130/30 Strategies Invade Fund Industry
July 23, 2007
The first of a new wave of 130/30 long/short mutual funds are hitting the mainstream investment landscape. They are taking their cue from the institutional arena where 130/30 strategies have been a scorching hot commodity and are rolling out to clients at a record pace.
Both new mutual funds and their institutional separate accounts employ this so-called "130/30," which is also known as a short-extension or "edge" investment strategy. It entails investing 130% of assets in long equity positions, with 30% of assets shorting stocks.
Shorting is a technique whereby a manager sells a stock that has been borrowed with plans to later buy the stock, hopefully at a lower price than it had been sold at, and then returns the borrowed security and pockets the difference as a gain. The manager typically uses the proceeds from the short sales to purchase the additional 30% long positions. The result is a 100% exposure to the underlying benchmark, allowing for the potential to pump up performance over more traditional long-only strategies if the manager's long and short equity bets are right.
Estimates are that between $30 billion and $65 billion in assets are now invested under this mandate across the investment management industry.
But don't call these 130/30 funds "alternative" investment products. Managers are quick to stress they belong within a standard equity allocation and aren't hedge funds.
ING Investment Management was the early pioneer, with its ING 130/30 Fundamental Research Fund debuting in April 2006. But the fund has only attracted $11 million so far, according to data from Morningstar of Chicago.
This past June, MainStay Investments, the retail distribution arm of New York Life Investment Management of New York, launched two 130/30 domestic equity mutual funds, with a third, an international fund, expected to debut at the end of August.
On July 2, Fifth Third Asset Management of Cincinnati launched both an institutional 130/30 investment strategy as well as an open-end 130/30 mutual fund called the Fifth Third Structured Large Cap Plus Fund.
More 130/30 mutual funds are in registration awaiting the green light from the Securities and Exchange Commission, at the same time that many institutional managers are readying brand new 130/30 portfolio capabilities of their own. State Street Global Advisors of Boston now manages $10 billion under the mandate, which it refers to as "edge strategies," although it doesn't manage a 130/30 mutual fund.
Among the fund advisors jumping into the fray are Dreyfus of New York, which has registered its Dreyfus Premier 130/30 Growth Fund. It will be sub-advised by parent company Mellon Capital, which itself has a U.S. Core Equity 130/30 Fund now pending that will be managed by affiliate The Boston Company Asset Management.
And last week, Munder Capital Management of Birmingham, Mich., registered the Munder Small-Mid Cap 130/30 Fund. It will invest in companies with market caps between $750 million and $15 billion.
Others may be ready to employ the strategy, but it's often hard to tell just by fund names unless the fund imbeds the 130/30 into its moniker.
Case in point: This past May, Russell Investment Group of Tacoma, Wash., which utilizes multiple managers to run pieces of its proprietary mutual funds, announced that it had given one of its sub-advisors the mandate to use the 130/30 strategy for portions of two of its funds.
Sub-advisor Aronson + Johnson + Ortiz, which manages a 22.5% slice of both the Russell Quantitative Equity Fund and Equity Q Fund, shifted those assets to a 130/30 strategy.
So far, most of the 130/30 strategies have been employed within the large-cap stock universe, but managers will find the strategy works well in the mid- and small-cap markets and international markets, as well, said Jocelin Reed, a 130/30 portfolio manager with Mellon Equity Associates in Pittsburgh. Mellon just rolled out its third 130/30 portfolio strategy to institutional investors.
"Investors and money managers are looking for extra alpha, the return in excess of the underlying index's return, out of a really plain-vanilla asset class," she said. Academic and industry research has shown that the strategy can make a portfolio much more efficient to run, she noted.
The approach allows managers more flexibility to increase positions of the stocks they like and decrease exposure of the stocks they believe are overvalued or poised to fall.
"We can generate alpha on both wings of the model," explained Keith Wirtz, president and chief investment officer of Fifth Third Asset Management. He noted that his firm spent over a year developing its 130/30 strategy and believes it fits perfectly within his firm's quantitative investment group, which uses proprietary models to rank stocks with the best and worst forecasts.
The increased exposure to both long and short positions offers the promise of better investment returns. "It's a new and improved version of what we've been doing all along," Wirtz added. "It allows up to project positive and negative views. In the past we were handicapped."
"There's been a fair amount of convergence between the retail space and the institutional space," said Mike Coffey, managing director and head of distribution at MainStay Investments. "High-net-worth investors are continually seeking different investments to help them meet their objectives," Coffey commented.
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