Taquanta Absolute(ly) Tops

January 2009

In a year in which over two-thirds of the country’s Absolute Return Funds failed to achieve a positive return, Taquanta Asset Managers’ two absolute mandates were the only funds to beat CPI with returns of 12,1% in the 12 months to end-November 2008.

As a result, the funds – Taquanta Absolute and Taquanta Domestic Absolute Return – jointly topped the list of best Absolute Mandate performers for the period, as published in the Absa Monitor For Retirement Funds. The average fund in the survey lost nearly 1% over the period.

Stephen Roberts, head of Taquanta Asset Managers’ Quants operation says 2008 was a dreadful year for investors, with the main equity indices plummeting more than 26%.

“Investors generally look to Absolute Return Funds for security and certainty, expecting them to generate positive returns, irrespective of market conditions. These instruments have become increasingly popular in recent years because they carry the inherent promise never to deliver anything less than a positive return. However, as we anticipated early in 2008, the majority of Absolute Return Fund investors ended the year sorely disappointed.”

Of the 40 funds falling within the Absolute Mandate category, 27 (67,5%) had negative returns for the year. Generally, the higher the fund’s benchmark (ie its target return of CPI or CPIX plus a percentage), the worse the fund performed in real terms. For example, all six of the funds with benchmarks of 19,1% (CPIX plus 7%) turned in negative performances ranging from around -3% to -14%. The group of funds with benchmarks of 18,8% (CPI plus 6%) also fared poorly. Only one out of eight achieved a positive return (0,8%) with the worst performer ending the year at -3,7%.

According to Roberts, Taquanta cautioned in 2007 of the prospect of an equity meltdown, holding the then unpopular view that equity valuations were stretched and that the risk was unlikely to be rewarded. “We began to scale back on equities early and thus when calamity struck in September and the bloodbath continued throughout October and November, our clients were largely insulated from the turmoil,” he explains.

Taquanta adopts a ‘cash plus’ strategy to its Absolute Return offerings and combines this with a Price Indifferent Investment (PII) quantitative active value tilted stock picking strategy and a Dynamic Equity process. The Dynamic Equity process ensures Taquanta not only takes appropriate action to protect portfolio performance, it allows for risk to be increased at appropriate points.

“This means we will invest in equity when the risk/reward ratio is acceptable. At present, although many equities are offering better value than they were prior to the meltdown, we believe equity prices could make new lows at some point over the next 12 months.

“However, as prices decline, opportunities will arise to purchase value stocks. Our Dynamic Equity process allows us to unlock value. With equities becoming cheaper, we will take more equity risk,” Roberts concludes.

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