Sean Ewing, CEO of Absolute Capital Management
Comments on AIM listing
The decision to go public was really based on our intention to become much more transparent as a business. Our view is that alternative is converging into the mainstream of investment. Private Equity, Alternative and Long-Only will continue to converge at an even more rapid pace than what it has heretofore. We predicted this some four years ago when we put together a very detailed business model as to how we could build an absolute return business of scale. Part of that strategy, part of that process was the listing. In doing so we issued a considerable amount of options and equity to staff, the intention was to try to remunerate them in a very tax efficient capital structure where we could benefit from a listing. And also to provide greater transparency, as I mentioned, to our investors and to the shareholders and the market in general. Also, as a result of our listing, we've used the equity to further increase our assets under management through integration acquisition. It's helped diversify our existing equity business into other areas such as debt. And the intention is to be active as a consolidator with some of the smaller managers, whereby the larger managers are growing at a speed of twice what the market itself is growing. So with that in mind, we want to be a large, diversified house, while at the same time to run a series of funds which don't get too big, that manage performance within the DNA of what absolute capital is about, which is really the preservation of capital.
Acquisition of Argo
I think there are a number of reasons behind that. I touched on the diversification of income - that's critically important for us as a business. We don't want to be seen to be a boutique business or as a specialist. We are seeking to have diversified funds, complementary to each other but uncorrelated. Secondly we are looking for fund managers which have an outstanding track record, ideally in excess of five years. And with Andreas and his team we got a track record of six and a half years, that had won numerous awards, had a sharp ratio of 3, an annualised return of about 18%, and was in a very complementary area to what we were doing. It's an emerging market debt specialist, with a small private equity fund. The size fitted tremendously well with us, it had just over 850 million, the personalities fitted. Andreas wanted to build his business aggressively, he's come on the board with us and, yes, I'm very excited.
Argo impact on performance
We performed very well in the first quarter of 2007. The Argo business continues to do what it has always done, which is to provide month on month solid performance within the target return which is around 12 to 15%. Albeit it has exceeded that. Our own funds have been very, very positive this quarter. We don't like trending, directional markets as was in the last quarter of 2006. Early 2007 we've had much more volatility, particularly at the end of February. Markets like that you'll see Absolute Capital Management perform well in excess of our peer group. Where it's trending, its directional, its momentum driven, we tend to under perform, and we're not shy to say that. The people who put money with Absolute Capital Management tend to put it with us to protect their capital and to perform when markets are a bit more volatile.
Argo integration update
In terms of the integration, it's been quite a seamless process, we are working on some of the more dynamic areas now in terms of looking at other correlated investment opportunities between the funds. But in terms of operational, financial, risk management and marketing, that has been rather straightforward. It gives us an additional presence in four different geographic locations which we didn't have heretofore. We are a virtual business by our nature anyway, having already run it through five different locations and so it's been quite painless and probably more so because of the people that bought it initially before we did the acquisition.
Differences vs. other hedge funds
I believe there's a number of reasons that we would perceive ourselves to be different. I think one is, first of all, the approach we take to investment, which is really built on not being a hedge fund but more particularly trying to preserve investors' capital and using modern portfolio methodology and techniques to enhance investment performance, but at the same time and particularly, protect the downside for investors. Secondly, the attribution of our funds tends to come primarily from non-English speaking jurisdictions. So when you get a lot of the US hedge funds and the London hedge funds playing, they are not playing in the same pool as we are, to anything like the same extent. So we're getting significantly greater attribution and returns from areas such as Germany, Austria, Switzerland, Scandinavia and Spain, and to a lesser extent, France. So I think that's very much a key differentiator. I think the final priority is that we don't have any fund management specific risk in terms of single funds or in terms of single managers. We've built a business where today no one manager accounts for more than 20% of our assets under management and indeed where no one fund accounts for more than 16% of our group revenues. So what we're building here is a scalable business. A lot of other hedge fund groups tend to be based on proprietary traders with teams with a single strategy and a single market. We've differentiated ourselves by building a broad range of funds, eleven funds now, there are two managers virtually on every fund. We're not sector specific, we are not country specific, and we are fishing, I think, in an area which is very high growth at the moment, it's old economy Europe and it looks very, very promising.
Looking ahead
We need to manage our performance as we grow our business. That is not necessarily a science. We've done it heretofore, we've doubled assets under management every year since inception organically. That's without acquisitions. Right now we're performing well, the team is good and strong, we are recruiting between 3 and 4 people a month as we grow. We see the first priority for us to manage our performance continue to drive good returns for existing clients and thus in turn our shareholders. More particularly we'd like to diversify into the real estate area, we've mentioned that before. We think it's becoming a much more liquid asset, we think it's a real play in terms of not just being a beta play any more, but also being a long/short opportunity and that's something we'd like to get involved in. Indeed when one would take our existing equity suite of products and its exposure to markets, the debt business and its exposure - if we were to bring in real estate we've got 84% of the investable universe available to us at that stage. And so we seek to move into that area. In doing so we think we'd further diversify the risk of returns, we'd give investors a broader coverage of funds and in doing so I think the market would see we have a very different business model to the peer group you mentioned.
