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Jake joined in 2013 as Head of Lipper UK & Ireland Research. Since 1998, he has specialised in mutual fund research & selection, fund-of-funds portfolio management and asset allocation strategies. He spent six years as a portfolio manager and fund selector at AIG and has been a mutual fund research specialist for Lloyds Banking Group, Towry and the Commonwealth Bank of Australia. He is a trustee director of the Thomson Reuters UK Pension Plan. Jake is a Chartered Member of the Chartered Institute of Securities & Investment (CISI) and a Senior Fellow of the Financial Services Institute of Australasia (Finsia).

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Fund Manager Briefing: SVS Church House Tenax Absolute Return Strategies Fund

Fund Manager Briefing: SVS Church House Tenax Absolute Return Strategies Fund

Jake Moeller reviews highlights of a meeting with James Mahon, Chief Executive Officer of Church House Investment Management and co-manager ofTenax Absolute Return Strategies Fundon January 26, 2016.

Dorset-based Church House Investments has been quietly flying under the radar since 1999. Formed from a small regional bank (sold to Virgins Richard Branson in 2010) with a private client base,Tenax Absolute Return Strategies Fundwas created in 2007. Originally seeded with around 10 million of an individual clients money, the fund has recently begun to gain a wider following, picking up a number of industry awards and ratings along the way.

James Mahon, Church House CEO and co-fund manager: Tenax Absolute Return Strategies Fund.

There can be no doubt that the start of 2016 has been tumultuous for investors. The FTSE All Share Index has fallen nearly 12% since the start of the year (to February 11, 2016), and the CBOE VIX is trading at a year-to-date high of $28 (as of February 11, 2016)up from $18 at the start of the year. For Mr. Mahon the only solution for such a market is diversification. We are committed to beating a risk-free rate, he states. This simply comes from our founding ethos, which was preserving client capital in all types of markets.

Table 1. CBOE Market Volatility Index year to date (February 11, 2016)

The Tenax fund aims to generate a positive return over any one-year period; it follows a three-month Libor GBP benchmark. The fund is a highly diversified portfolio of assets including shares; plain-vanilla bonds; alternatives; and real assets such as property, infrastructure, and some private equity. The funds current largest exposure is to floating-rate notes (+30%), which Mr. Mahon (and comanager Jeremy Wharton) have implemented as an interest-rate hedge, and over 10% cash and short-dated sovereigns. Buying bonds to hedge our interest-rate risk was too expensive, states Mr. Mahon, so we have been patiently building up our FRN position, since we see these as the most effective instruments in this current rates environment.

Table 2. Five year performance of Tenax Absolute Return Strategies Fund within quartiles of IA TAR sector (in GBP to 31/1/16)

Source: Lipper, Lipper for Investment Management.

The asset allocation process of this fund is by Mr. Mahons own admission more art than science. Both Mahon and Wharton are fans of SwensensYale asset allocation model, which they loosely use as a theoretical underpinning for fund construction. However, they dont advocate the high exposure to equities that Swensen does. Both Swensen and Buffett have been vulnerable to short-term volatility, states Mr. Mahon, and Church House has rarely exceeded 20% exposure to equities across the total portfolio. Indeed, any equities exposure traditionally exhibits a defensive high-quality value bias with lower betas and incorporated stop-loss positions.

Table 3. Five year performance of Tenax Absolute Return Strategies Fund vs FTSE All Share & Libor ( to 31/1/16)

Source: Lipper, Lipper for Investment Management.

The managers have a macroeconomic top-down overlay that they use to help identify preferred sectors in which to invest. In the absence of a neutral strategic asset allocation position it is difficult to quantify how these tilts manifest themselves. There is no black-box or resampled optimizer to be found here. Mr. Mahon again refers to the art of blending. Our focus is on the selection of individual securities, he states. For each asset class the primacy is on finding the highest probability of meeting our positive return objectiveits how we think about everything, even equities.

Portfolio turnover is very low in this fund, and it is clear that trading on short-term opportunities is not a high priority. We recognise there is a weakness in equities markets at the moment and some value is appearing, states Mr. Mahon. However, were not rushing in to buy equities just yet.

Table 4. Five year risk/ return chart of Tenax Absolute Return Strategies Fund within IA TAR sector (in GBP to 31/1/16)

Source: Lipper, Lipper for Investment Management.

The performance ofTenax Absolute Return Strategies Fundwithin the IA Targeted Absolute Return sector has generally remained within the second quartile (see Table 2.) but with one of the lower risk profiles of all constituent funds. Risk/return analysis sees Tenax on the border of the preferred northwest quadrant over five years (see Table 4.) and the fund is a top Lipper Leader scorer over both the three- and ten-year periods (see Table 5.). The fund has fallen only 1.6% year to date (as of February 11, 2016) compared to an 11.4% fall for the FTSE All Share.

Table 5. Lipper Leader Scores Tenax Absolute Return Strategies Fund (to 31/1/2016)

Source: Lipper, Lipper for Investment Management

The Tenax fund is marketed as a potential preretirement-phase investment, and although this fund is by no means a cash substitute, it will be appealing to a wider group of investors in these volatile times. It has a durable, low-volatility track record and has two highly experienced and unapologetically conservative managers at the helm.

For highly process-driven investors the funds lack of formal asset allocation constructs might pose a problem, but for investors seeking genuine drawdown resilience and a diversified portfolio this fund has readily attractive features. The fact that the original seed investor remains in the fund is some reflection of the regard in which the managers of this fund are held.

Lipper delivers data on more than 265,000 collective investments in 61 countries.Find out more.

This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.

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