47 Degrees North – Innovation in style, process and structure
Fund selectors will often insist they need to meet the manager, know the company and test the record. For managing partner Fraser McKenzie (pictured), that is not enough.
Zurich-based 47 Degrees North first came to public notice in the high octane pre-crisis world of 2007, when as a small asset manager it beat off 97 other contenders to win an emerging markets mandate from CalPERS, the California Public Employment Retirement System.
This was the start of a long relationship which continues with CalPERS holding a minority interest in 47 Degrees North Capital Management and being a significant investor in its funds.
Other associations built on that strong start. In 2009, the firm teamed up with the London-based private investment house of the Guinness family, known for its brewing business, and chaired by Edward Guinness, the Earl of Iveagh.
That connection also remains, with 47 Degrees North advising on the Iveagh Wealth absolute return funds.
The firm continues to break new ground in the asset management business with funds offering access to early-stage managers, innovative strategies and thematic hedge fund investments.
Supporting early stage managers is a fascinating sector which tends to run in cycles, says managing partner Fraser McKenzie.
Talented, experienced fund managers who have worked for large corporates, funds or banks may want to move to a smaller firm where they can run their own show, and specialise in what interests them.
These firms then grow, become less differentiated, and get taken over by larger entities wanting to stake out a particular space.
“We find the smaller funds give better returns and risk transparency. Sometimes a fund manager is not so great the first time round, but gets better with his second or third fund. They learn from their mistakes. It is a leap of faith to back them, but it can be very rewarding.”
The fund development cycle brings out innovative strategies, says McKenzie with another set catching the eye of institutional investment consultants with millions to allocate to certain strategies and asset classes that become more mainstream.
For its expanding Innovation Fund, the firm has been looking to build a team with a ‘knowledge trust’ superior to its peer group.
The Cayman-listed, SEC-registered fund of funds aims to gather together strategies which McKenzie, with his track record of close to 30 years in the capital markets, believes are truly innovative in some way.
While other managers are battling uncertainty and volatility, the Swiss boutique is revelling in the opportunities market conditions are throwing up.
“We can see a confluence of events right now of maturity, liquidity and depth, that can produce a coherent storyline with big upside,” says McKenzie.
The Innovation fund holds 15 positions in eight strategies, with no single position accounting for more than 10%.
Clients buy the fund, not the individual strategies within it. Candidates are identified by personal recommendation, peer conversations or perhaps a note in a piece of research. Each is carefully screened, but many are rejected.
The differentiating and winning factor for McKenzie is what he calls the “value proposition” of each strategy.
“That has almost nothing to do with the strategy itself, or the individual fund manager, whom we can meet any number of times,” he says.
“For us, it is all about the value inherent in the underlying securities in which the fund is investing and what opportunity the manager is taking advantage of.”
That test says something about the intellectual weight behind the 47 Degrees North selection.
One of McKenzie’s favourite books is Here’s Looking at Euclid by Alex Bellos, which celebrates the legacy of the Greek mathematician/philosopher, and looks at the spatial relationship and ratios between factors, rather than their linear connection.
McKenzie is looking for managers who instinctively understand that perception of risk and reward is based on the logarithmic scale, and fund firms that can capture and maintain that process.
He praises Iveagh Wealth, led by chief investment officer Chris Wyllie, for its investment model, which combines their proprietary top down macro-economic model with the bottom up investment process.
Neither gets diluted by the other.
The Innovation Fund supports strategies such as rehabilitated credit, which plays the difference between the credit and stock price of a target.
It is like buying a cheap option, Mc-Kenzie says, with a lag of between nine and 15 months before the gap closes.