View the article online at http://citywire.co.uk/money/article/a603927
Insight team 'pairs up' to stay in positive territory
Fund manager Andrew Cawker explains how 'pairs trades' in the media and oil exploration sectors has boosted his performance this year.
A relatively negative view on food retailers and a more positive one on housebuilders has helped the £710 million Insight Absolute UK Equity Market Neutral fund, a pick of Citywire Selection, stay in positive territory so far this year.
The team – headed up by Andrew Cawker, and backed by Richard Howarth, Iain Brown and David Headland – has also seen 'pairs trades' in the media and oil exploration sectors add to positive performance this year.
Pairs trades refers to the strategy of matching a long position (buying shares to benefit from a rise in the price) with a short position (an investment that pays off if the shares fall) in two stocks of the same sector. The strategy aims to hedge against the risk of the market in which the two shares trade.
'Volatile, slow growth'
Against a backdrop of what Cawker calls volatile, slow growth and with European and economic risks still heightened, the team has been using ever tighter hedges in the pair trades to mitigate downside risks. Gross exposure to Europe has also been reduced over the past few weeks.
'This is a very complicated time so we have to be very careful to hedge out market beta [the return of the market without any active stock selection]. In previous difficult periods our gross market exposure would come down, but this time it has picked up because we can hedge out much of the hedging risk,' Cawker said.
'This is a period to protect capital and when the market has had a 5-10% correction the fund has held up well. If we can't hedge out the beta we can apply stop losses.'
Housebuilders a positive contributor
A long position on housebuilders that was adopted at the start of the year has contributed around 20 basis points so far this year, with the team eyeing improving profits and cashflows in the sector due in part to their considerable landbanks.
'We are long a basket of housebuilders versus builders merchants and DIY stores which allows us to hedge out some of the cyclical risk. Housebuilders' business models have changed and they are making their assets work much harder than they used to,' Cawker said.
Another key pairs trade is German life science and health care conglomerate Bayer, which is long, versus a basket of more expensively rated healthcare stocks. The group is trading on around nine times earnings compared to the sector average of 12 times, and Cawker tips it for a steady rerating.
'We have hedged it against similar healthcare stocoks which have more patent risks. Bayer has a good pipeline of new drugs coming through so it has derisked and it is also a beneficiary of dollar strength with good exposure to emerging markets.'
Another successful pairs trade over the past few months has been a long position on Moneysupermarket.com (MONY.L) versus a short on the FTSE 350 media and markets sector. 'Moneysupermarket.com is a beneficiary of the move to online while many companies in the media and markets sector are challenged by that shift,' Cawker said.
The company falls into the team's preferred stock category, namely companies that can still continue to grow despite the difficult backdrop and have limited downside risk.
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