works hard on basic measures of performance like free cash flow generation to come
to an understanding of what he thinks a company isworth. Hewants, through research,
to identify stocks that are not being correctly valued and then assign them a target
price, buying and holding them until that price is achieved. He is happy to hold the
stock for a year or so if the price is rising. In fact core positions in his fund may
be held for two years with positions actively traded. He spends a lot of the research
time working on themes, like the German banking story, or new legislation where the
impact on stock prices has yet to be recognised by the market. He uses stop-losses on
both long and short holdings to minimise losses, which raises the level of trading the
fund does to protect assets.
No hedge fund manager can exist in a fundamental bubble, and Browne’s asset
allocation approach within the fund is based on a top-down model of the world. He
has very clear ideas about the direction in which the world economy is travelling and
those ideas shape his current positive outlook on the equity markets. In Browne’s
model Europe has some issues to face that will weaken interest in equities, but he
says there are sufficient new catalysts to enable an astute asset manager to uncover
undervalued stocks.
The $360 million long/short fund is diversified across industries, market caps and
countries and there is a bias against over-weighting in one industry or market. Browne
has managed the fund since the beginning of 2001, after operating a hedge fund at
Chase for three years. In the bear market of 2000–03 the fund made money in every
year. Measured against the Dow Jones Stoxx index of European companies it was up
11% in euros in 2001 against the Stoxx 50’s minus 18.7%. In 2002 it returned 6%
against minus 35% for the Stoxx 50. In 2003 the fund made 2.2% against the Stoxx
50’s 10.5%.
As with most hedge funds the investment philosophy is absolute return, with the
standard 20% performance fee; Browne’s in trouble if the fund losses money. The
focus on absolute return means that funds like Browne’s sacrifice performance for a
lower risk profile. The benefits of that are evident in a bear market where they still
make money, but during a bull market they can lag the index. His fund typically runs
between 50 to 60 positions, with each averaging about 1.4% of the total portfolio.
The fund closed to new investors in the middle of 2003 having reached its target size.
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