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EUROHEDGE: FUND PROFILE
January 2013

Broadwalk on a roll with unique services vehicle

Ex-Panmure Gordon/Cazenove man Charlie Cottam is racking up a striking track record as he nears the five-year mark with his niche long/short equity strategy at Broadwalk Asset Management, returning 26% in 2012.

The last 12 months have been an excellent time for the Broadwalk Select Services Fund — the specialist long/short equity offering managed out of London by Charlie Cottam, which focuses on investing in listed services companies.

While some equity hedge funds struggled to stay on course in 2012, the majority succeeded in posting a positive return – and the EuroHedge European Equity GBP Index was up by a reasonable 7.95% for the year. But Broadwalk’s annual gain was well above average, returning 26.05% to notch up its second-best year since launching in mid-2008.

"We've been quite bullish – probably more than many other managers," he says. "We were around 64% net long in January 2012, which I think was a bit higher than the average fund."

The fund invests primarily in UK-quoted stocks, but Cottam points out that these companies provide a lot of exposure to the rest of Europe and the US. The fund is not specifically UK-focused, and he plans to invest more widely as the fund grows.

Broadwalk's investors are mostly high-net-worth individuals, and the firm has attracted inflows via Swiss private banking channels. As the fund approaches the five-year mark in June 2013, Cottam hopes this milestone – coupled with strong performance – will draw new investors to his specialist strategy.

"There has definitely been more interest building as 2012 progressed, and we believe that performance will continue to be good," he says.

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SIMON KERR'S HEDGE FUND BLOG

Views on the hedge fund industry and traded markets
24 December 2009

A Creative Way to Build a Hedge Fund Brand Name
� Broadwalk Asset Management.

I was listening to trader trainer Michael Martin interview Jim Rogers on his excellent website (http://martinkronicle.com/), and I heard Jimmy Rogers say that investors should stay with what they know and are interested in. In working with portfolio managers I often ask them which sectors or types of stock they are good at investing in, and which they can’t seem to get right. It may be they can’t read retailers, or always seem to mis-time growth stocks, but it is very important to eliminate what you are not good at as a trader or investor. I think of it as playing defence to some extent � by eliminating a repeated error, and focussing on what you are provenly good at your returns have to improve.

There may be an element of ego involved – it may seem a sign of weakness on the part of a money manager to leave out a sector or type of stock from their universe. But investors, and ultimately the manager, will only be interested in the scale of returns achieved. So my conviction is to put the ego to one side, check the data, and eliminate areas of weakness. For example I worked with a manager who occasionally dabbled in the financial sector, but whose major strength was in consumer-related sectors. Analysis showed that the hit rate (percentage winning trades) was a lot lower in financial stocks than in other sectors, and I advised leaving the financials alone. Losses in the financial positions were slightly larger than those typically tolerated. If anything the stop-losses should have been tighter and positions sized smaller initially.

The ultimate specialism is sector funds, a strategy area I hope to return to shortly in more detail. In Europe we have begun to be used to hedge funds specialising in sectors, though they are a well established and successful phenomenon of the US hedge fund industry. Investor interest in sector hedge funds should be strong – the return data suggests they can offer enhanced return and lower correlation with markets if the funds have an appropriate framework for portfolio structure. The evidence for this contention is stronger at the manager level than at the index level - there is scope to add a lot of value to a portfolio hedge funds through manager selection in sector funds.

I came across an unusual sector fund this month. The Broadwalk Select Services Fund, run by Charlie Cottam, is Europe’s first "Services" sector focused fund. The Fund has been going since June last year, and it has been going rather well. Most hedge funds made money in the first half of 2008 and lost more than their first half gains in the second half of the year. The Broadwalk Select Services Fund was up 1.3% over the last seven months of 2008 through putting in four down months and three up months. Obviously the average up-month in 2008 was bigger than the average down-month!

Charlie Cottam preserved capital well in the first few months of this year, and did better thereafter: through the end of November the Fund is up 44% for the year. The relevant market index for the fund is the FT-All Share Index (the Fund concentrates on UK companies), and that benchmark was down in four months of 2009, and the Fund managed by Broadwalk Asset Management was down in only one of those months. Over the whole life of the Fund the FT-All share has been down 14.6%. According to the manager he didn’t get properly invested until February/March of this year, but once he did he made excellent returns through stock selection – the net is now about 80%, and the fund is concentrated (large position size).

The manager of the Fund claims two forms of competitive edge: better information and original analysis. The original analysis comes from Cottam’s experience on the sell-side. As a chartered accountant himself he sees accounting issues not well understood by those analysing the service sector specifically. He may have a point as there are few sell-side analysts in the sector with similar tenure as an analyst. The manager himself sees an advantage in his ability to use his been-through-the-cycle experience to turn around his conception on a company and stock quickly – he can grab an emerging opportunity at the time when other analysts are getting out their apocryphal pen to write a research note.

Cottam is an experienced sell-side analyst, and in that may be a true edge as he was company broker to 33 UK corporates. This unique arrangement for UK quoted companies – a corporate brokership for each quoted company – gives the appointed broker a privileged position in terms of access to management. Cottam has kept his company network intact as he has moved to the buy side. His management contacts and experience of individual management teams based on their historic behaviour helps Cottam to spot the early warning signs of change in outlook for companies and sectors. His sell side experience enables him to understand the flow information on stocks and their relative positioning in the market.

So Charlie Cottam uses his deep experience in service companies to extract alpha – staying with what he knows and is interested in. He has also taken steps to reinforce his edge by keeping senior management engaged with Broadwalk – last year he initiated the Broadwalk Business Services Awards. This is the second year of the Broadwalk Business Services awards to recognise outstanding achievements by quoted companies in the business services sectors. The UK often leads the world in business services -it is one of the less well-known success stories of the economy, and these awards are a step towards raising its profile. The categories and 2009 winners are: Company of the year (Aggreko), CEO of the year (Nick Buckles, G4S), Chairman of the year (John Peace, Experian), Deal of the year (Balfour Beatty - Parsons Brinkerhoff), Small company of the year (Hargreaves Services), and Entrepreneur of the year (Michael O’Leary, Ryanair).

I think this is a terrific example of creative thinking by a hedge fund manager, and Charlie Cottam’s entrepreneurialism and unusual means of brand building are to be commended.

http://simonkerrhfblog.blogspot.com/