London-based hedge fund firm Sloane Robinson produced five straight years of disappointing results in one of its main funds, but appeared to have turned things around last year with a huge gain. But the fund has fallen off the performance wagon once again.
The firm’s SR Global Fund-International lost 14 percent in the first half of the year, and this is after it had gained 4 percent in June, according to its latest monthly investor report, obtained by Alpha. This must be a huge disappointment to not only Hugh Sloane, who runs the fund, but to investors as well.
Last year, the portfolio, launched in 1994, surged more than 36 percent after five very tough years, including three in which the fund fell by double-digit percentage rates. Its worst year was 2011, when it lost 24.3 percent.
Meanwhile, Sloane Robinson’s Japan portfolio is down more than 12 percent in the first half of the year, while two funds launched or reconstituted at the beginning of 2013 are barely profitable. Global Opportunities is up just 1 percent, while Emerging Markets is up 0.2 percent. The only bright spot this year is the firm’s Frontier portfolio, up 13.8 percent.
Sloane has hitched a major portion of the International portfolio’s fate to the Japanese market. He is 40 percent net long Japan, by far the biggest gross or net exposure to any country. The next two countries with the largest net exposures are the Netherlands, at 8.6 percent, and the U.S., at 5.9 percent.
Sloane is apparently sticking with this conviction, telling clients that Japan remains the cheapest of the major markets, “with the most rapid and improving profits growth and with the most accommodative monetary intent.” He adds that this combination is unlikely to be sustained, resulting in higher equity prices.
He stresses the portfolio remains “strategically hedged.” Noting the yen has risen more than 3 percent in the first half of the year, Sloane tells clients he does not expect the Bank of Japan to further ease monetary policy, but nonetheless expects the yen to weaken.
“Against the U.S. dollar, yen weakness would likely be catalyzed by a resumption of the rising trend in U.S. interest rates,” Sloane states in the report. He thinks U.S. rates will rise based on three major factors — Fed tapering, a belief that the U.S. economy is strengthening and “clear signs” of wage growth.
He acknowledges that historically, wage growth amid accommodative monetary conditions leads to rising inflation and therefore rising rates. “In spite of the Fed Chairwoman’s renowned dovishness, we think higher rates are probable next year and that asset markets will begin to discount this,” Sloane explains.
He thinks the more vulnerable equity markets are the U.S., due to its high valuations, and Europe, due to what he calls the absence of profits growth. Sloane says these concerns led to his reduction in the International portfolio’s gross long position, to 81 percent in equities and hedges in European and Hong Kong indices. However, he says he is maintaining his long-term holdings in gold and index-linked bonds.
Among sectors, Sloane’s biggest net exposure is to financials, at 14.8 percent, followed by consumer discretionary and IT/telecom, each at 12.6 percent. His top four stock positions as of the end of May — the latest for which such information was available — were Japanese stocks: Kenedix, a real estate company; semiconductor maker Rohm; Astellas Pharma, a drug company; and auto parts maker NGK Spark Plug. They are followed by the lone U.S.-based top-ten holding, Halliburton.
Sloane Robinson was founded in 1993 by Sloane and George Robinson. At the end of 2007, it managed $15 billion. However, after several years of big losses in a number of its funds, assets had shrunk to less than $3 billion under management one year ago and $1.6 billion at the beginning of this year.
