Christian Thum "on a roll" this year with new fund at Mako Global Investors
By Staff Writer
Fri Jun 26, 2015
A veteran of Goldman Sachs, Merrill Lynch and Marble Bar, Christian Thum is making good progress so far this year with his new fund at Mako Global Investors – applying his long-running and distinctive approach to European long/short equity investing with a dual emphasis on cyclical industries and the German-speaking markets.
CT Invest, a new European long/short equity fund managed by experienced stock-picker Christian Thum at London-based Mako Group, is performing extremely well in what will be its first full calendar year of trading – having returned more than 15% for the first five months of 2015.
The fund’s performance to the end of May puts it comfortably ahead of most of its peers for the year to date, with the EuroHedge European Equity USD Index currently showing a median return of 6.72% since the beginning of January.
CT Invest posted some particularly punchy numbers in January and February, when it made 7.75% and 6.70% respectively as Thum’s bullish outlook for Europe began to bear fruit thanks to a widespread rally in the equity markets.
The strategy launched in October and is a generalist fundamental European long/short equity fund, focused squarely on bottom-up stock picking. It distinguishes itself from the pack in part because of its two main areas of focus: a geographical emphasis on the German-speaking countries, and a sector bias towards European cyclicals and industrials.
Thum has been running long/short strategies with this remit for more than a decade – and has been honing his expertise in the Germanic markets and European industrial sectors over the course of his entire 20-plus year career.
The 'CT’ in CT Invest, Thum started out at Salomon Brothers Asset Management in 1994. The following year he joined the equity division of Goldman Sachs Frankfurt, where he later became head of the German shares equity trading desk, managing a team of six traders.
After transferring to London with Goldman, he joined Merrill Lynch in 2004 and helped to co-create its Strategic Investment Group, an internal hedge fund unit. It was here that Thum first ran the strategy he now employs via CT Invest – he managed more than $1 billion in his long/short equity portfolio at Merrill, and led a team of over 20 investment professionals with a combined portfolio of several billion dollars. In 2008, he moved to Marble Bar Asset Management as a partner, where he continued to apply his Germany-biased investment strategy as a component of the firm’s main fund. From 2011 he was a portfolio manager with the fast-growing Brazil-headquartered global investment banking and asset management group BTG Pactual, before joining the Mako Group’s proprietary trading desk in 2013.
The Mako Group started life as a niche trading house in 1999 and has gradually expanded to become a diverse financial services group. For a time the firm was backed and partially owned by Close Brothers, until Mako began to repurchase Close’s stake in 2011.
CT Invest comes under Mako Global Investors, a relatively new structure within the group that was established in 2012 with a view to developing a small range of distinct hedge fund strategies on an opportunistic basis. At present, Thum’s fund is the only vehicle structured under the MGI banner.
Despite performing well so far this year, the fledgling fund got off to a relatively rocky start upon launching in October last year – and ended 2014 down 3.74% for the three months it traded.
"October was a difficult month, but we were actually pretty flat for October and November – and then December was down," says Thum of a month in which his fund lost 3.6%.
He puts this somewhat jittery start down to timing, and points out that his fundamentally positive view on Europe was perhaps a little ahead of the game. "The market was focusing too much on the weaker numbers that had been coming through during the second half of 2014, but the underlying European market was pretty good," says Thum. "So we were simply positioned a bit early."
CT Invest has more than gained back that lost ground this year, though, and the fund has profited as European equities have rallied. Indeed, Thum points out that the state of the markets at launch meant he was able to buy into some attractive opportunities at particularly low valuations before prices started to rise.
"Valuation and earnings are the two factors that are absolutely key to a fundamental strategy," observes Thum. "Then I try to avoid positions that are too crowded and I try to get in early, which is when I find often you can make the biggest return."
His desire to avoid crowded trades and correlation is one of several reasons for a focus on German-speaking Europe. "I’m German myself, I’ve worked in those markets during eight years at Goldman, and I know those markets very well," he explains. "I think everyone has a tendency to gravitate towards what they know best."
He continues: "I also think it’s true that there are very few German long/short managers out there, which gives you a certain edge as it means there are a lot of companies in that market that are probably under-researched. So the fund is pan-European, but we’re doing more in Germany than the average French guy or British guy would do."
Around 35% of the CT Invest portfolio is currently invested in Germany, and Thum’s other specific area of interest – pan-European cyclicals – also represents a hefty weighting.
With one major theme being geographical and the other a sector play, there is naturally some overlap between these two areas of focus. As a general indicator, Thum estimates that between 40% and 60% of the portfolio at any given time will be allocated to opportunities in the German-speaking countries and/or European cyclicals.
The fund’s pan-European industrials coverage includes electrical and mechanical engineering; defense and aerospace; steel; construction; trucks and autos; airlines and transport; and chemicals. Sectors not covered here, but incorporated within the fund’s coverage of the German-speaking countries, include consumer; TMT; utilities; pharma; financials; and mining.
"We’re reasonably diversified: the biggest contributor year to date has only added around 260 basis points to our overall return, so we’re certainly not dependent on one or even a handful of key stocks," says Thum.
The fund typically holds between 25 and 35 long positions. The largest positions are capped at a maximum 10% of the portfolio, but in practice are closer to 6-8%. The portfolio usually contains a similar number of shorts, but these positions are usually somewhat smaller than those in the long book.
Holding periods vary from position to position, but on average a stock might be held for anywhere from six to 18 months, says Thum. "It’s not just a case of buy-and-hold; we actively manage the position during that time," he continues.
"So we might add to the position if it’s at a low valuation, or sell some when it’s high – which then allows us to purchase more at a later date when the price has come down. That’s a very good way of adding alpha."
As a bottom-up fund, Thum is primarily concerned with the case for individual companies, and he says that macro views do not play a major role in his decision making. But it would be wrong to assume that he ignores the macro and geopolitical environment altogether. For example, he has avoided investing in Greek companies against the backdrop of the ongoing economic crisis and looming threat of 'Grexit’.
Thum believes a solid fundamental approach to equity investing will inevitably reflect the top-down picture. "The macro shows itself in stock valuations," he says, observing that in 2012 and 2013 "prices became very attractive because people were very scared of the macro. The bigger picture – those concerns – were driving valuations down and enabled us to pick up stocks at very attractive levels."
Thum expects European equity markets to continue to rise until the end of the year, driven by improved earnings that will mostly benefit cyclicals, value stocks and financials.
He points out that the past five Eurozone economic upcycles have lasted between eight and 21 quarters, whereas the current one is only five quarters old. Meanwhile, 73% of European companies have beaten top-line estimates; earnings-per-share revisions have turned positive; and other indicators such as consumer confidence, loan demand and supply, and GDP expectations have all been on the rise.
Thum is supported by a three-strong research team including senior analyst Oliver Hampe – a longstanding colleague who worked within Thum’s team at Goldman in Frankfurt and later rejoined him at Merrill Lynch.
Encouragingly, CT Invest has grown its asset base relatively quickly in the eight months since launch. The fund started out with $15 million in a founder share class that offered preferential fees to those investors prepared to allocate early; since then, assets under management have increased tenfold and the fund currently manages some $153 million.
Thum points out that the fund’s focus on large and mid-cap stocks means there is plenty of growth potential – with a likely eventual capacity for the strategy of around $1 billion.