Built for performance

London's MPC Investors is embarking on the next stage of its growth in launching a European long/short equity fund with ex-JP Morgan Asset Management manager Ajay Gambhir at its helm. Peter Harrison, MPC's chief executive officer, says early indications suggest MPC is on track to hit its target of adding at least $600m via Gambhir's fund to the $1.6bn it already manages in hedge and long-only funds.

MPC is also launching a multi-asset portfolio under the stewardship of Miles Geldard in June.


However, the boutique manager is also setting itself to benefit from what, it could be argued, will prove the next stage of hedge fund industry growth and maturity - that of institutional allocators selecting individual hedge funds rather than just funds of hedge funds to access alternatives.

"The model of boutiques and hedge funds has been hugely successful," Harrison says. "When it comes to pension funds and endowments and foundations, the business we want to build is one of partnership and fiduciary standards which are consistent with pension provider demands." MPC Investors is authorised by the UK Financial Services Authority.

Harrison notes that around 30% of MPC investors are funds of funds, with the rest coming directly to the boutique.

While today US institutions form the lion's share of those institutional allocators that come direct, he adds that they are starting to see the first signs of disintermediation of funds of funds with UK institutions approaching MPC.

Perhaps as another sign of this development, Harrison adds that consultants have also visited MPC to examine their single hedge fund offerings. Harrison cites studies showing a significant proportion of US pension funds having exposure to hedge funds, and US pensions having 5%-10% exposure to them on average, and US endowments having up to 25% exposure, "so we are only at the tip of the iceberg. Harrison adds that performing portfolio optimisation suggests a 30%-35% exposure may be a more appropriate allocation to hedge funds. "The direct route is the ultimate rich vein of assets out there,"

Harrison says.

"Institutions' experience in terms of returns is better, and the stickiness of assets is greater, and as a manager you're in there at the ground floor as their fiduciary. It's a fundamental sea change in the business taken on a five-year view. While it's not something that will happen overnight, you have to build your firm to ensure you're fit for purpose."


MPC has a dedicated risk and analytics function and offers performance attribution. Value at risk (VaR) analysis is integrated "so we and our investors can really understand the dynamics of the performance".

It is not just the potential size of assets that can come from institutions that make them an attractive group. Harrison notes that having longer term investors, such as pensions, looking for "CPI plus 3%" removes some of the short-term pressure of the monthly NAV from managers' shoulders.

"Having to have a short-term successful business puts short-term performance pressures on you to be in the top quartile. We are building MPC for the long term."

This, of course, does not mean MPC intends to ignore performance, the recruiting of Gambhir in March being a good example. At MPC, the Samsara fund will be run using the same process and philosophy by which he ran the JP Morgan Europe Dynamic Long Short hedge fund.

At JP Morgan, Gambhir returned 31.5% net in 2005 followed by 40.2% in 2006. Over three years to the end of 2006, Gambhir turned in 104.7% with a Sharpe ratio of 3.1.

"To manage assets in the best interests of clients is absolutely fundamental, and investment performance paramount," he says, "and everything MPC espouses is to support that objective."

He differentiates a mentality he dubs as one of the bank-owned asset managers and a different approach of independent asset managers. "With an independent asset manager, it's about management of assets to derive the best returns for investors versus the gathering mentality, which was a subset of the bank's approach."

Unusually, Gambhir had his long-only fund at JP Morgan AM capped. This state of affairs is, of course, more prevalent in the hedge fund world than the long-only one.


"In the new fund, I will be looking in ideal circumstances to find companies going through turning points in their life cycles, whether on the short or long side," Gambhir says.

The short book will find itself populated by companies with "fading economic returns", according to MPC's fundamental analysis. On the long side, Gambhir says, will be firms "with historical operational problems where there is the prospect of acceleration of economic returns".

Fundamental analysis and bottom-up stock selection to find more than 50 positions for each book will have behind it Gambhir's seven years' experience in private equity and corporate finance.

"On the short side, I would look for successful franchises where there may be margins that are supranormal and show the potential for subsiding," Gambhir says. While many may await the first profit warning before going short, Gambhir shows his contrarian approach by explaining: "You need to recognise where you can generate useful returns, even when investing when things seem uncomfortable to do so."

On the macro front, Gambhir says that after four years of "global synchronised economic upswing, there is quite a lot of compression which could make supranormal margins subject to fade at this point in the economic cycle." He adds: "I would expect to see capacity coming on strongly in different sectors and suffer cost pressures such that those margins they have enjoyed could deteriorate."

Now, says Gambhir, European companies are displaying a "far greater focus on generating shareholder than they did in the 1990s. In the 1990s the by-word was to expand their global footprint whatever the outcome for margins or returns, whereas today there seems to be a focus on 'what are the returns from an action we're contemplating doing?'"

While the European fund can also invest in Central and Eastern Europe as far as these regions fall within the eurozone, Gambhir says he has not built up a large exposure to this region historically.


Gambhir's move from large asset manager to boutique has in part been mirrored by that of MPC's chief executive.

Harrison's background was initially managing pension fund money mandates at Newton and JP Morgan Fleming before joining Deutsche AM as Global CIO in 2006. MPC's $1.6bn is dwarfed by the multiples of that Deutsche AM had while Harrison was there, yet one senses Harrison prefers boutique houses where assets can be managed, not continuously gathered.

MPC was founded in 2000 by Mark Hadsley-Chaplin, Patrick German and Chris Maude as a dedicated active asset manager and a home for talented managers leaving asset managers and investment banks.

The Pilgrim Fund was launched in October 2000, a portfolio that has since generated returns of around 12% annualised on volatility of about 6% and a maximum drawdown of 2.8%, according to figures from the group.

An Anglo-European long/short equity fund with around $1.2bn of assets, it has delivered a net return of more than 116% since inception. Thereafter followed Pilgrim Select, a more focused version of the Pilgrim Fund, launched last July. It immediately closed, having hit target capacity of $100m.

Miles Geldard and Lee Manzi have joined MPC's multi-asset team from JP Morgan AM and launched multi-asset and convertible funds in January - the MPC Global Convertibles Fund and MPC Strategic Reserve Fund. MPC has also appointed Dan Mannix as head of sales from JP Morgan AM, where he was head of the wholesale channel within the UK, and Len Munden as head of operations.

As well as hedge funds, MPC manages long-only mandates in UK equities, including the Hiscox UK Opportunities Fund.

MPC had also tried without success to launch and steer to critical mass a Japan long/short portfolio, which was closed in 2006. "At the back end of 2005, the founders realised they were doing something wrong," Harrison explains. "To find and select fund managers successfully you need a fund manager."

Why? Because, says Harrison, a fund manager can empathise with managers during rough patches which inevitably will occur.

"To know why sometimes things do not go right, sometimes it's bad judgement and occasionally systematic flaws in the process, and to understand which of these is to blame one needs to understand how decision making is taking place in the fund, and how the markets are," Harrison says.

"In periods of exuberance you need to 'sit on them', and in periods of pain you need to be able to comfort them."

Harrison notes that with various information providers, managers' performance can be tracked up to the second, even if the manager is taking a long-term view. Putting this in the perspective of Gambhir's fund, Harrison adds: "Ajay is a very good contrarian, but that can mean going against the grain, and many people may not be comfortable doing that."


Not surprisingly, Harrison says MPC's ideal scenario would be to have investors who understand the boutique's process and philosophy.

"To understand what is driving the funds takes a long time and a lot of analysis and historical numbers are not always the best guide to doing that."

Having Gambhir, with his impressive track record, has allowed MPC to ensure investors in the upcoming fund fit their needs, and vice versa.

He cautions investors, however, not necessarily to apportion Gambhir's fund to the low-volatility portion of their own portfolio.

"Volatility is not a target, it is returns we are aiming for, and it may well be that volatility is higher," he says.

The fund will have monthly dealing and redemptions on 90 days' notice, and a first year soft lock with a 3% redemption penalty.

MPC is always on the lookout for "talented managers who can invest across the cycle", Harrison says, but he adds that strategies such as systematic CTA would not be appropriate for MPC.

Interestingly, he adds that it is beneficial to have teams at MPC who are all more or less at a similar stage of their lives, so share generically similar values and aspirations because of this, for example the fact many at MPC have family lives.

"We have people who share a mutual respect for one another and have the same kind of DNA make-up," he says. For those who come to MPC, teams are built around them before they start trading. Gambhir, for example, already has a dealer on his team.

"Experience is an important part of making money, but I think you need to know where your north is," Harrison says. "You need a deep belief in the way you go about doing things and the value of doing that, and it comes to the fore at times of stress. Without a compass, a fundamental investor can become a trader and start going for momentum, and it's important to understand what makes people tick."


It could be argued that if any colleague understands what makes Gambhir tick, it will be Peter Harrison. "I recruited Ajay into Flemings about 10 years ago as an analyst," he explains. "I was running the UK research department and he was the first person I hired, and after that he went on to manage $6bn." Added to this was $2bn in the European high-alpha team within the European equity group, of which Gambhir was managing director.

Harrison also draws a line between asset gatherers and asset managers: "We firmly believe the future is about strong investment performance and limited capacity, something asset gatherers have difficulty understanding to the same extent," he says.

While Gambhir's long-only fund was capped at JP Morgan AM, so too was his hedge fund, at about $350m, according to Harrison. MPC will market the fund to the end of June, then allow Gambhir two and a half months to concentrate on the markets - and not client meetings and roadshows - before launching on 17 September.

At the portfolio level, the new fund will have its long and short books managed separately, and the short side will be run for profit, not just as a buffer against losses. Gambhir almost achieved this in the short book at JP Morgan in 2006 despite markets being up 25%, Harrison adds.

"The fund will be characterised by a lot of alpha on the short side," he says, "and if you go back to May and June 2006 when the index was down 4%, Ajay was up 1.8%."

He was one of only four among around 300 industry peers to end this period up. "In April 2005, he was up slightly while the [FTSE Europe] index was down 1.7%." October 2005's 2.5% fall saw Gambhir's fund suffer its only drawdown, of 50bps. "A large part of this ability is the strong valuation discipline he employs on the short side," Harrison says.

"Gambhir wants to be there for high expectation stocks often for the first profit warning because that's often when you make money, because that's when you get the big drop, but it is of course when you're at more of a risk of a private equity bid."

However, Harrison notes that Gambhir's contrarian style can see the fund's short book be in companies that actually appear healthy, "so are not the darlings of the private equity world".

Indeed, Harrison says, Gambhir's contrarian style could see names on the long side appear more attractive to M&A suitors before these names begin their road to recovery and strength, hopefully bringing their share prices up with them.

Harrison notes that having more than 80 positions in the portfolio can take away the critical importance of timing ("which can drive a manager to distraction") that may afflict more concentrated portfolios.

Gambhir will run a relatively flatly weighted portfolio, Harrison says, and have the ability to buy in deeper to a stock he holds firm convictions about, and also will not have to holds stocks he has no firm feelings about.


And after the launch of Gambhir's fund, where to then for MPC? The firm already offers Ucits-compliant products. However, Harrison notes some concern with the new 130/30 products.

"Most houses doing them come from a traditional base, and have not shorted stocks before, and suddenly they will be going into crowded shorts." While a typical fee structure will be 1% management and 10% performance, Harrison notes that those managers successful at 130/30 could turn to pure hedge fund management.

"Also, most of the systems in the houses have not dealt with shorting, so you can have weak systems and managers and non-formulaic approaches. Investors could suffer bad experiences, and the right people to be doing it should be the absolute return managers going down the curve trying to offer more beta."

He adds simply the reason MPC has not ventured down the 130/30 path: "If a client is making the decisions to put these techniques into their portfolio, then why not allocate to hedge funds?" For pension funds, 90% or more of whose risks could typically be expected to be beta risk, the wisdom of adding to this could also be questioned.

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