Winner: Best sub-$100 million hedge fund

The Castellain Cavendish 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.

Robert Goldsmith, the fund’s portfolio manager at Castellain Capital, works alongside an investment manager. Together they carry out the analytical work. The rest of the team is operational. There is also an investment committee which meets on a bi-weekly basis to discuss investment ideas, purchases and sales.

Although the fund was only launched in 2009, various members of its team have worked together for up to eight years.

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.

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 (including property funds, hedge funds, private equity funds, funds of hedge funds (FoHFs) and mortgage funds) to understand the scope for corporate action and to realise value.

“We’re very much focused on buying things that trade at discounts to what we estimate its intrinsic value to be. It’s not so much about the quality of the company itself but whether it’s cheap. We don’t mind investing in poor-quality funds so long as the price is cheap enough,” Goldsmith explains candidly.

“We’re a fundamentals investor so it involves going through the accounts with a fine-toothed comb, having a look at the assets if we can and speaking to people we know in the industry to check the valuations,” he adds.

Goldsmith was pleased with the fund’s performance in 2010. He believes the market was “trickier” than in 2009. “2009 really marked the nadir of the bear market and it would have been difficult not to make money as a predominantly long-only fund. In 2010 a lot of things had already rallied. You had to work harder and dig a bit deeper to find value,” Goldsmith explains.

The recipe for overcoming the lack of obvious opportunities was straightforward hard work, Goldsmith says, as the investment ideas require more due diligence following the financial crisis in order for him and his team to be “comfortable” that the returns are possible and the risks not too high.

Although it is rare for Goldsmith to short, the technique is included in the fund’s mandate. He has held some short positions this year. Usually overvalued investment companies trading at big premiums to estimated intrinsic value are targeted for shorting. This sometimes happen when the market becomes “over-excited” about an event Goldsmith considers unlikely to materialise. 

Goldsmith believes investing in investment companies is cyclical and the current stage of that cycle is playing into his fund’s strengths. There was a huge boom in investment companies between 2004 and 2008 and a huge trough between 2008 and now, he says.

“We still think there are a large number of problems to work through. There’s going to be a long period of consolidations and wind-downs and that is going to be our bread and butter,” he concludes.

Fund facts
Full name of fund: Castellain Cavendish
Name of portfolio manager: Robert Goldsmith
Name of investment/management company: Castellain Capital
Contact information: Robert Goldsmith, 34 New Cavendish Street, London W1G 8UB (+44 (0)20 7034 1916; robert@cascap.co.uk; www.cascap.co.uk)
Launch date: February 1, 2009
Assets under management: $20 million (at April 30, 2011)
Net cumulative performance since inception: 165%
Annualised return: 54%
Annualised volatility: 17.5%
Sharpe ratio: 2.5
Strategy: deep value
Share classes: sterling
Administrator: Herald Fund Services
Auditor: Moore Stephens
Custodian: Deutsche Bank International
Legal counsel: Crill Canavan
Domicile: Jersey, Channel Islands
Management fee: 2%
Performance fee: 20%
Minimum investment: £250,000
Lock-in: none
Redemption/liquidity terms: monthly dealing with 60 days' notice