Multi-asset and Fixed Interest Fund Profile - Church House Investments

James Mahon, CIO and fund manager, SVS Church House Tenax Absolute Return Strategies Fund, and Jeremy Wharton, director and fund manager, SVS Church House Investment Grade Fixed Interest Fund and co-manager, CH Tenax Fund discuss multi-asset and fixed interest fund profiles. Mahon and Wharton talk about managing risk, finding USPs and market structure changes.

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  • 15 mins 28 secs

Church House

22 Sackville Street
London W1S 3DN

Telephone: 0207 534 9870
PRESENTER: Church House Investments is bringing two of its existing funds to the wealth manager and adviser market. They’re an absolute return strategy called Tenax and an investment grade corporate bond portfolio. Well to discuss the products in more detail and why they’re making the move I’m joined now by the firm’s Chief Investment Officer, James Mahon, and by fund manager Jerry Wharton. James, first of all tell us a little bit about Church House.

JAMES MAHON: Church House is an investment management company. We set up in 1999, so we’re now 15 years old. We’ve been completely independent since 2010. We manage a range of funds, six funds that initially we set up for our private clients for specific portfolio purposes, but at this stage we really feel we should be opening these funds up, hence marketing of the funds, which we started with the fixed interest fund Jerry runs. What else, the company is independently owned, so it’s owned by the directors and the Cayzer Trust Company has a 20% stake.

PRESENTER: Now the Church House Tenax Absolute Return Strategies Fund, what’s the aim and objective?

JAMES MAHON: Tenax is an absolute return fund in the purest sense of the word. So it is a multi-asset class fund and it is broadly diversified across asset classes. We have a straightforward objective of making positive returns every year on a rolling annual basis, and to date, if I look back over the past five years, we’ve achieved this over 90% of the time with an average annual return of around 6.8%. So it’s not a fund of funds, but it is broadly diversified across the market.

PRESENTER: You like to keep volatility low on this portfolio, how do you manage risk?

JAMES MAHON: We do like the volatility to be low, but we don’t specifically target it, so we’re expecting that the volatility will be low as a result of the way we manage the fund and to date this has been the case. So the historical volatility’s running at around about 3½%, which it has been for some while, so significantly lower than all the other asset classes really.

PRESENTER: So what exactly is your role and Jerry’s on the portfolio?

JAMES MAHON: Well my experience is more in the equity derivatives or exchange market. Jerry, I must let him speak for himself, but he’s much more in the credit markets and the bond markets, so we are complementary in that sense. Do you want to?

JERRY WHARTON: Well I think that that’s a very important point is that as a house we cover all asset classes in terms of our experience, which is not necessarily the case with some other of our peers, but we do find that that enables especially with a fund such as multi-asset fund that we think all the sort of bases covered and we apply that experience to the different asset classes involved.

I would just point out that this fund was launched at the end of November 2007, which was obviously a pretty dramatically moment to launch any kind of fund, especially an absolute return fund, so that the volatility numbers bear out the strategy we feel was correct from the start. We got 2008 almost right. It was impossible to get it completely right, but we felt overall the performance of the fund during that period was pretty consistent and was rather better than might have been expected.

PRESENTER: Well how do you cope with the increased correlations between asset classes that we’ve seen in the last few years?

JAMES MAHON: Well it’s true that correlations have increased, but we haven’t found that our correlation has increased. So if you start with that the worst period for the fund say from December 2007 through to March 2009 and the London market was down 47% and at worst we were down 7½%. Similarly in March 2012 or March to summer 2012 the market slipped back around 12%, we were off 2%. So we haven’t really experienced a great deal of correlation, and we wouldn’t expect to because of the design of the fund.

PRESENTER: So how do you select the investments?

JAMES MAHON: This is done on an investment by investment basis. So we start with our macro view, but that doesn’t drive the investments. Clearly it sets the framework for what we’re doing. But we are looking at each investment, so each investment has a role to play. So probably let you fill in on that a bit.

JERRY WHARTON: Well it’s probably worth pointing out that we do have other funds beyond this fund, and some of the holdings will be held by other funds, which means that they’ve already had the necessary due diligence and analysis on that holding. Certainly from the credit perspective it means that I can match holdings across different fixed income products, and it just means that they don’t end up looking the same the funds, but it does actually mean that you’re monitoring the individual holdings to the extent that you need to, and obviously if you’re investing directly you are doing that on a full time daily basis.

JAMES MAHON: And we do find that cross-fertilisation between the credit analysis that Jerry does and the equity analysis that I do, that’s very useful, that that really does provide us with insights.

PRESENTER: So if you have a different view on investment who wins the argument?

JAMES MAHON: Neither of us wins. If we disagree on a holding we wouldn’t undertake it.

JERRY WHARTON: But I mean we take the lead from each other. So, you know, if James has an idea that’s equity related I’ll put in my penny’s worth, but I defer to the fact that he’s spending more time focussing on that part of the capital structure than I am. So therefore if I have a strong view on the credit of a particular company then he’ll consult me about that. It’s a very important thing to be aware that we go up through the capital structure in a way that not everyone necessarily does.

PRESENTER: It’s now the middle of 2014, where are you looking to generate returns for the next 12 months?

JAMES MAHON: Perhaps we should tell you a bit about our current positioning, 25% of the fund is invested in floating rate notes, so that perhaps gives you a flavour that we are very cautiously placed, concerned about what might happen to interest rates here even though we’re getting very mixed signals from the Governor, and this is true across the book. So the fixed interest book has a short life at present and across the various markets we are fairly cautiously placed.

PRESENTER: So it’s more about avoiding losses than making gains?

JAMES MAHON: No, each investment has a role to play, so we look at each investment and consider will that investment generate us an absolute return or has it the probability of generating us an absolute return over its life. So we would expect to continue making low volatility returns.

PRESENTER: So what’s your attitude to cash?

JAMES MAHON: We wouldn’t be worried by cash at all. We think it’s a useful asset class. I mean in terms of the practical day-to-day management Jerry has a great deal of experience of treasury management, and of course we have floating rate notes, so we will manage the cash actively. But as an asset class we’re very happy to let it run up, we would view it as the next opportunity waiting to arrive. So it’s a fund that we would wish to be patient with.

PRESENTER: Does your peer group performance quartile ranking have any bearing on the way you run money?

JAMES MAHON: No, not in the slightest.

PRESENTER: So what’s the key sign that you’re doing a good job for investors?

JAMES MAHON: If we are achieving those consistent low volatility returns.

PRESENTER: So what are the key risks to the fund over the next 12 months?

JAMES MAHON: Well clearly there are some significant geopolitical risks and economic risks in the market, but we feel confident that the low beta and low volatility returns we have achieved so far we will continue to achieve. I’m not expecting to be upset by any of those sort of moves however they pan out.

PRESENTER: Similar story when it comes to fixed income?

JERRY WHARTON: Well obviously fixed income has a lot of interest rate sensitivity, it’s a big risk within the fixed income portion, but as James has pointed out we have a big allocation to floating rate notes. There’s obviously negligible interest rate risk within that portion, and the rest of the fixed income element is of relatively short duration, and there’s also quite a lot of hybrid exposure which is really more correlated to the equity of the issuer rather than to benchmark yield spreads. We feel that credit spreads in general will be well supported by the pickup in economic activity.

PRESENTER: Well, Jerry, moving on to the Church House Fixed Interest Investment Grade Fund, what’s the aim of the portfolio?

JERRY WHARTON: The fund aims to be a better quality player within the sector. As the name implies, I can’t invest in the high yield, the fund doesn’t invest in high yield, it’s purely investment grade. That is not a characteristic of most funds; they will have an allocation to high yield. We’re not saying there’s anything wrong with that, but we regard high yield as a separate asset class, this fund is not trying to blend the asset classes.

It’s worth thinking back to 2008, this is not a volatile fund and 2008 was very much a time that proved the stance of the fund. We had a relatively stable 2008 and the fund was very well positioned we felt to cope with the coming volatility that we perceived was going to come by a turn of the credit cycle. We didn’t obviously think that 2008 would pan out in the way that it actually did, but we felt there was definitely a turn in the credit cycle coming which is obviously what happened in a pretty dramatic way.

PRESENTER: So are there any other major USPs on this fund compared to its peers?

JERRY WHARTON: Well I have to maintain a 25 to 35% in natural AAA rated paper. The fund it’s not a static fund, it’s a very actively traded fund, and I’m not afraid to make that point, because the fund enjoys extremely good access to the market well really through old contacts of mine from my gilt market days, and that’s essential if you are obviously trading a fund in an active manner.

PRESENTER: So how do you go about sourcing investments?

JERRY WHARTON: We effectively have a stable of credits that we’re very happy with that we’re up to speed with, and that’s around 100 credits. As I mentioned before we go up through the capital structure, obviously analysing what the equity of an issuer is up to, if there is equity it’s essential, but we put a lot of time into analysis of an issuer before then going into the actual curve of issuance by that single name, and that then feeds through. So if there’s a new issue coming into the primary market and it’s one that we’re up to speed with in terms of credit, we can move very quickly. With the level of issuance that we’ve seen and the demand for issuance that we’ve seen over the last few years you have to be able to move pretty quickly. But you also want to make sure that you’re investing into credits that you really do know something about.

I think one thing that has happened in credit markets is that there’s been obviously Reach for Yield, which is what Yellen has been talking about, but it means that some people will jump at a new issue not necessarily having done a lot of homework on that issue. We disagree with that as an approach. If we’re not up to speed with an issuer, if we’re not happy that we actually know really where they are from a credit perspective we won’t invest. Sometimes that means you miss out on an opportunity, but we don’t feel you should jump at every single new issue that comes to market either.

PRESENTER: What impact would rising interest rates have on your fund?

JERRY WHARTON: The duration of the fund at the moment is just shy of 5, so it’s about 4.90. But if I run a parallel shift on the fund of 100 basis points it actually shakes out to be around 3½. That would be a parallel shift; obviously we’re expecting hikes of 25 basis points on a measured level. I think that the first interest rate hike, you know, because it’s so well flagged when it happens we’ll obviously not move the curve significantly, but the realisation of the second hike that we’re on that path could have a bit more of a profound effect.

PRESENTER: What’s your attitude to gilts these days?

JERRY WHARTON: I use them as a cash tool. So whenever there’s any cash in the fund it goes straight into short-dated gilts. The fund is there as a corporate bond fund to accept credit risk, so I don’t tend to hold large holdings of gilts for any length of time and I want to try and add yield within the fund, and I do that obviously by accepting and embracing credit risk and picking up the actual spread that’s available.

PRESENTER: Why should investors consider buying your fund today?

JERRY WHARTON: Well the fund has an element of interest rate protection already built into it, 25% of the fund is floating rate and needs very high quality medium-term notes issued by big banks and supranationals. They refix over LIBOR on a quarterly basis, they will obviously not see any capital loss when rates do rise, so that’s an essential part of the stance of the fund. The fund overall is about 50% hedged against rising rates and we obviously know that the next movement in rates will be up.

Also, the fund is not a volatile fund. We proved that during 2008 when the fund maintained its stance in what we felt was a very strong way and the chances for volatility coming into the market through central bank hikes is high.

PRESENTER: Jerry Wharton, James Mahon, thank you very much.

BOTH: Thank you.


This is a financial promotion for Professional Clients and/or distributors only. This is not intended as investment advice. You should read the Prospectus and the Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at All information prepared within has been prepared by Church House Investments Ltd, York House, Sherbourne, DT9 4JW. This document should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorised by Church House Investments to do so. No warranty is given as to the accuracy or completeness of this information and no liability is accepted for errors or omissions in such information. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us.

Authorised and regulated by the Financial Conduct Authority. Absolute return investments should not be regarded as short-term and should normally be held for at least five years.

General risks

• The value of investments and the income from them may go down as well as up and you may not get back your original investments.
• Past performance is not a guide to future performance.
• Higher performance may mean greater risk.
• Inflation may affect the future buying power of your money.
• In certain circumstances there may be a risk that we will not be able to quickly convert a fund holding into cash.