Luque: Hello, I am Fernando Luque, editor for Morningstar in Spain, and I am joined today by Benjamin Melman, director of absolute return and quantitative management at the Edmond de Rothschild Investment Managers. Thank you for being here, Benjamin.
Melman: Thank you very much.
Luque: Benjamin is also the manager of the Quadrim 4, a strange name by the way. This is an absolute return fund with very low volatility objective. Can you tell us a little bit more about how you construct these absolute return funds?
Melman: Sure, absolutely. Our main conviction is to say that if you want a very diversified fund in a complicated environment, you have to diversify the style and the strategies. Diversifying within the asset class in which you invest is one thing, but as we know, in a crisis, diversification is disappearing at a time when you need it the most. So what we do in this portfolio is to bring very different strategies; most of them are arbitrage on equities, bonds and currencies, relying on very different concepts. Some are more technical, some are more coming on the macro side, and some are more relying on concepts like value.
Luque: As an absolute return fund, this fund tries to obtain a positive market return in every market condition.
Melman: Yes.
Luque: But how would you define the current market condition, is it more difficult right now than last year? How would you define the current conditions?
Melman: Well, we launched this fund in May 2007, and I would say it has been quite difficult almost all the time, because the crisis began during the summer of 2007. I would say it is still complicated but probably less so than before, and I would add that for Quadrim 4, it is usually able to perform in a very complicated environment. Strangely, its best performance was achieved in the worst months on the market, and we are happy with that, because it makes this fund different from other funds.
Luque: What types of asset classes or what type of strategies are you favouring right now? You spoke about equities. What about currencies, etc.? Which asset classes are more present in the portfolio?
Melman: Well, we still like currencies and adding currencies, because they are cheap; they are yielding a lot of money. For example, Indonesia is yielding 6.5% which is quite nice. They are relying on strong economies and some countries, which are rated by the agencies. So we love currencies, and Asian currencies. We also like Swiss francs when we have some problems in euroland, but we also like bonds, emerging debt, credit, European credit—investment grade and high yield, even (though) it is more and more an overcrowded trade, we still some opportunities on credit. And on equities so far, we still think it’s too soon to come back in this market. What we do today is we look at defensive play, which is obviously very cheap, while cyclicals are very expensive. We like and we are investing in telecoms and utilities right now.
Luque: But the fund can go short in equities.
Melman: Yes.
Luque: Are you short right now?
Melman: No, we are not short. We still think that September will be complicated due to the fact that we are close to the 3Q results in the US, and we can see some profit warnings after the US slowdown, so we are cautious on September. And we will see by the year end if we will have the famous year end rally. Today it’s too soon to tell. But in September, we remain cautious.
Luque: By the way, a lot of investors are asking us about commodities. Do you consider commodities in the Quadrim 4 as an asset class?
Melman: No, we don’t invest in commodities in this fund, but we are very interested in commodities, and we play the idea of commodities almost with currencies. For instance, the Australian dollar or the Brazilian real are very related to the commodities. And so, we are close to this idea, but we play it with currencies.
Luque: As an asset allocator, because you are an asset allocator, what recommendation could you give to the individual investor who is constructing his own portfolio?
Melman: To remain cautious right now. We are not out of the woods, even if, obviously, equities are more and more cheap. September might be too soon to come back (into) the equity market. There is still a good way to invest, it is to go to buy some credit—investment grade or high yield, emerging debt is still nice; but to remain selective and control the risks. As we know, markets are still very fragile since May, and it is not completely over.
Luque: Ok, so they have to be cautious.
Melman: Absolutely.
Luque: Thank you for these recommendations, Benjamin, and for this interview.
Melman: Thank you.
