Europe key worry for Oyster managers

Managers of various funds run for Bank Syz say it is Europe that keeps them awake at night.

Speakers at a recent conference for Bank Syz’s Oyster fund range gave Europe’s politicians poor marks, but said, cautiously, that opportunities exist in markets for skilled practitioners nevertheless.

Woody Brock, founder of US think-tank Strategic Economic Decisions, said Western politicians had done poorly at confronting their populations with harsh realities about debt. “People are not as dumb [as politicians think] – everyone I speak to understands the situation about debt,” Brock said.

The mire that resulted is not just Europe’s problem, but America’s too, he added, as the West had built indebtedness on promises that hit the next generation – “destructive promises, without representation”.

Europe the problem

Oyster fund managers from around the world noted Europe – currently at the apex of such problems – was crucial to their decisions. Derek Smashey, who co-manages Oyster US Selection from his Missouri-based firm Scout Investments, is incorporating more non-US indicators, such as PMI indices, into the top-down portion of its process.

“The political situation matters and what the central banks are doing, so in addition to indicators, we also listen to Wall Street research advisory services,” Smashey said. “It all helps us develop themes, and where we should focus our efforts and what areas of the market we should be bullish or bearish about.”

In its bottom-up analysis, Smashey uses two processes depending on the prevailing climate. If it is ‘constructive’ the managers use a discounted earnings model. If the climate is more ‘defensive’, they apply relative valuation based on price to book, price to sales or enterprise value to sales. Switching between the two allowed Scout to beat the S&P 500 by 2.3% in 2008, then beat the index’s 25.6% rise in 2009 by 21.6%.

Hart Woodson, manager of the Oyster Global Convertibles fund, said ownership of his universe shifted enough to make a re-run of the difficult 2008 unlikely for convertibles.

Back then, 75% were held by often-highly leveraged hedge funds. Now, a far broader community partakes, comprising defensive equity funds to bond funds wanting less duration.

Oyster Global Convertibles focuses on paper trading within 20% of the bond floor, and scales out of trades as the instruments appreciate to 30% above the floor – “effectively forcing us to buy low and sell higher”.

Woodson said it was not unreasonable to expect, if “things go pear-shaped and Greece blew up”, a strategy such as his would lose 12% if the markets dropped 20%.

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