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Nicolas Rousselet

Unigestion sees value in M&A and energy specialist stock pickers


Mergers and acquisitions and energy-focused equity long/short are two of the most attractive fund strategies for 2016 at Unigestion, according to the group's Managing Director and Head of Hedge Funds, Nicolas Rousselet (pictured). 

Identifying the best strategies for investors has been no easy task in recent times, thanks in large part to the excessive interference of central banks. In a bid to boost inflation by weakening their currencies, the European Central Bank and the Bank of Japan have both resorted to negative interest rates. The ECB now has a -0.4 per cent deposit rate for banks wishing to park their cash, in a bid to get them lending. 

So far it hasn't worked and the extent of meddling has proven to be problematic for many hedge fund strategies particularly fundamental stock pickers. 

"We still see value in fundamental stock picking but the timing for when this will be able to unlock its full potential is difficult to ascertain. Flows into defensive stocks are pushing valuations spreads to extremes, but there certainly is room for more tightening," says Rousselet.

"Last year, everything hinged on what the US Federal Reserve would do; were they going to raise rates? When? And by how much? It had huge consequences for the hedge fund landscape. We were glad to see the Fed finally introduce a 0.25 per cent rate hike last December but overall, the rate hike was not as high as many were expecting at the start of the year. Now the situation is more mixed." 

This is because the global economy is stuttering. Some argue that the Fed should have introduced the rate hike 18 months ago, at the very least to give it some room to manouevre should the US economy find itself in trouble again. 

"As a result, fundamental stock picking strategies are struggling and whilst they could be attractive were rates to start rising and change the current paradigm, it is currently difficult to see what that catalyst would be," says Rousselet. 

He confirms that global macro is still a favoured strategy as traders seek to profit from the `currency war', although it is worth noting that long USD was a profitable trade in the second half of 2014 through to March 2015. Since then there has been a bit of a slow down. 

"If you talk to macro managers they'll tell you that the worst environment was in 2012 and 2013 when everything was correlated and volatility was low. Markets are still correlated but the situation is more complicated. Market direction is changing rapidly and traders have to be faster and more willing to stick to their long-term views," says Rousselet. 

Given the challenging conditions that hedge funds face, allocators such as Unigestion need to apply an even greater focus and diligence to identify the best managers capable of generating non-correlated returns. The opportunity set has necessarily become much more specific, more considered. 

With respect to where it sees value in the market, Unigestion is favouring M&A and the energy sector in 2016. 

With respect to M&A, (by this we mean managers running merger-arbitrage strategies rather than event-driven strategies) Rousselet confirms that Unigestion has been allocating capital in this area of the market since Q4 2015, and continues to do so. 

"Normally we wouldn't be so favourable on M&A, but spreads are wide and the quality of the pipeline is good. Two years ago, the volume of deals was there, but spreads were quite unattractive. Spreads have now widened and things are pointing in the right direction so we like M&A a lot at the moment. 

"Another strategy that we feel could be beneficial in the mid-term, although it is a complicated strategy and needs managers with the right skill set because it is very volatile, is energy sector equities. Twelve months ago, there was a huge craze for high yield corporate bonds of energy companies. In the last week of February 2015, the feeling was `there won't be enough for everyone', such was the level of demand," explains Rousselet.

Of greater attraction, from a valuation, and specifically short selling perspective is energy-focused equity long/short strategies. The idea being that the energy sector is highly dislocated; as a result there will be winners and losers as the sector looks to recalibrate. 

"Among the community of specialists, we basically feel that energy is the perfect hunting ground for top stock pickers. We are selecting managers who are able to adjust their overall exposure dynamically and right now they are carrying more of a short bias in their strategies. While it didn't work amazingly last year, it still contributed positively in 2015 and has started 2016 very strongly," confirms Rousselet. 

He adds that whereas in the M&A space Unigestion are willing to make a tactical allocation, as spreads could become unattractive by the end of the year, Unigestion has more of a dedicated longer-term allocation to the energy sector.

One strategy that has become a more attractive hedge is CTAs. Unigestion were underweight CTAs for a number of years and focused more on macro strategies when they staged a rebound in performance in the last six months of 2014. 

"Before that rebound, we really didn't like the way CTAs were positioned. Most were long bonds, long equitiesºthey were long everything! And that worried us. Performance could have gone either way, it was like flipping a coin. That wasn't a position we were willing to take. 

"They rebalanced in 2015 and became less risky so we added to CTAs. Now they are short equities, long bonds, which is a more attractive hedge. They are a very useful component of portfolios nowadays," states Rousselet. 

It is precisely when managers such as energy specialists are able to make positive returns in a month like January, when the rest of the markets incurred losses, that Unigestion can demonstrate the value of its top-down work to investors as well as its skill in selecting the right manager talent.

This is the true test of a hedge fund allocator's worth. The worst situation for any allocator is selecting managers in a benign market. Just because the markets are up doesn't guarantee that the manager is anything special. 

"The best time to pick managers is in times of stress," says Rousselet. "Maybe not necessarily allocate to them, but certainly select them and then allocate when the time is right. 

"Our investors want to find investment opportunities/strategies that are uncorrelated to the market; an alternative return stream to what they are getting from traditional markets. M&A is a very attractive proposition in that regard today." 

Within energy, the value on the short side is huge, making it difficult for managers to find the right longs. That is the challenge manager's face: balancing the portfolio with suitable long positions. In a year's time, Rousselet thinks there will be more opportunities: "It's a great environment right now for energy stock pickers," he says, confirming that currently the focus is on identifying new areas and upgrading the book. 

"You always have to think to yourself, `Can I do better?' 

"It's during periods of volatility and market dislocation that the cream rises to the top. We actually think it is a very exciting time for investors right now to gain exposure to M&A and energy markets," says Rousselet in conclusion. 

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