Media hedge fund's Asian perspective

A hedge fund manager specializing in global media companies explains how the sector works.

Neil Carter, Sydney-based manager for Rutherglen Capital, discusses his global media fund. Established at the end of 2002, the fund currently has $28 million under management and the two partners are just starting to actively market it for the first time.

Why a media hedge fund?

John Kenny and I have a combined experience of over 15 years analyzing the media sector. We both previously worked as sell-side analysts with ABN AMRO in London, where we were a number-one rated media team by Institutional Investor, Extel and Reuters.

We believe our fund can generate alpha thanks to our detailed sector knowledge and our in-depth fundamental research driven process. The media sector is also well suited to a hedge fund approach. It 's large and liquid, making up 5% of global market cap. Moreover, the media loves to talk about itself, so there is a constant news flow about media-related companies.

The sector also displays good volatility, and the underlying sub sectors are homogenous with high correlations, making them well suited for our pairs trading strategies.

How do you trade media plays?

Our strategy is to do pairs trading in the sub-sector of the media sector. We split our portfolio into 12 sub-sectors including entertainment managers, cable and satellite, internet, newspapers, consumer publishers etc. We're looking to find companies that will outperform in each particular sub sector and use fundamental bottom-up driven research to identify them. By taking a sub-sector approach to our pair trades we aren't subject to market rotation.

We are a market-neutral, low volatility fund, so our goal is to be up about 1% a month. In 2003, our fund was up 7.6%, and in 2004 we were up 4.5%.

We're very focused on capturing alpha, and our fund has no correlation to the MSCI World Media Index.

Why set up in Sydney to run a global media fund?

The media sector is global, and if you want to access the Australian and Asian markets you need an Asian time zone base. John, my partner, is based in London, and between us we can cover the globe for 24 hours. Being based in Sydney also gives us a window for pre-trade analysis. Increasingly, company announcements are made at the close of business, and the Australian day allows for a day of full in-depth analysis before markets open.

How do you and your London-based partner work together?

Generally, I do more of the research here in Sydney and John does more of the trading out of London. However, both of us generate ideas, and are capable of running the fund independently if one is away. We overlap for at least two to three hours every day. European markets open at 5pm Australia time so we talk from 4pm onwards.

We have an open line using Voice Over Internet technology and send each other charts and discuss our portfolio positions. Both of us trade off the same trading blotter, so one of us can put the order on and the other can move it around.

How significant is Asia to your portfolio?

We cover a universe of about 150 companies, as we tend to only invest in large liquid names with a market cap about $1 billion or more. In market cap terms Asia is fairly small, and makes up around 10% of our media universe. However, as there are several smaller companies in Asia, the region makes up around 20% of our investment opportunity. Currently two out of 20 pair trades, or about 10% of our portfolio is invested in Asia.

What type of opportunities has your fund been able to exploit in the Asian media sector?

We look at a number of companies across Asia, but Japan and Australia provide the most opportunities as we follow 10 companies in Japan and seven in Australia. At the moment we have a long position in Nippon Broadcasting and a short in TV Asahi, with a similar TV pair (long Ten, short Seven) in Australia.
What's the outlook for the Asian media sector in 2005?

Advertising growth in the region should be reasonably strong in 2005. Consumer products companies looking to target the huge growth potential in Asia, led by China and India, will need to invest marketing dollars to build their brands. Also there's likely to be some M&A activity as international media companies look to gain local exposure, facilitated by a general trend towards deregulation and relaxation of foreign ownership rules.

How do you plan to grow the business?

We started trading in December 2002, and ran private managed accounts for seven months. The fund launched officially in August 2003. We currently have $28 million under management. GAM is one of our biggest and earliest investors, and John and I are both heavily invested in the fund as well.

We've recently begun to actively market our fund, as up till now we've been focused on building our track record, especially as both of us come from sell-side backgrounds. Further down the road, I think we'd look towards launching another version of our fund with a more directional bet on the media sector. This will naturally have a higher volatility than our market-neutral fund, and will appeal to a different type of investor base.