Manager Insight

Manager aims for U.S. stock exposure with low volatility.
By Michael Ryval | 29/08/14

Jeffrey Burchell is focused on running a U.S. equity fund with low volatility so that older investors will be cushioned against the occasional bumps that beset markets.

About the Author
Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

"Managers that are restricted to one asset class will never turn their back on it," says Burchell, manager of the $227-million  Aston Hill Capital Growth and co-chief investment officer at Toronto-based Aston Hill Asset Management Inc. "But my fund is much more dynamic. That's why we run with such a low beta, which ranges from 0.20 to 0.70."

Burchell believes that managers who favour highly priced stocks must be confident that corporate earnings are accelerating, since otherwise their portfolios are highly vulnerable. "Very rarely does a high multiple turn into a really high multiple," he says. "So we've been more 'tepid' on the asset class and looking for opportunities to generate return. But most important, we're focused on preserving capital."

To buttress his point, Burchell notes that the fund has a 65% cash position. "Our goal is to provide low-volatility returns, with the U.S. equity market as our primary asset class," he says, noting that the fund differs considerably from its peers within the U.S. Equity category. "From the very beginning, we said this fund would always carry a lot of cash."

Given his defensive focus, Burchell admits that he might miss a big rally. "But we will limit the downside. Over the nearly four years that we've managed the fund, we've never had a month when it's been down more than the market in a down month. This is a U.S. equity fund for older investors."

In the three years ended July 31, the one-star rated fund returned an annualized 11%, compared with 17.8% for the median fund in the U.S. Equity category. For the 12 months ended in July, the fund returned 8.9%, versus 20.6% for the median.

Burchell raised cash at the end of 2013 to about 60%, and early this year put some of it to work. Last June, he increased cash from 50% to current levels. Having hedged the bulk of the fund back into Canadian dollars, Burchell also employs short positions, and has gone as high as 13.5%. As a result of trading around core positions, turnover reached 261.4% last year. Single positions are limited to about 4% of fund assets.

One representative holding in the 35-name fund is HCA Holdings Inc. HCA, which operates hospitals and related health-care entities. "They benefit from health-care reform and more people are getting insurance," says Burchell.

 
Jeffrey Burchell

Even though the stock is at a 52-week high, Burchell believes there is further upside. "The valuation is not expensive. It's trading at around seven times enterprise value to EBITDA (earnings before interest, taxation, depreciation and amortization) but it should be about 10 times EBITDA."

A native of Dartmouth, N.S., Burchell has a background in law and finance. After earning a BBA at Acadia University in 1994, he took a year off to travel and then enrolled in a joint law and MBA program at Dalhousie University. He graduated in 1999, but chose to focus on finance.

Burchell's first job was an investment-banking internship at Griffiths McBurney. Then he spent 18 months as an equity researcher at RBC Dominion Securities. Between 2002 and 2003, he covered technology stocks at National Bank Financial. That was followed by a stint as an institutional sales representative for Research Capital Inc.

For the next seven years, Burchell worked at Polar Securities Inc., where he became a portfolio manager on a market-neutral long/short fund that focused on U.S. stocks. "I learned not to understand individual business, but how companies operate inside those industries. It was 'broad and shallow' -- understanding the industry and deciding whether it's worth pursuing."

In 2010, with a view to focusing on capital preservation and being a 'long' investor, Burchell joined Aston Hill and began to manage Aston Hill Capital Growth, a former closed-end fund acquired from Lawrence Asset Management.

Since August 2012, Burchell has also managed the $90-million Aston Hill Global Growth & Income. About 45% of the portfolio is in U.S. equities, and is comprised of the same names as Aston Hill Capital Growth.

The fund, which is in the Global Neutral Balanced category, has about 25% in fixed income, mostly high-yield bonds, and about 30% cash. It returned 14.7% for the 12 months ended in July, compared with the 13.3% median return.

Burchell expects that 2014 will be a choppier year than 2013. "We still believe in the U.S. equity asset class. But we need to see earnings growth kick in. We're waiting for that."

Meanwhile, he has been picking away at the market and recently acquired Republic Services Group Inc. RSG, a leading provider of waste management. "Construction waste has been down, but is starting to tick up," says Burchell, who anticipates about 20% upside in the stock over 18 months. "The residential business is stable. But they are starting to get a bit of pricing power in that area."

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