Ever since its launch in January 2000, we have employed the same top down macro approach to manage our flagship fund, the Culross Global Fund. This approach uses macro themes as the diversifying building blocks of the fund’s portfolio. The fund typically holds around 6-8 themes, with each theme focusing on a particularly promising investment story, macro narrative, industry sector, asset class, region or investment style.
Each theme is populated by specialist funds or ETFs that we carefully select not only for their standalone merits, but also for how well they match the theme for which they are picked. The fund typically holds 20-25 managers in total. The essential advantage of using this thematic approach is that themes may be inherently long, market neutral, or short. This enables us to select and weight a combination of themes in the portfolio to achieve the overall bullish or bearish tilt that is appropriate for prevailing market conditions.
As the economic and market cycle evolves, we adapt the thematic composition of the portfolio by adding bullish, bearish or market neutral themes as appropriate. We believe that the successful management of a portfolio of funds requires an investment process with a significant top down component. By including an assessment of macroeconomic and market conditions, one makes an explicit attempt to avoid being in the wrong types of fund at the wrong part of the cycle.
The experience of many funds of funds in 2007 and 2008 serve to show the dangers of ignoring the macro: many were caught with injudicious exposure to leveraged strategies in illiquid assets late in a business cycle characterised by rising policy rates and rising mortgage defaults. During this period, the Culross Global Fund allocated to short credit themes, short financials themes, and long volatility themes. In 2007, the fund was up +37.5% net and in 2008, +3.2% net.
This thematic approach requires our investment team to carry out ongoing macroeconomic research and market surveillance to identify changes, trends and opportunities. The objective of this process is to identify change that the market has not yet priced in. We study macroeconomic data, market price data and trends, central bank policy, government policy, political events, sentiment, fund flows, liquidity, cross asset correlation and volatility.
Past themes have included Japan Opportunities in 2003, European Economic Change in 2005, Asian Consumer Power in 2006, RMBS Opportunities in 2011, and Financial Sector Recovery in 2013.