Mike Clancy is the co-founder of Elgin Capital LLP. He has
15 years’ credit and derivative experience in New York
and London, and was most recently global co-head of credit
trading at Merril Lynch.
- How do you define the approach of your fund?
We'd define it as a research-driven, long/short credit
fund with primary focus on Europe.
- What are the key characteristics of your strategy
and how are you different from your 'peer group'?
To start with, our team at Elgin is excellent - we have
an experienced group of successful people working together
to manage all aspects of the fund - research, trading,
portfolio management, derivatives and risk management.
Our risk management capabilities are a key element to
our approach. We reduce the non credit risks within the
portfolio so that our returns are derived purely from
credit selection.
We adopt a systematically research-driven approach to
identify credit opportunities within our universe. We
focus on European issuers and on non-European domiciled
issuers that have been active in the European credit space
e.g. Philip Morris, Xerox, Ford. Our current portfolio
is approximately 45 names (65 positions) and we are carrying
2-3 non-European domiciled names.
We run a diversified portfolio with a minimum of 75%
in investment grade assets. We primarily invest in corporate
bonds and single name Credit Default Swaps ("CDS").
We use long and short techniques to maximise our performance
irrespective of market direction. In fact, in our first
twelve months we were long 10 months and short 2 months.
Approximately 68% of the Fund's annual net return was
due to long positions with the remainder being attributed
to short positions, demonstrating the validity of the
Fund's long/short strategy in a decidedly directional
market.
In terms of our peer group, there are a number of other
European credit funds but the universe of comparables
is a mixture of high yield and investment grade and few
have the diversification requirements and credit research
focus that Elgin does. Some credit funds which are primarily
investment grade include Crescendo, GLG, Orn and AlpgaGen
but each one of these funds is slightly different from
Elgin Corporate Credit Fund.
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How do you construct your portfolio?
We have a systematic and disciplined investment approach
that is research intensive. We examine the macro environment,
technicals, sector and the individual credits to select
appropriate strategies and credits. Sometimes the technical
analysis dominates, other times it's the macro analysis.
But we have to do all the work to properly evaluate the
opportunity and maximise the trade potential.
We look at the macro environment - from monetary policy
to future earning prospects. We look at the volatility
of the equity markets and the health of the M&A environment.
For us, technical doesn't mean charts; it's primarily
supply and demand. Our technical view helps us determine
the strength of our conviction and whether we should be
involved in the primary or secondary markets. New issue
supply is currently running at about two-thirds of prior
years so it's a quite bullish environment.
About 75% of our portfolio is usually individual names
- longs we like and shorts we don't. With fallen angles
like ABB and Ahold, we play them from both the short and
long side, migrating through the capital structure. Our
intensive credit research analysis allows us to carefully
conduct relative value analysis, picking among the best
names when all are cheap.
We've made money from our technical analysis (e.g. France
Tel in Sterling), and credit events (e.g. tobacco litigation/tobacco
M&A with Altria and BAT) and credit trends (e.g. France
Tel).
- What are the key themes on the long and short books?
How do you identify them?
Unsurprisingly, our theme identification comes out of
our research process. Examples of shorts would be European
car manufacturers and the European utilities sector. With
the automobile manufacturers we worry about overcapacity,
intense competition and with manufacturers' large US dollar
exposure. With the utilities, it's their desire to diversify
and our fear that diversification means deteriorating
credit fundamentals and credit ratings. We are selectively
long the Telecommunications sector. We categorise Telco's
in two camps - those who are managing for equity holders
and those who are managing for debt holders. . It's predictable
that we favour that we favour players like TI and France
Tel.
- What's your performance been like?
Since inception in February 2003, we've posted consistent
returns while our asset base has grown from Euro 13M to
nearly Euro 240M. Full year returns (February 2003-January
2004) were up 10.71% with annualised volatility of 4.63%.
Our Sharpe ration for our first year was 1.85 (using 3
month Euribor as the risk free rate).
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How do you price the portfolio?
We mark the portfolio to market every evening. GlobeOp,
our administrator, reviews the pricing and does position
reconciliation daily. At the end of the month, our administrator
goes through every position, obtains pricing quotes, re-prices
the portfolio and issues the NAV.
- How liquid is your portfolio?
Our portfolio is fairly liquid as 75% is in investment
grade. We can liquidate the portfolio in 2-3 days.
- What risk controls and measures do you have in place?
Our approach to risk management is both rigorous and
sophisticated. We identify and measure precisely the risks
that we want to take and the ones we want to shed. The
risks are measured by single names and by securities as
well as by each credit sector along the yield curve.
We have a system combining P&L reporting and risk
management. The system is linked directly to the markets
to assist intra-day activity. The combination of derivatives
and credit backgrounds has produced a bespoke risk management
report and process fitting these general principals. We
measure the risk of each instrument traded and measure
the risk of all hedges using the same methodology, thereby
assuring cross-portfolio consistency. This allows us to
precisely eliminate all portfolio risks except the desired
credit risks.
Risk reports are used to monitor against predefined limits.
This monitoring is carried out by Nick Reed, our CFO,
who is independent to the investment decision making process
and reports directly to me.
Basically, we measure everything to gauge for levels
of market exposure. We have a "live" internal
system which monitors the credit risk (spread duration
and portfolio spread Beta) of each position as well as
monitoring performance targets and stops for each position.
Portfolio concentrations by ratings, single names, sectors,
investment grade/sub-grade mix, interest rate risk and
leverage (gross and net) are amongst the variables we
monitor. We also "shock" the portfolio for certain
adverse scenarios and manage our cash balance accordingly.
The portfolio is monitored throughout the day to ensure
that we remain within our guidelines (by single name exposures,
sector exposure, Investment Grade/Sub-Investment Grade
mix etc.).
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What's your outlook for 2004?
I think 2003 was a theme picking and 'index' market while
in 2004 credit selection and the ability to go both long
and short will prevail.
We believe that the stable rate environment will provide
a favourable platform for the credit market in 2004. Going
forward, though, we believe that markets will be significantly
more sensitive to any information leading to changes in
monetary policy.
The supply of investment grade will be moderate but sub
investment grade issuance will be brisk. So far this year,
the volume of issuances is already down 60-70%. The is
positive for technicals but everyone is chasing the deals.
We expect upgrades in the Telecoms sector and downgrades
in selected industrial credits. The improving M&A
environment should be slightly negative for investment
grade credit but boost cross-over credits. A more active
M&A environment also throws out credit-intensive opportunities.
We now have two (soon to be three in mid-March) dedicated
credit analysts in our team which will improve our ability
to capitalise on these opportunities.
The investor liquidity is good with wider investment
grade spreads tempting real money back into the market.
-
What's your background and how are the responsibilities
for running the fund divided between the team?
Guillaume Bonpun and I run the portfolio and we sign
off on all trades. Guillaume began his career in 1991
as a debt capital markets specialist at BNP Capital Markets,
and eventually ran their London syndicate desk. He moved
to Dresdner Kleinwort Benson in Paris in 1997 to lead
their French debt origination and syndicate effort and
then to London as Head of Bond Syndication (which went
on to be ranked no. 2 in the newly formed EURO market)
in 1999. He joined Merrill Lynch in 2000 to run European
Corporate Debt syndication, leaving in 2002 to form Elgin
with myself.
I began in 1986 as an interest rate derivatives trader
at Bankers Trust in New York and moved to London in 1990
to trade interest rate and foreign exchange derivatives
both at Bankers Trust and UBS until 1997. During that
time I managed global derivative businesses in debt, equity,
and foreign exchange.
In 1998 I joined Dresdner Kleinwort Benson as Global Head
of Credit and Emerging Markets. We were named European
Corporate Bond House of the Year by IFR magazine in 1999.
Prior to forming Elgin in 2002, I was Global Co-head of
Credit Trading at Merrill Lynch, responsible for the firm's
primary business (debt syndicate), corporate bond trading,
credit derivatives, high yield trading, distressed debt,
leveraged loans, and the trading of securitised products.
We have two (soon to be three) experienced and highly
capable credit analysts with buy side and sell side experience.
On the trading and risk management, we have two knowledgeable
professionals. Our trader has over 10 years experience
of both prop trading and market making, and other trader
and risk manager has 7 years experience in product control
and risk management and is a Chartered Accountant.
On the infrastructure side we have an experienced CFO/COO
in Nick Reed (Chartered Accountant with 11 years experience
in both cash and derivative markets) and Terry Watkins
who manages all customer relations and marketing (19 years
of investment banking experiences spanning both corporate
finance and debt capital markets).
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Do you or your team have any plans to visit Asia in
the coming months?
Yes, Terry Watkins will be in Asia in mid April to meet
current and prospective investors.
