The search for uncorrelated, or weakly correlated assets, is an issue this publication has dwelt upon before. (To see an example, click here). The search is demanding: right now, some market measures, such as the CBOE S&P 500 Implied Correlation Index, suggest correlations in markets are very high. (The index, which examines correlations between stocks in the US S&P 500 Index, is currently around 81, compared with 43 in early January, 2007.)

But at RWC Partners, a UK-based investment house running long-only and long-short products, it says that periods of high correlation create an opportunity for stock pickers to obtain investment “diamonds” that have been sold off along with the dross. And once correlations start to weaken, the firm says it has the historical data to prove that this is a winning strategy.

“When all correlations are the same, that is unsustainable in anything other than the short term,” Priya Kodeeswaran, portfolio manager at the global growth equity team, told this publication in a recent interview at his offices in St James’s.

“People are thrashing around in these markets when correlations are nearly at one and they don’t take advantage of this when these correlations start to go down,” he said.

Kodeeswaran showed a chart of how performance for a stock-picking fund can wane during high-correlation periods but then improve when stocks cease to move in lockstep and the underlying strengths and weaknesses of individual companies shine through the market noise. When it is clear that correlations are declining, that is when a fund manager can also leverage a position to amplify his or her (hopefully) correct calls, he said.  

One of the portfolios under his control is the RWC Global Growth Absolute Alpha Fund (formerly Advance Absolute Alpha Fund), which hunts after firms that are innovating or changing and which will see significant dispersion of predicted earnings from sell-side analysts. The fund has $11.2 million of client assets and was launched in February last year. For A-shares, requiring a minimum investment of $25,000, there is a 20 per cent performance haircut and a 2 per cent management fee; for B-shares (minimum of $10 million), the performance fee is 20 per cent but the management fee falls to 1 per cent.

And so far, the fund has made ground: the dollar-denominated A shares have a net asset value of $104.3, with the B-shares at $105.9.

Part of the art in running this fund is realising that periods of high market correlations tend to be brief and can be overthrown when certain events – such as company reporting periods – put the focus back onto the fundamentals. As a result, Kodeeswaran spends a great deal of time checking for those “clusters” of corporate events.

This kind of thinking is nothing new for Kodeeswaran, who came to RWC in September 2009 to establish the team and launch the RWC Global Growth Absolute Alpha UCITS IV fund. He joined from Cheyne Capital where he was a partner managing a global TMT-oriented long-short strategy.

In the limelight

RWC, which has around $4.5 billion of assets and is 49 per cent owned by Schroders, has certainly been busy lately. (Schroders bought the stake last summer). In September, RWC announced it was launching an onshore macro hedge fund at the end of October, run by Peter Allwright and Stuart Frost, previously of Threadneedle. The fund’s strategy will replicate the Threadneedle Macro Trading Crescendo Fund that the pair used to manage. In August, it launched a global value fund for Ian Lance and Nick Purves, the managers of the firm’s Income Opportunities fund.

RWC’s managers are also unafraid to ruffle industry feathers. In August last year, for example, it said that the proliferation of “hedge fund lite” products sold in the form of UCITS 3 wrappers created risks and that some of these funds could fail.

Dozens of firms have been launching UCITS funds, such as EFG, Morgan Stanley, Credit Suisse, Deutsche Bank and Threadneedle. There have been some concerns that some of the underlying investments of these funds may make it difficult for them to deliver on the high standards of liquidity that UCITS funds are supposed to offer. Following the record hedge fund losses of 2008 (down around 19 per cent) and difficulties some investors experienced in liquidating assets, a number of alternative investment firms have packaged absolute return products inside UCITS wrappers. UCITS funds enable managers to use derivatives, for example, to take short as well as long positions. Hence the tag “hedge fund lite”.

RWC has come a long way in a relatively short time. The business was launched in 2000 and re-shaped with the arrival of Peter Harrison, the current CEO, in 2006.

RWC may not be the largest of firms in AuM terms, but it has the service capacity of a much bigger operation, Dan Mannix, head of business development, told this publication in the same interview. 

Mannix said that managers at RWC invested in their own funds and in the business of RWC itself. The firm has a total of 12 UCITS funds of various types and two non-UCITS funds. The RWC teams, meanwhile, convey some idea of this firm’s breadth of offerings: UK Equity (led by John Innes); European Equity (Ajay Gambhir); US Equity Team (Mike Corcell); Growth Growth Equity Team (Priyanthan Kodeeswaran); Global Convertible Bond (Davide Basile); Equity Income and Value (Nick Purves and Ian Lance) and Absolute Return Bond and Currency (Peter Allwright and Stuart Frost).

It is an impressively broad list. Come market rain or shine, RWC’s managers will hope that most of these strategies will bear fruit if or when some semblance of economic normality returns.