Hedging Bets
Abate says he selectively hedges the portfolio by buying put options. “We’ll only tactically hedge when our assessment of market risk is elevated. We’ll only use puts on the S&P 500, or in a specialized manner like we did coming into this year [when] we used Nasdaq-100 options for a portion of the portfolio.”
The Nasdaq options came in handy with the fund’s tech heavyweight holdings, including Apple, Microsoft, Amazon.com and Alphabet. Abate says these companies were attractive investments thanks to their EVA improvement, but he was uncomfortable with their high valuations coming into this year. He wanted to hold on to them while trimming the risk posed by such valuations.
“As we entered the year we felt the best way to hedge that valuation risk was to buy Nasdaq-100 put options on the portion of the portfolio dedicated to the FANG-type stocks,” he explains. “If your mandate is like ours where we aim to deliver an asymmetrical upside to downside capture ratio, the hedges will help when you need them.”
The fund has a high reported turnover rate of 86%. Abate says he and his partner, senior analyst Braho Omeragic, don’t run it for tax efficiency but for tax awareness.
“We’re very cognizant of capital gains distributions,” he says. “We will take losses, so we try to be tax efficient in that way. There have been years when we didn’t have any capital gains distributions, and 2022 is likely to be another year where we don’t have a capital gains distribution.”
Centre Asset Management might have a small presence in the U.S.-listed fund market, but the strategies underpinning its Select Equity Fund and Global Listed Infrastructure strategies funds are marketed overseas in the form of UCITs distributed by Sanlam, a South African diversified financial services company that owns a 20% stake in Centre. Abate says Centre is wholly independent of Sanlam, which provides operational and distribution support so he can focus on managing funds rather than managing a business.
“We don’t want to spread ourselves too thin,” he says. “We make vanilla and chocolate ice cream in two wrappers: one for U.S. investors and one for offshore investors. All we’re trying to do is make the best vanilla and chocolate ice cream, that’s it.”