coming years?
Thomas Péan: It’s very clear to many people that fixed income markets are not an attractive investment anymore. Rates and coupons are at historic lows. If someone invests in safe assets like German bunds, their portfolio is even not protected from inflation anymore. This will certainly drive more assets into absolute return funds who offer an attractive alternative.
On the other hand, I’m not sure if we will see large increases in the number of new fund launches. I can’t speak for less common or more exotic strategies, but the management of long/short equity funds is a real art. I think history has shown that it’s not straightforward and not well understood by many with even big companies pulling out of the space. Our CIO Jean-Charles Mériaux always makes a point that launching a new fund is not difficult, finding the right people to manage the fund is the real key. I believe that there’s a lot of truth in that and that this could significantly limit the number of new long/short equity funds that will be launched in coming years.
LH: How do you see the DNCA absolute return fund offer evolve in the coming years? Any plans or thoughts on new fund launches?
Thomas Péan: Each investor can find an Absolute Performance Fund that matches its degree of aversion to risk. We launched our Venasquo fund last year and have hereby completed the absolute return part of our equity long/short fund offering. On a longer time frame, we could think of adding fixed income arbitrage type of funds. Again finding the right investment management team would be the key to realizing that.
LH: Thank you very much Thomas for the interview!
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