Ben Yearsley: 'Master of Disaster' sees more trouble in Europe

The Analyst

Leonard Charlton, manager of the Melchior ST European Absolute Return fund, has a reputation for identifying companies whose share prices are likely to fall. He has proved so adept at this during his career that colleagues dubbed him "The Master of Disaster". Despite being an unlikely moniker for a highly successful fund manager it fits, especially given his current views.

Mr Charlton is currently more concerned over the wider economic environment than at any time since launching the fund. French and German purchasing managers' index (PMI) figures, a key measure of economic health, are at levels last seen in November 2011, prior to the European Central Bank's (ECB) long-term refinancing option (LTRO) which provides cheap funding to banks.

Unlike many fund managers and commentators, he does not believe the LTRO is a game changer, although banks would be in worse shape without it. Stock market volatility is therefore likely to continue for the next three years, in his view, as Europe's problems are simply being kicked down the road.

With this fund, Mr Charlton aims to deliver 5-10 per cent growth per year regardless of stock market conditions. He wants the fund to be uncorrelated to stock markets, so whether they are going up, down or sideways the fund's return should be indifferent. To achieve this he can buy shares in the anticipation prices will rise (long positions), or go "short" to benefit from falling prices. If Mr Charlton sees more opportunities for share prices to rise, long positions will outnumber short positions and vice versa if he believes stock markets will fall. This means the overall portfolio will be described as "net long" or "net short" respectively.

Presently, the fund is 4 per cent net short. This has been the wrong positioning so far in 2012 as the fund has been positioned for falling stock markets at a time when they have been rising. He is apologetic for the resulting poor performance, but his conviction is unwavering – he sees economic problems ahead and believes markets have risen too far too fast.

Nevertheless, Mr Charlton recognises the importance of being pragmatic. If China began to loosen monetary policy, reducing interest rates or increasing investment for example, to boost growth; or if the ECB started to print money to buy sovereign debt, it could signal a turning point for the global economy. Either of these events could cause him to review his stance and bring the fund back to a neutral or long position.

The portfolio is fairly concentrated with just 53 holdings at present. Mr Charlton aims to own quality businesses, while shorting those he believes to be poor. Notable holdings include the advertising agency WPP and Aegis, the media and digital marketing firm. He believes both can benefit from increasing online spending by consumers.

He also likes BSkyB, which he suggests could win the next round of rights to broadcast English football at a favourable price. Another favoured position is Pirelli, which has refocused itself from a large conglomerate encompassing telecoms, real estate, broadband, and, most famously, the tyre division, to concentrate mainly on the latter. Despite record increases in the price of raw materials Pirelli expanded profit margins in 2011 and is placing greater emphasis on its more profitable range of premium tyres.

This is a core holding designed to smooth out the volatility of stock markets for long-term investors. It is unlikely to perform in the same way as more traditional funds, lagging behind in stronger markets while providing some protection in weaker markets. I believe Mr Charlton's robust process has been a key driver of the fund's success since launch. It had a great 2011 and despite the poor start to 2012 he remains convinced he can return the fund to profit this year. The only drawback is the performance fee levied in addition to the standard annual charges.

If you share the view that the European debt crisis is far from over, this fund could be worth considering as part of a defensive portfolio.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Sport
Australia vs New Zealand live
cricket Follow over-by-over coverage as rivals New Zealand and Australia face off
News
Zayn has become the first member to leave One Direction. 'I have to do what feels right in my heart,' he said
peopleWe wince at anguish of fans, but his 1D departure shows the perils of fame in the social media age
Life and Style
Researchers found that just 10 one-minute swill-and-spit sessions are enough to soften tooth enamel and make teeth vulnerable to erosion
health
News
i100
Arts and Entertainment
The Regent Street Cinema’s projection room in the 1920s
film
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing