Amid the post-Worldcom carnage in the distressed debt market, the Standard Liberty Distressed Securities Fund – a joint venture between Liberty Ermitage (“Liberty”) and Standard Bank (“Standard”) – says it managed a positive performance in May of (+0.69 per cent) and to remain largely undamaged in June (down -0.30 percent).
How did they do it? “What’s most interesting about our portfolio, is what has NOT been in it – we don’t hold Worldcom, Adelphia, NTL, Telewest and the other names that have caught out most of our competitors,” says David Newport, the Senior Investment Officer for the fund comments. “We just didn’t think the value was there. We had a number of positions that made money in June and indeed the fund was up until the last day of the month, when we were affected by the bid offer spreads widening out. What we tend to see is that, because many of our competitors are running multi-billion dollar funds, they have to be invested in the large situations, just to put their money to work. We made the decision to cap the fund at around $300 million in order to keep the fund nimble. As a result, we do not have these limitations and have tended towards more differentiated names in the portfolio”.
Newport also reckons the returns a tribute to risk analysis. “In this business, valuation is key, but timing is critical,” he says. The fund is heavily exposed to Europe (currently approximately 50 per cent), with the rest of the portfolio invested in niche US situations. With heavy European exposure, the fund gains from asynchronous cycles. “What we tend to see is that although the US and European distressed cycles are to a certain extent correlated over the long term, on a month-to-month basis, there is often little correlation between the US and European portfolios,” says Jonathan Wauton, Director at Liberty Ermitage. ” So, by combining the two geographic mandates, we can hope to achieve a lower volatility of return than by investing in a purely European or US portfolio”.
The fund was launched in December 2001 and, with current commitments, assets under management will exceed $100million by the end of July.