Investors abandon 130/30 strategies

Date: Tuesday, May 19, 2009
Author: Pia Sarkar, Pensions and Investments Online

In a risk-averse environment, 130/30 has lost its cool factor, with investors shying away from the strategy after getting clobbered in the market downturn.

Top-ranked JPMorgan Asset Management saw its assets under management in 130/30 plunge 21.8% to $7.77 billion as of March 31 compared with six months earlier, according to Pensions & Investments' semiannual survey. Still, it managed to snatch the lead from Barclays Global Investors, whose 130/30 assets fell 29.3% to $7.04 billion in the same period. (JPMorgan had been listed as first in the previous survey, but since revised its Sept. 30 figures.)

Virtually all of the 21 managers who responded to the survey saw double-digit asset declines, proving that even the strongest players were no match for the markets. The increased risk as a result of leverage built into the strategies also made them vulnerable.

Total assets under management — in 130/30 or similar strategies, also known as active-extension strategies — collectively plummeted 32.9% for the managers surveyed, to $31.56 billion from $47.02 billion in the six-month period. (Several managers that participated in the previous survey, including BNY Mellon Asset Management and Martingale Asset Management, did not participate in the current poll. However, the overall decline compares only the assets of the 21 firms that reported as of March 31).

State Street Global Advisors was also hard hit, placing third in P&I's rankings as of March 31 and suffering a 38% drop to $3.01 billion as of March 31 from six months earlier.

“It's an investment in stocks where the manager has more tools to add value, but net-net you are still fully invested in stocks,” said Paul Quinsee, chief investment officer of core U.S. equity for JPMorgan in New York.

Mr. Quinsee said JPMorgan uses the Standard & Poor's 500 as the benchmark for its large-cap core-plus 130/30, its flagship strategy. And between Sept. 30 and March 31, that benchmark fell 31.5%. He described it as the “worst market in a very, very long time.”

The Russell 1000 index dropped by 31.5% in the period; the Morgan Stanley Capital International Europe Australasia Far East index tumbled 43.1%.

“All equity strategies have fallen in that period and 130/30 is no exception to that,” Mr. Quinsee said.

Nonetheless, JPMorgan's large-cap core-plus strategy outperformed the benchmark, which, given the circumstances, still counts for something. Mr. Quinsee noted the firm saw positive inflows for 130/30 retail mutual funds.

He said JPMorgan decided to close the strategy to institutional investors last year because it had grown too fast, but recently began making it available again on a limited basis.

130/30 misperceptions

Scott Bondurant, global head of long/short investments for UBS Global Asset Management, Chicago, said even though 130/30 strategies are clearly facing headwinds, “we think there is a lot of misperception about the strategy.”

“Some people don't realize or appreciate that the strategy is 100% net long in up markets and down markets so it's designed to outperform the benchmark but not provide protection in down markets,” he said.

Mr. Bondurant said that 130/30 has been unfairly punished because of that misperception.

“Investors are a little gun-shy right now, but once they think about the promise of 130/30 and as it plays out, they'll again move toward it,” he said.

UBS reported $892 million as of Dec. 31, according to the company's latest available figures. That represents a 44.1% decline from Sept. 30. Mr. Bondurant noted that $200 million of the drop was from a tax-aware fund that sold and realized tax losses that will be reinvested within the next six months.

Harindra de Silva, president of Analytic Investors LLC, Los Angeles, which saw its active-extension assets decline 35% to $2.45 billion, also cited a misperception of 130/30 strategies among investors.

“Some have lost confidence when it was realized that this was not a hedge fund alternative,” he said. Those same investors might never come back to the strategy, but Mr. de Silva maintained that the ones who didn't fully understand it “probably shouldn't have bought it in the first place.”

In fact, one of the main appeals of the 130/30 strategy is its ability to be used as an equity substitute and fit into the equity allocation, rather than the alternatives allocation.

Most of the managers agreed that the market was mainly to blame for the strategy's troubles. Will Cazalet, director of global long/short equities for AXA Rosenberg Investment Management LLC, Orinda, Calif., said 130/30's first real market dislocation test was in 2007. Then in 2008, there was the collapse of Bear Stearns Cos. Inc. and Lehman Brothers Holdings Inc., exposing 130/30 managers to counterparty risk.

“It would be an unfair environment in which to judge this strategy because it's been so extreme,” he said.

AXA Rosenberg's AUM in 130/30 fell 33.3% in 130/30, to $1.4 billion. Mr. Cazalet said the firm managed to retain all of its clients except for one European investor, which shifted its $200 million account into AXA Rosenberg's long-only strategy.

When 130/30 began gaining popularity in 2006, Mr. Cazalet said many of those offering the strategy were “me-too” managers that jumped on the bandwagon but might not have done a good job with their stock selections.

He added it is very difficult to assess the strategy as a whole and instead it should be looked at on a manager-by-manager basis.

Those who succeed tend to have a rich set of ideas that allows them to outperform the benchmark, he said. They must also be skilled in short selling and in risk management.

“Managers who can demonstrate those skills should do well with these types of strategies over time,” Mr. Cazalet said.

Still, when the market is down, 130/30 managers get dragged down with it. As a result, several managers have reported dwindling interest in the strategy among investors, many of whom are also loath to take on risk associated with it.

'Leverage is a bad word'

“Leverage is a bad word in the current environment and anything that is risk-seeking is not the right place to be,” said Churchill Franklin, executive vice president and chief operating officer for Acadian Asset Management LLC, Boston. “All the reasons why people bought this strategy — to get more alpha out of it — have really worked the wrong way in the short term.”

Acadian's 130/30 assets plunged 51.4% to $1.03 billion. Mr. Franklin attributed the drop to the firm's more concentrated portfolio, in which it took bigger bets in a fewer number of stocks than its competitors.

“That hurt us in this market, but it will help us in the long run,” Mr. Franklin said, noting that Acadian has been in the 130/30 strategy for seven years — longer than most of its competitors.

Only within the past week or so has Acadian started to see some hints of a comeback, with investors expressing interest in the firm's 130/30 emerging markets strategy, although Mr. Franklin acknowledged it's still too early to make any predictions.

“These are strategies for confident times and these have been anything but confident times,” he said.

Contact Pia Sarkar at psarkar@pionline.com