Mike Taylor, managing director and executive chairman of New Zealand boutique absolute return fund management house Pie Funds is on a quest to find his fellow small cap absolute return funds across the globe as he puts together his first focused fund of funds.
Pie was founded in December 2007, which with the benefit of hindsight was a pretty tough date to launch. "The global financial crisis hit as soon as we started" Taylor says in an interview with Asia Pacific Intelligence, "but it provided a great opportunity. We just had to survive 2008 and if you were there at the end you could capitalise when markets rebounded."
Pie has NZ$100m ($85m) under management in three funds, having started with just NZ$3m ($2.5m) in 2007 and has, as the only small cap specialist manager in New Zealand, carved out a niche in the space. The current three funds are the Pie Australasian Growth Fund, the Pie Australasian Dividend Fund and the Emerging Companies Fund. The planned new fund will be a Global Small Companies fund of fund.
The Growth Fund is in the top 50 funds globally out of over 180,000 ranked by Morningstar for five year returns, with a five return to 31st March of 27.6% per annum, 29.8% for the last year while the Dividend Fund has achieved 50.7% in the last 12 months.
The outstanding performance is partly down to Pie's policy of capping the amount of capital they will allow into a fund. "If we removed the cap we would get significant demand from investors but it would be detrimental to returns" Taylor says.
Investors come from the retail sector in New Zealand, attracted, Taylor says, by: "The daylight between us and our competitors in terms of performance." The New Zealand hedge fund industry remains a pretty small place with not too many funds, controversially lying at the bottom of the Morningstar listings of global fund industries. Taylor finds that his investors are generally people with a decent pot of money who want to allocate a little to a riskier investment, focused on producing returns.
The policy of capping capacity in Pie's existing funds has encouraged organic growth and now the firm wants to offer their investor base something else other than Australasia, hence the global quest. But based at the bottom of the globe, research can be difficult. "We would require a significant team of people on planes going out all over the world" Taylor says, so the firm is conducting its research to find other managers who look like them through data research and networking.
Taylor wants managers whose first goal is return; who have high conviction, a focus on small caps, not owned by an institution and who focus on performance to grow funds under management. Ideally these entrepreneurial fund groups will come from the US, Europe, the UK, Latin America, Asia and the emerging markets. Taylor says: "Initially I thought it would be relatively easy to find people who look like us but it's actually quite hard."
Taylor was inspired to set up a fund management firm because he found that retail managed funds in New Zealand were serial underperformers. "I found from my own personal investing that without too much difficulty I could perform quite well" he says, having managed his own portfolio and that of friends and family for some 10 years prior to establishing Pie.
Risk management for Pie comes through derivatives use and an ability to cash up to 100%. "We aim for lower volatility than the underlying indices in Australia and New Zealand - clients don't like volatility" Taylor explains. "The funds are very actively managed because in the small companies space things can change quite rapidly and we are not ashamed to admit if we get something wrong - if something changes we cut the investment" he says.
His aim for the new global fund is to have one of the lowest fee structures possible in a fund of funds; a concentrated portfolio which is absolute return but long only; an ability to show consistent alpha;‚ it will be capped at $250m and the sub funds that Taylor is looking at must 'eat their own cooking'. "The manager must have skin in the game" Taylor says, and he holds no equity investments outside of the Pie funds, having invested in both the Pie Australasian Growth Fund and the Pie Australasian Dividend Fund since inception.
Taylor was part of the 2010 Opalesque New Zealand Roundtable. You can read that here.
(This piece first appeared in Opalesque's AMB in April.)
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.