BlackRock Hedge Selector: Seeking Quality And growth
Edison | Mar 19, 2014 07:30AM ET
Long/short expertise in UK small- and mid-caps
BlackRock Hedge Selector Ltd, (BHUE) is currently has one class of share (BHUE) acting as a feeder for the BlackRock UK Emerging Companies Hedge Fund. After the strong run enjoyed by small- and mid-cap companies over the last three years, investors may now appreciate the merits of a fund focused on taking advantage of differentiation between companies in this area, through a long/short strategy. Ralph Cox will assume sole responsibility for management of the fund while co-manager Richard Plackett completes a six-month sabbatical from April this year.
Investment strategy: Seeking quality and growth
The managers of the UK Emerging Companies Hedge Fund follow a fundamental, bottom-up approach to selecting positions. For long positions they look for companies with sustainable market positions, good cash generation, healthy balance sheets and strong management. They have a bias against turnaround stories and a preference for companies with a record of delivering EPS growth. The criteria for short positions are a mirror image of the long criteria, with the managers indicating that they have had a number of successes when identifying financially vulnerable companies. Close attention is paid to holding size, with long positions typically in the 0.3% to 3.0% range, while risk/liquidity considerations mean short positions normally fall in the 0.5% to 1.0% range.
Market outlook: Good time to think alternatively
The Numis Smaller Companies plus AIM (ex-investment companies) Index was up 27% in the year to end January and has outperformed the FTSE All-Share Index by 50% over three years. While the recent positive surprises on UK GDP growth suggest scope for small-cap earnings growth to follow suit, some investors, particularly those whose time horizon is uncertain, may feel uncomfortable initiating or adding to straight small-cap exposure at this point. Through its long/short positions, BHUE offers selected exposures to individual companies and relatively low correlation with the equity market; this could be an attractive option in this climate, particularly if, as the managers expect, individual company performance becomes more differentiated.
Valuation: Marginal premium
Implementation of a quarterly redemption facility has seen BHUE shares move to a marginal premium to NAV. The most recent redemption opportunity (for March 2014) only attracted applications for 0.4% of the shares, suggesting any selling pressure may have abated.
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