Shortlist: Best sub-$100 million Ucits product

The Merrion European Absolute Return Fund is a Ucits-compliant pan-European equity long/short fund launched in mid-2010. During its first six months (ending December 31, 2010), it delivered over 10% net in volatile market conditions and demonstrated its ability to deliver alpha from both the long and short components of the portfolio. The fund increased assets by 30% during this period.

The fund aims to deliver absolute returns in the range of 15%-20% annually with an annualised volatility of between 7.5%-10%.

The portfolio managers, Michael Nicol and Alistair MacDonald, both have over 25 years’ experience as UK and European equity analysts and fund managers with larger funds.

MacDonald has also covered Pacific markets and Nicol previously managed a €600 million ($846.7 million) equity long/short portfolio. He has established a strong track record running equity long/short portfolios over the last 10 years.

The fund follows a bottom-up strategy with no geographical or sectoral overlay. Stock selection and timing decisions are made by identifying valuation anomalies and catalysts that are likely to lead to re-rating or de-rating of a company's share price. 

These decisions are then reflected in the portfolio by taking long and short positions. Typically the portfolio may hold up to 30 long and up to 30 short positions. The size of each position depends on various factors including conviction, risk and liquidity.

At the heart of the investment process is a strong understanding of the nature of risk and a proprietary correlation analysis model that guides portfolio construction. The managers aim to capture a variety of uncorrelated mini-themes, for example luxury cars or mining. These can be expressed on both the long side and the short side and ensures that the portfolio is adequately diversified.

“This enables us to control market directional risk far more effectively than simple net exposure analysis,” says Nicol. “Crucially, the process is not dependent on leverage and it does not need to be adapted or compromised to comply with Ucits regulations.”

The fund operates as a joint venture between Dublin-based Merrion Investment Managers and Edinburgh-based Midmar Capital.

Merrion Investment Managers is an established equity boutique with over €1 billion ($1.4 billion) assets under management. Midmar Capital is a specialist UK Financial Services Authority-regulated equity long/short company set up by Alistair MacDonald and Michael Nicol along with Kevin Gallacher, former managing director of Merrion Investment Managers.

Fund facts:
Fund name: Merrion European Absolute Return
Fund Managers: Michael Nicol and Alistair MacDonald (Midmar Capital)
Investment Management Company: Merrion Investment Managers
Contact: Kevin Gallacher, Midmar Capital, 1 St Colme Street, Edinburgh EH3 6AA (+44 (0)131 220 8212; kevin.gallacher@midmarcapital.com; www.merrion-absolute.com)
Launch date: June 30, 2010
Portfolio size: $32 million
Net cumulative performance since inception: 11.99% (at December 31, 2010)
Average annualised return: 24.78% (at December 31, 2010)
Average annualised volatility: 2.81% (at December 31, 2010)
Sharpe ratio: 2% (at December 31, 2010)
Strategy: equity long/short
Share classes: euro, sterling and US dollar
Administrator: Northern Trust International Fund Administration Services
Custodian: Northern Trust Fiduciary Services
Auditor: KPMG
Legal counsel: McCann Fitzgerald
Domicile: Ireland
Annual management fee: 1.5%
Performance fee: 20%
Minimum investment: €250,000
Lock-in/up: none
Redemption/liquidity terms: daily