THESE LAST COUPLE OF MONTHS HAVE BEEN VERY EXCITING FOR LEON MFO INVESTMENTS LTD. FIRST, THE 2022 EUROMONEY SURVEY HAS PLACED THE FIRM IN THE NUMBER ONE RANKING FOR MANY CATEGORIES INCLUDING WEALTH MANAGEMENT, INVESTMENT MANAGEMENT, AND MORE. SECOND, THE COMPANY IS LAUNCHING TWO NEW FUNDS THAT WILL OFFER INVESTORS ACCESS TO OUR WELL-PROVEN INVESTMENT STRATEGIES.
BY DEMETRIS NICOLAOU, CFA
HEAD OF BUSINESS DEVELOPMENT
OF LEON MFO INVESTMENTS LIMITED
LEON is utilizing its strong investment expertise in wealth management and portfolio construction and is launching these two new funds (RAIFs). These funds will allow investors to access the corporate bond and credit markets in unique ways. The first fund is Leon Income Fund RAIF V.C.I.C. PLC. The original idea was to take advantage of the yield difference between USD and EUR corporate bonds. Bond coupons in USD are 2% higher than in EUR and this spread is not expected to change any time soon. This investment strategy has been implemented by our portfolio managers since 2015 for some client portfolios. Having built a track-record of 7 years and in various market conditions throughout this period, it was time to emulate this strategy into a new fund.
This fund will target an absolute return strategy of medium to low risk. At the portfolio construction stage two approaches are utilized. The bottom-up selection of bonds, where our team of analysts will research the bonds of 300- 400 companies, identify 80-100 companies with improving fundamentals, and select the bonds of 30-40 companies whose price levels are more attractive. Simultaneously, a top-down risk control approach is implemented where our team determines the country selection and the industry. Then they will look at the average duration of each bond and of the portfolio. Typically, the fund’s portfolio consists of larger companies, leaders in their industries, with stable cash flows, and reasonable debt levels. The investment team performs deep credit analysis to identify bonds that will increase in price as their business quality improves. The focus is mainly on leading companies with ratings of BB and above.
The targeted geographical allocation of the fund’s portfolio is 52% USA and Canada, 42% Emerging Markets, and 6% Europe. The allocation is also well diversified by industry and by company. With interest rates on deposits being close to zero, this fund offers a reasonable low risk alternative with optimal diversification.
The second fund is Leon Global Hedge Fund RAIF V.C.I.C. PLC. This fund utilizes an investment strategy that has also performed consistently well for existing client portfolios since 2018. This is a fund of hedge funds and will invest in specialized hedge funds which focus on two broader themes: a) Short-term alternative credit and b) Arbitrage.
The opportunities in short-term private credit exist in activities like trade finance, consumer finance, receivables, bridge credit, and more. The alternative credit portfolio benefits from increases in short term interest rates and provides a good hedge against inflation. Private credit is usually issued at variable interest rates that provide a hedge against inflation and interest rate risk.
On the other hand, arbitrage opportunities are sought in interest rate arbitrage, equity index arbitrage, FX or commodity arbitrage, and volatility arbitrage. The arbitrage portfolio benefits from market volatility and provides a good hedge against market corrections.
After 8 years of lower volatility, arbitrage has 3-5 strong years ahead. Volatility is expected to emerge from various sources such as:
a) Macroeconomic disparities between countries, industries and companies,
b) Unpredictable fiscal policies and rising regulation,
c) Trade wars, ESG trends, social changes, and more.
Managed by an experienced team, this fund identifies hedge funds that have steadily performed well in the above areas and funds that have low correlations between them. This is a disciplined strategy that has consistently offered attractive returns to investors since 2018. This fund will provide investors access to markets which are hard to access and where arbitrage opportunities persist.
The portfolio construction process for LEON Global Hedge Fund is a four-step process:
- The Primary Screening where about 100 funds are identified.
- The Preliminary Due Diligence which will distinguish the 50 funds for further analysis.
- The Detailed Due Diligence where 15-20 funds are short-listed of 15-20 and a more rigorous follow-up is initiated.
- The Portfolio Construction process where the top 12-20 funds are selected.
Great attention is also paid to risk management, where we evaluate a) Liquidity gap risks, b) Market risks and c) Performance risk, using a very disciplined methodology. In addition to these funds, our group remains strong through its international network providing all family office services like wealth planning, tax, legal, investment advisory, and succession planning. Our team’s expertise and our client focus are our key competitive advantages.
As the Cyprus funds industry is growing, we hope with our own funds to contribute to higher visibility of the sector and offer more choices to professional and well-informed investors.
Disclaimer: This article does not disclose all associated risks and should not be considered as an offer or invitation to subscribe to units or shares in the above funds.
