Best New Product: Winner

Keeping the Castellain Cavendish fund relatively small at only $10 million at present with a target size of $100 million will allow the fund manager Robert Goldsmith to continue to invest in smaller listed investment companies that are below the radar of the typical hedge fund or institutional investor.

“We are able to take positions in these smaller companies without having to take a huge stake for it to be meaningful for us,” he explains.

The fund looks for opportunities arising among listed investment companies trading at a discount to the manager's estimation of their intrinsic net asset value and where the discount is expected to narrow through corporate activity.

So far the strategy has paid off. The fund returned 126% for investors from launch to end of April 2010.

While Goldsmith admits the markets were particularly favourable for the fund in 2009, it did outperform the wider market and he sees “good opportunities in 2010”.

Alongside the fund manager others involved in the fund have had significant experience both as investors in and issuers of listed investment companies, in particular in a distressed environment.

The partners were major investors in the split capital investment trust sector post its decline in 2000-02. They, including Goldsmith, were all heavily involved in the recovery of the sector, participating in various takeovers (both as offeror and shareholder) and reconstructions.

In 2004-06 the partners were involved with some of the largest issues of listed property funds and hence have a detailed understanding of the corporate structures and the opportunities afforded by these structures.

First and foremost Goldsmith says, the fund has a specific focus in its investment universe. “We stick to our knitting and as a value fund we are very much focused on where we are today rather than trying to predict growth in the years ahead,” he says

Goldsmith maintains a proprietary database of listed investment companies within the fund’s universe, tracking key fundamental pricing and trading metrics. From this he generates a shortlist of ideas for further investigation.

His research is primarily focused on fundamental analysis. “We generally look at the current, realisable value of the portfolio of assets without relying on assumptions about the future performance of a particular asset class or geography,” Goldsmith says.

The fund dissects the corporate structure of the investment company attempting to understand what parts of the structure are recourse or non-recourse and how value might be extracted from its constituent parts.

In addition analysis is undertaken of the shareholder base, board of directors and the underlying assets of the investment companies to understand the scope for corporate action and to realise value. “But,” Goldsmith stresses, “we only put ideas forward as potential trades if the shares trade at a discount to our discounted estimate of their net asset value.”

From this research the manager builds an investment thesis which is presented to the company’s investment committee “and debated at length”.

“If we are comfortable with the thesis, we ensure that the position fits within the existing portfolio in terms of strategy, geography and asset class exposure, and that we will remain within our risk parameters if we take a position,” says Goldsmith.

Once the fund has begun building a position, where applicable it will begin an activist strategy to realise value. In many instances, Goldsmith says, this is working with managers to realise advantageous positions. As an example of this he cites one company which had received a take over bid and where the fund was involved in achieving a 20% increase in the offer.

As to the prospects for the fund over 2010, Goldsmith says the company still sees “plenty of opportunity” but is “more cautious” and has increased hedging within the fund believing there are more downside risks than in 2009. “Nevertheless, long term we see a lot of value to go for,” he concludes.

Fund facts: Castellain Cavendish

Full name of fund: Castellain Cavendish
Name of portfolio manager: Robert Goldsmith
Name of investment/management company: Castellain Capital
Contact information: 34 New Cavendish Street, London W1G 8UB (+44 (0)20 7034 1916; www.castellaincapital.com)
Launch date: February 1, 2009
Assets under management: $10 million (April 30, 2010)
Net cumulative performance since inception: 126% (at March 31, 2010)
Annualised return: 93% (at March 31, 2010)
Annualised volatility: 21.2% (at March 31, 2010)
Sharpe ratio: 3.0
Strategy: deep value investment companies
Share classes: sterling
Administrator: Herald Fund Services
Auditor: Moore Stephens
Custodian: Deutsche Bank International
Domicile: Jersey
Management fee: 2%
Performance fee: 20% with a high water mark
Minimum investment: £100,000
Lock-in: None
Redemption/liquidity terms: monthly with two months' notice