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

Finacial products from our partners
Property search
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: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    SThree: Recruitment Resourcer

    £20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn